Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE SECURITIES

v2.4.0.8
INVESTMENTS IN REAL ESTATE SECURITIES
6 Months Ended
Jun. 30, 2014
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS IN REAL ESTATE SECURITIES
INVESTMENTS IN REAL ESTATE SECURITIES
 
During the six months ended June 30, 2014, New Residential acquired $1.4 billion face amount of Non-Agency RMBS for approximately $882.0 million and $297.8 million face amount of Agency ARM RMBS for approximately $316.9 million. New Residential sold Non-Agency RMBS with a face amount of approximately $1.9 billion and an amortized cost basis of approximately $1.2 billion for approximately $1.3 billion, recording a gain on sale of approximately $60.3 million. Furthermore, New Residential sold Agency ARM RMBS with a face amount of $306.0 million and an amortized cost basis of approximately $322.9 million for approximately $324.4 million, recording a gain on sale of approximately $1.5 million.
 
On March 6, 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated and New Residential 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 were issued by the American General Mortgage Loan Trust 2009-1 and represent 75% of the mezzanine and subordinate tranches (the "2009-1 Retained Certificates") of a securitization sponsored by Third Street Funding LLC, an affiliate of Springleaf. The securitization, including the 2009-1 Retained Certificates, is collateralized by residential mortgage loans with a face amount of approximately $0.9 billion. On May 30, 2014, New Residential sold the 2009-1 Retained Certificates for approximately $598.5 million and recorded a gain of approximately $39.7 million. At the time of sale, the 2009-1 Retained Certificates had an amortized cost basis of approximately $558.8 million. The purchase and sale of the 2009-1 Retained Certificates is included in the purchases and sales described above.

On May 27, 2014, New Residential exercised its cleanup call option related to sixteen Non-Agency RMBS deals and purchased and retained performing and non-performing residential mortgage loans. New Residential owned $17.4 million face amount in these deals and received par on these securities, which had an amortized cost basis of $12.0 million prior to the repayment. See Note 8 for further details on this transaction.

 
The following is a summary of New Residential’s real estate securities as of June 30, 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)
 
$
1,159,363

 
$
1,244,864

 
$
6,179

 
$
(4,031
)
 
$
1,247,012

 
120

 
AAA
 
3.12
%
 
1.50
%
 
4.7
 
N/A

Non-Agency
    RMBS
 
348,232

 
210,051

 
9,186

 
(2,346
)
 
216,891

 
77

 
CCC
 
1.75
%
 
7.14
%
 
8.5
 
11.0
%
Total/Weighted
    Average(G)
 
$
1,507,595

 
$
1,454,915

 
$
15,365

 
$
(6,377
)
 
$
1,463,903

 
197

 
AA-
 
2.81
%
 
2.80
%
 
5.6
 
 

 
(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 six 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.
(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 $12.5 million.
(G)
The total outstanding face amount was $64.1 million for fixed rate securities and $1.4 billion for floating rate securities.

Unrealized losses that are considered other than temporary are recognized currently in earnings. During the six months ended June 30, 2014, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $0.9 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 June 30, 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
 
$
477,511

 
$
450,308

 
$
(332
)
 
$
449,976

 
$
(4,838
)
 
$
445,138

 
58

 
AA-
 
3.15
%
 
2.92
%
 
4.9
Twelve or More
    Months
 
116,021

 
124,285

 
(612
)
 
123,673

 
(1,539
)
 
122,134

 
13

 
AA+
 
3.34
%
 
1.51
%
 
3.3
Total/Weighted
    Average
 
$
593,532

 
$
574,593

 
$
(944
)
 
$
573,649

 
$
(6,377
)
 
$
567,272

 
71

 
AA
 
3.19
%
 
2.65
%
 
4.6
 
(A)
This amount represents other-than-temporary impairment recorded on securities that are in an unrealized loss position as of June 30, 2014.
(B)
The weighted average rating of securities in an unrealized loss position for less than twelve months excludes the rating of five bonds for which New Residential was unable to obtain rating information.

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:
 
June 30, 2014
 
 
 
 
 
Unrealized Losses
 
Fair Value
 
Amortized Cost Basis After Impairment
 
Credit(A)
 
Non-Credit(B)
Securities New Residential intends to sell(C)
$
155,599

 
$
155,871

 
$
(1,073
)
 
$
(272
)
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
144,118

 
145,212

 
(974
)
 
(1,094
)
Non credit impaired securities
321,508

 
326,519

 

 
(5,011
)
Total debt securities in an unrealized loss position
$
621,225

 
$
627,602

 
$
(2,047
)
 
$
(6,377
)
  
(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 June 30, 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:
 
Six Months Ended June 30, 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
464

Additions for credit losses on securities for which an OTTI was not previously recognized
151

Reductions for securities for which the amount previously recognized in other comprehensive
    income was recognized in earnings because the entity intends to sell the security or more likely
    than not will be required to sell the security before recovery of its amortized cost basis
(1,073
)
Reduction for credit losses on securities for which no OTTI was recognized in other
    comprehensive income at the current measurement date
(408
)
Reduction for securities sold during the period
(231
)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized
    in other comprehensive income
$
974


 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS as of June 30, 2014:
Geographic Location
 
Outstanding Face Amount
 
Percentage of Total Outstanding
Western U.S.
 
$
85,243


24.5
%
Southeastern U.S.
 
73,322


21.0
%
Northeastern U.S.
 
61,194


17.6
%
Midwestern U.S.
 
58,722


16.9
%
Southwestern U.S.
 
32,368


9.3
%
Other(A)
 
37,383


10.7
%
 
 
$
348,232


100.0
%
  
(A)
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 six months ended June 30, 2014, the face amount of these real estate securities was $361.7 million, with total expected cash flows of $339.4 million and a fair value of $258.0 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:
 
Outstanding Face Amount
 
Carrying Value
June 30, 2014
$
186,186

 
$
144,836

December 31, 2013
$
729,895

 
$
483,680


 
The following is a summary of the changes in accretable yield for these securities:
 
Six Months Ended June 30, 2014
Balance at December 31, 2013
$
143,067

Additions
81,365

Accretion
(8,175
)
Reclassifications from non-accretable difference
(778
)
Disposals
(155,287
)
Balance at June 30, 2014
$
60,192



See Note 18 for recent activities related to New Residential's investments in real estate securities.