Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE SECURITIES

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INVESTMENTS IN REAL ESTATE SECURITIES
3 Months Ended
Mar. 31, 2014
Investments In Real Estate Securities  
INVESTMENTS IN REAL ESTATE SECURITIES
7. INVESTMENTS IN REAL ESTATE SECURITIES

 

During the three months ended March 31, 2014, New Residential acquired $1.4 billion face amount of Non-Agency RMBS for approximately $863.4 million and no new Agency ARM RMBS. New Residential sold Non-Agency RMBS with a face amount of approximately $437.9 million and an amortized cost basis of approximately $244.6 million for approximately $248.5 million, recording a gain on sale of approximately $3.8 million. Furthermore, New Residential sold Agency ARM RMBS with a face amount of $154.2 million and an amortized cost basis of approximately $162.2 million for approximately $162.9 million, recording a gain on sale of approximately $0.7 million.

 

On March 6, 2014, New Residential and Merrill Lynch, Pierce, Fenner & Smith Incorporated entered into an agreement pursuant to which New Residential agreed to purchase approximately $625 million face amount of Non-Agency residential mortgage securities for approximately $553 million. The purchased securities represent 75% of the mezzanine and subordinate tranches of a securitization previously sponsored by Springleaf. The securitization, including the purchased securities, is collateralized by residential mortgage loans with a face amount of approximately $0.9 billion.

 

The following is a summary of New Residential’s real estate securities as of March 31, 2014, 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, except for securities that are other-than-temporarily impaired.

  

                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)   $ 1,085,447     $ 1,162,098     $ 4,131     $ (3,579 )   $ 1,162,650       109     AAA     3.16 %     1.53 %     4.3       N/A  
Non-Agency RMBS (G)     1,780,864       1,173,195       14,962       (5,586 )     1,182,571       121     CC     0.97 %     4.68 %     8.4       14.9 %
Total/Weighted Average (H)   $ 2,866,311     $ 2,335,293     $ 19,093     $ (9,165 )   $ 2,345,221       230     BBB-     1.80 %     3.49 %     6.8          

 

(A) Fair value, which is equal to carrying value for all securities. See Note 12 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. This excludes the ratings of the collateral underlying four bonds that are no longer rated and four bonds for which New Residential was unable to obtain rating information. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency ARM RMBS. 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 that is subordinate to New Residential’s investments. Excludes Other ABS securities representing 0.2% of the carrying value of the Non-Agency RMBS portfolio.
(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 $8.6 million.
(G) Includes Other ABS securities representing 0.2% of the carrying value of the Non-Agency RMBS portfolio.

 

                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)
Other ABS   $ 207,431     $ 2,160     $ 60     $ —     $ 2,220       1     N/A     0.21 %     4.93 %     7.5     N/A

 

(H) The total outstanding face amount was $584.0 million for fixed rate securities and $2.3 billion for floating rate securities.

 

Unrealized losses that are considered other than temporary are recognized currently in earnings. During the three months ended March 31, 2014, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $0.3 million with respect to real estate securities. 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 March 31, 2014.

 

          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 (B)   Coupon     Yield     Life
(Years)
 
                                                                 
Less than Twelve Months   $ 1,165,919     $ 1,046,734     $ (1,090 )   $ 1,045,644     $ (8,843 )   $ 1,036,801       80     BBB     1.90 %     3.55 %     6.2  
                                                                                     
Twelve or More Months     47,733       51,102       (703 )     50,399       (322 )     50,077       8     AAA     3.32 %     1.40 %     3.5  
                                                                                     
Total/Weighted Average   $ 1,213,652     $ 1,097,836     $ (1,793 )   $ 1,096,043     $ (9,165 )   $ 1,086,878       88     BBB+     1.96 %     3.46 %     6.1  

 

(A) This amount represents other-than-temporary impairment recorded on securities that are in an unrealized loss position as of March 31, 2014.
(B) The rating of securities in an unrealized loss position for less than twelve months excludes the rating of one bond which has not been rated.

 

New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:

 

    March 31, 2014  
          Amortized Cost Basis     Unrealized Losses  
    Fair Value     After Impairment     Credit (A)     Non-Credit (B)  
Securities New Residential intends to sell (C)   $ 62,742     $ 63,825     $ (121 )   $ (1,084 )
Securities New Residential is more likely than not to be required to sell (D)     —       —       —        N/A  
Securities New Residential has no intent to sell and is not more likely than not to be required to sell:                                
Credit impaired securities     238,162       240,857       (1,793 )     (2,695 )
Non credit impaired securities     797,997       803,384       —       (5,386 )
Total debt securities in an unrealized loss position   $ 1,098,901     $ 1,108,066     $ (1,914 )   $ (9,165 )

 

(A) This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion of credit losses, New Residential’s management estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include management’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.
(B) This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income.
(C) A portion of securities New Residential intends to sell have a fair value equal to their amortized cost basis after impairment, and, therefore do not have unrealized losses reflected in other comprehensive income as of March 31, 2014.
(D) New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.

 

The following table summarizes the activity related to credit losses on debt securities:

 

    Three Months Ended March 31, 2014  
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income   $ 2,071  
Increases to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income     104  
Additions for credit losses on securities for which an OTTI was not previously recognized     225  
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date     (607 )
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income   $ 1,793  

 

The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS as of March 31, 2014:

 

Geographic Location (A)   Outstanding Face Amount     Percentage of Total Outstanding  
Western U.S.   $ 452,630       28.8 %
Southeastern U.S.     437,365       27.8 %
Northeastern U.S.     301,484       19.1 %
Midwestern U.S.     248,757       15.8 %
Southwestern U.S.     93,646       6.0 %
Other (B)     39,551       2.5 %
    $ 1,573,433       100.0 %

  

(A) Excludes Other ABS securities representing 0.2% of the carrying value of the Non-Agency RMBS portfolio.
(B) Represents collateral for which New Residential was unable to obtain geographic information.

 

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 three months ended March 31, 2014, the face amount of these real estate securities was $353.0 million, with total expected cash flows of $330.0 million and a fair value of $252.0 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, 2013 and March 31, 2014:

 

      Outstanding Face Amount     Carrying Value  
March 31, 2014     $ 787,134     $ 533,155  
December 31, 2013     $ 729,895     $ 483,680  

 

The following is a summary of the changes in accretable yield for these securities:

 

    For the Three Months Ended March 31,  
    2014  
Beginning Balance   $ 143,067  
Additions     78,028  
Accretion     (3,541 )
Reclassifications from non-accretable difference     (577 )
Disposals     (32,763 )
Ending Balance   $ 184,214