Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN SERVICER ADVANCES

v2.4.0.8
INVESTMENTS IN SERVICER ADVANCES
6 Months Ended
Jun. 30, 2014
Investments, All Other Investments [Abstract]  
INVESTMENTS IN SERVICER ADVANCES
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 six months ended June 30, 2014, the Buyer also agreed to purchase outstanding servicer advances on a portfolio of loans underlying Pools 5 and 12. As of June 30, 2014, New Residential and third-party co-investors had settled $3.6 billion of servicer advances, net of recoveries, financed with $3.3 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 44.5% interest in the Buyer as of June 30, 2014. As of June 30, 2014, noncontrolling third-party investors, owning the remaining interest in the Buyer have aggregate capital commitments to the Buyer of $389.6 million and New Residential had funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of June 30, 2014, the third-party co-investors and New Residential have previously funded their commitments however the Buyer may recall $131.3 million and $95.8 million of capital distributed to the third-party co-investors and New Residential, respectively.  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 investment 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 as of June 30, 2014 was 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:
 
June 30, 2014
 
Six Months Ended June 30, 2014
 
Amortized Cost Basis
 
Carrying Value(A)
 
Weighted Average Discount Rate
 
Weighted Average Life (Years)(B)
 
Change in Fair Value Recorded in Other Income
Servicer advances
$
3,596,228

 
$
3,679,105

 
5.6
%
 
3.8
 
$
82,877

  
(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:
 
 
 
 
 
 
 
 
 
 
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
June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer advances(C)
 
$
102,159,164

 
$
3,551,464

 
3.5
%
 
$
3,265,530

 
91.9
%
 
90.8
%
 
3.3
%
 
2.2
%
December 31, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Servicer advances(C)
 
$
43,444,216

 
$
2,661,130

 
6.1
%
 
$
2,390,778

 
89.8
%
 
88.6
%
 
4.0
%
 
2.3
%
 
(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:
    
 
 
June 30, 2014
 
December 31, 2013
Principal and interest advances
 
$
1,282,504

 
$
1,516,715

Escrow advances (taxes and insurance advances)
 
1,597,466

 
934,525

Foreclosure advances
 
671,494

 
209,890

  Total
 
$
3,551,464

 
$
2,661,130


 
Interest income recognized by New Residential related to its investments in servicer advances was comprised of the following:
 
 
Six Months Ended 
 June 30, 2014
Interest income, gross of amounts attributable to servicer compensation
 
$
153,684

  Amounts attributable to base servicer compensation
 
(49,306
)
  Amounts attributable to incentive servicer compensation
 
(1,555
)
Interest income from investments in servicer advances
 
$
102,823