FAIR VALUE OF FINANCIAL INSTRUMENTS
|6 Months Ended|
Jun. 30, 2014
|Fair Value Disclosures [Abstract]|
|FAIR VALUE OF FINANCIAL INSTRUMENTS||
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and fair values of New Residential’s financial assets recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of June 30, 2014 were as follows:
New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended June 30, 2014 as follows:
Investments in Excess MSRs Valuation
The following table summarizes certain information regarding the inputs used in valuing the Excess MSRs owned directly and through equity method investees as of June 30, 2014:
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).
Excess Mortgage Servicing Rights Equity Method Investees Valuation
New Residential’s investments in equity method investees measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended June 30, 2014 as follows:
Investments in Servicer Advances Valuation
The following table summarizes certain information regarding the inputs used in valuing the servicer advances:
Real Estate Securities Valuation
As of June 30, 2014, New Residential’s securities valuation methodology and results are further detailed as follows:
Residential Mortgage Loans for Which Fair Value is Only Disclosed
The fair value of New Residential’s residential mortgage loans held-for-investment are estimated based on a discounted cash flow model analysis using internal pricing models and are categorized within Level 3 of the fair value hierarchy.
For reverse mortgage loans, the significant inputs to these models include discount rates and the timing and amount of expected cash flows that management believes market participants would use in determining the fair values on similar pools of reverse mortgage loans.
The following table summarizes the inputs used in valuing reverse mortgage loans as of June 30, 2014:
For performing loans, the significant inputs to these models include discount rates and market-based assumptions for prepayment speed and default.
(A) Includes accrued interest receivable.
For non-performing loans, the significant inputs to these models include discount rates, loss severities, and market-based assumptions regarding the timing and amount of expected cash flows primarily based upon the performance of the loan pool and liquidation attributes.
Real Estate Owned (“REO”) is initially recognized at fair value less costs to sell and the carrying value of the acquired property is reviewed on a recurring basis and adjusted, if necessary, to the lower of cost or fair value. The fair value of REO is estimated using a broker’s price opinion discounted based upon New Residential’s experience with actual liquidation values and, therefore, is categorized within Level 3 of the fair value hierarchy.
New Residential financed certain investments with the same counterparty from which it purchased those investments, and accounts for the contemporaneous purchase of the investments and the associated financings as linked transactions (Note 10). The linked transactions are valued on a net basis considering their underlying components, the investment value and the related repurchase financing agreement value, generally determined consistently with the relevant instruments as described in this note. Values of investments in non-performing loans are estimated based on a discounted cash flow analysis using internal pricing models that employ market-based assumptions regarding the timing and amount of expected cash flows primarily based upon the performance of the loan pool and liquidation attributes. The linked transactions, which are categorized as Level 3, are recorded as a non-hedge derivative instrument on a net basis.
New Residential also enters into economic hedges including TBAs, which are categorized as Level 2 in the valuation hierarchy. Management generally values such derivatives using quotations, similarly to the method of valuation used for New Residential’s other assets that are categorized as Level 2.
Liabilities for Which Fair Value is Only Disclosed
Repurchase agreements and notes payable are not measured at fair value; however, management believes that their carrying value approximates fair value. Repurchase agreements and notes payable are generally considered to be Level 2 and Level 3 in the valuation hierarchy, respectively, with significant valuation variables including the amount and timing of expected cash flows, interest rates and collateral funding spreads.
Short-term repurchase agreements and short-term notes payable have an estimated fair value equal to their carrying value due to their short duration and generally floating interest rates. Longer-term notes payable, representing the securitized portion of the servicer advance financing, are valued based on internal models utilizing both observable and unobservable inputs. As of June 30, 2014, these longer-term notes have an estimated fair value of $1,262 million and a carrying value of $1,260 million.
The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.
Reference 1: http://www.xbrl.org/2003/role/presentationRef