Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVES

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DERIVATIVES
3 Months Ended
Mar. 31, 2014
Derivatives  
DERIVATIVES
10. DERIVATIVES

 

As of March 31, 2014, New Residential’s derivative instruments include both economic hedges that were not designated as hedges for accounting purposes as well as non-performing loans accounted for as linked transactions that were not entered into for risk management purposes or for hedging activity. New Residential uses economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors including governmental monetary and tax policies, domestic and international economic and political considerations and other factors. New Residential’s credit risk with respect to economic hedges and linked transactions is the risk of default on New Residential’s investments that results from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments.

 

As of March 31, 2014, New Residential also held to-be-announced forward contract positions (“TBAs”) with $850.0 million in a long notional amount of Agency RMBS and $975.0 million in short notional amount of Agency RMBS, and any amounts or obligations owed by or to New Residential are subject to the right of set-off with the TBA counterparty. In addition, as of March 31, 2014, New Residential held a $300.0 million short position of 3-year forward U.S. Treasury (“U.S.T.”) notes, and $100.0 million notional exposure of an interest rate swap. New Residential’s net short position in TBAs of $125.0 million notional, 3-year forward U.S.T. short position, and interest rate swaps were entered into as economic hedges in order to mitigate New Residential’s interest rate risk assumed as part of its purchased securities with Merrill Lynch, Pierce, Fenner & Smith Incorporated that were previously sponsored by Springleaf, and planned resecuritization of certain Non-Agency RMBS. Furthermore, New Residential’s interest swaps are subject to certain customary margin requirements.

  

New Residential’s derivatives are recorded at fair value on the Consolidated Balance Sheets as follows:

 

        March 31,     December 31,  
    Balance Sheet Location   2014     2013  
Derivative assets                
Real Estate Securities (A)   Derivative assets   $ —     $ 1,452  
Non-Performing Loans (A)   Derivative assets     44,271       34,474  
TBAs   Derivative assets     362       —  
U.S.T. Short Positions   Derivative assets     407       —  
        $ 45,040     $ 35,926  
                     
Derivative liabilities                    
Interest Rate Swaps   Other liabilities   $ 84     $ —  
        $ 84     $ —  

 

(A)

Investments purchased from, and financed by, the selling counterparty that New Residential accounts for as linked transactions and are reflected as derivatives.

 

The following table summarizes information related to derivatives:

 

    March 31,     December 31,  
    2014     2013  
Notional amount of Non-Performing Loans (A)   $ 228,540     $ 164,598  
Notional amount of U.S.T. Short Positions     300,000       —  
Notional amount of Interest Rate Swap Agreements (B)     100,000       —  
Notional amount of Real Estate Securities (C)     —       10,000  
                 
Notional amount of TBAs, long position (D)   $ 850,000     $ —  
Notional amount of TBAs, short position (D)     975,000       —  
Notional amount of TBAs, net   $ (125,000 )   $ —  

 

(A) Represents the UPB of the underlying loans of the non-performing loan pools within linked transactions.
(B) Receives LIBOR and pays a fixed rate.
(C) Represents the current face amount of the real estate securities within linked transactions.
(D) Represents the notional amount of Agency RMBS, classified as derivatives.

 

The following table summarizes gains (losses) recorded in relation to derivatives:

 

        For the Three Months Ended March 31,  
    Income Statement Location   2014     2013  
Non-Performing Loans (A)   Other income (loss)   $ 671     $ —  
TBAs   Other income (loss)     362       —  
U.S.T. Short Positions   Other income (loss)     408       —  
Interest Rate Swaps   Other income (loss)     (84 )     —  
        $ 1,357     $ —  

 

(A) Investments purchased from, and financed by, the selling counterparty that New Residential accounts for as linked transactions and are reflected as derivatives.

 

The following table presents both gross and net information about linked transactions:

 

    March 31,     December 31,  
    2014     2013  
Non-Performing Loans                
Non-performing loan assets, at fair value (A)   $ 128,957     $ 95,014  
Repurchase agreements (B)     84,686       60,540  
      44,271       34,474  
Real Estate Securities                
Real estate securities, at fair value (C)     —       9,952  
Repurchase agreements (B)     —       8,500  
      —       1,452  
Net assets recognized as linked transactions   $ 44,271     $ 35,926  

 

(A) Non-performing loans that had a UPB of $228.5 million as of March 31, 2014, which represents the notional amount of the linked transaction and accrued interest.
(B) Represents carrying amount that approximates fair value.
  (C) Real estate securities that had a current face amount of $10.0 million as of December 31, 2013, which represents the notional amount of the linked transaction.