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
6 Months Ended
Jun. 30, 2014
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS, EQUITY METHOD INVESTEES
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:
 
 
June 30, 2014
 
December 31, 2013
Excess MSR assets
 
$
655,766

 
$
703,681

Other assets
 
8,451

 
5,534

Debt
 

 

Other liabilities
 
(3,777
)
 
(3,683
)
Equity
 
$
660,440

 
$
705,532

New Residential's investment
 
$
330,220

 
$
352,766

 
 
 
 
 
New Residential's ownership
 
50.0
%
 
50.0
%
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Interest income
 
$
17,292

 
$
8,140

 
$
35,785

 
$
13,756

Other income
 
8,194

 
34,528

 
2,489

 
31,374

Expenses
 
(1
)
 
(2,414
)
 
(41
)
 
(2,938
)
Net income
 
$
25,485

 
$
40,254

 
$
38,233

 
$
42,192


 
The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
 
June 30, 2014
 
Unpaid Principal Balance
 
Investee  Interest in  Excess MSR
 
New Residential Interest in Investees
 
Amortized Cost Basis(A)
 
Carrying Value(B)
 
Weighted Average Life (Years)(C)
MSR Pool 6
$
9,050,743

 
66.7
%
 
50.0
%
 
$
36,286

 
$
45,089

 
5.1
MSR Pool 6 - Recapture
    Agreement

 
66.7
%
 
50.0
%
 
5,951

 
8,551

 
12.2
MSR Pool 7
29,547,830

 
66.7
%
 
50.0
%
 
94,036

 
95,882

 
5.2
MSR Pool 7 - Recapture
    Agreement

 
66.7
%
 
50.0
%
 
12,209

 
24,136

 
12.4
MSR Pool 8
13,043,774

 
66.7
%
 
50.0
%
 
52,744

 
50,716

 
5.2
MSR Pool 8 - Recapture
    Agreement

 
66.7
%
 
50.0
%
 
4,707

 
12,630

 
12.1
MSR Pool 9
27,924,457

 
66.7
%
 
50.0
%
 
97,755

 
122,440

 
4.9
MSR Pool 9 - Recapture
    Agreement

 
66.7
%
 
50.0
%
 
29,343

 
30,134

 
12.1
MSR Pool 10(D)
63,763,048

 
66.7-77.0%

 
50.0
%
 
189,488

 
190,143

 
5.1
MSR Pool 10 - Recapture
    Agreement

 
66.7-77.0%

 
50.0
%
 
13,038

 
10,546

 
12.6
MSR Pool 11
16,491,872

 
66.7
%
 
50.0
%
 
41,115

 
55,440

 
5.6
MSR Pool 11 - Recapture
    Agreement

 
66.7
%
 
50.0
%
 
22,640

 
10,059

 
13.1
 
$
159,821,724

 
 

 
 

 
$
599,312

 
$
655,766

 
6.2
 
(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 June 30, 2014 (Note 6).

In the second quarter of 2014, a weighted average discount rate of 12.0% was used to value New Residential's investments in Excess MSRs (directly and through equity method investees).

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments made through equity method investees:
 
 
Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration
 
June 30, 2014
 
December 31, 2013
California
 
23.5
%
 
23.5
%
Florida
 
9.1
%
 
9.2
%
New York
 
5.5
%
 
5.3
%
Texas
 
4.9
%
 
4.9
%
Georgia
 
4.0
%
 
4.0
%
New Jersey
 
3.8
%
 
3.7
%
Illinois
 
3.5
%
 
3.5
%
Maryland
 
3.2
%
 
3.1
%
Virginia
 
3.2
%
 
3.1
%
Washington
 
2.8
%
 
2.8
%
Other U.S.
 
36.5
%
 
36.9
%
 
 
100.0
%
 
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.