Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES

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INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES
6 Months Ended
Jun. 30, 2018
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES

Mortgage Servicing Rights

In 2016, a subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), became a licensed or otherwise eligible mortgage servicer. NRM is presently licensed or otherwise eligible to hold MSRs in all states within the United States and the District of Columbia. Additionally, NRM has received approval from the Federal Housing Administration (“FHA”) to hold MSRs associated with FHA-insured mortgage loans, from the Federal National Mortgage Association (“Fannie Mae”) to hold MSRs associated with loans owned by Fannie Mae, and from the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to hold MSRs associated with loans owned by Freddie Mac. Fannie Mae and Freddie Mac are collectively referred to as the Government Sponsored Enterprises (“GSEs”). As an approved Fannie Mae Servicer, Freddie Mac Servicer and FHA-approved mortgagee, NRM is required to conduct aspects of its operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals. NRM engages third party licensed mortgage servicers as subservicers to perform the operational servicing duties in connection with the MSRs it acquires, in exchange for a subservicing fee which is recorded as “Subservicing expense” on New Residential’s Condensed Consolidated Statements of Income. As of June 30, 2018, these subservicers include Ocwen, Nationstar, Ditech, PHH, Shellpoint, and Flagstar, which subservice 27.0%, 26.0%, 22.4%, 13.0%, 10.9%, and 0.7% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables).

New Residential has entered into recapture agreements with respect to each of its MSR investments subserviced by Ditech (defined below), Nationstar, and Shellpoint (defined below). Under the recapture agreements, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by Ditech, Nationstar, or Shellpoint of a loan in the original portfolios.

Ditech MSRs

In August 2016, NRM entered into a flow and bulk agreement for the purchase and sale of mortgage servicing rights (the “Ditech Purchase Agreement”) with Ditech Financial LLC (“Ditech”), a subsidiary of Ditech Holding Corporation. During the six months ended June 30, 2018, pursuant to the Ditech Purchase Agreement, NRM purchased Ditech Flow MSRs with respect to certain Fannie Mae and Freddie Mac residential mortgage loans with a total UPB of $2.0 billion for a purchase price of approximately $18.2 million. Ditech subservices the related residential mortgage loans.

On January 16, 2018, pursuant to the Ditech Purchase Agreement, NRM purchased MSRs and related servicer advances receivable with respect to certain Freddie Mac residential mortgage loans with a total UPB of $11.5 billion, for a purchase price of approximately $101.5 million.

Shellpoint

On November 29, 2017, concurrently with the NRM Acquisition LLC (the “Shellpoint Purchaser”) entry into a Securities Purchase Agreement (the “Original SPA”) with Shellpoint Partners LLC, a Delaware limited liability company (“Shellpoint”), NRM entered into (i) a Bulk Agreement for the Purchase and Sale of Mortgage Servicing Rights (the “Shellpoint MSR Purchase Agreement”) with New Penn Financial LLC (“New Penn”), a Delaware limited liability company and a wholly owned subsidiary of Shellpoint, pursuant to which NRM has agreed to purchase from New Penn the mortgage servicing rights relating to a portfolio of Fannie Mae and Freddie Mac mortgage loans having an aggregate UPB of approximately $7.8 billion for a purchase price of approximately $81.0 million (the “Shellpoint MSR Purchase”), which closed on January 16, 2018, and (ii) a Subservicing Agreement (the “Shellpoint Subservicing Agreement”) with New Penn, pursuant to which New Penn has agreed to subservice Fannie Mae and Freddie Mac mortgage loans for which NRM has acquired the right to service such loans. Under the Shellpoint Subservicing Agreement, New Penn is entitled to certain monthly and other servicing compensation, and both NRM and New Penn may terminate the Shellpoint Subservicing Agreement, subject to certain specified terms, notice periods and other requirements.

Pursuant to Amendment No. 1 (the “Amendment”) to the Original SPA (as amended by the Amendment, the “Shellpoint SPA”), on July 3, 2018, Shellpoint Purchaser purchased all of the outstanding equity interests of Shellpoint (the “Shellpoint Acquisition”) for a purchase price of approximately $212.0 million based on the tangible book value of Shellpoint, subject to certain customary closing and post-closing adjustments. See Note 18 regarding the Shellpoint Acquisition completed on July 3, 2018.

Other MSRs

On February 28, 2018, NRM entered into an agreement to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Freddie Mac and Fannie Mae residential mortgage loans with an aggregate total UPB of approximately $3.3 billion for a purchase price of approximately $33.5 million. The Freddie Mac and Fannie Mae residential mortgage loans were interim subserviced by the seller until they were transferred to Shellpoint, as NRM’s designated subservicer, on March 16, 2018 and April 1, 2018, respectively.

On March 28, 2018, NRM entered into an agreement to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Fannie Mae residential mortgage loans with an aggregate total UPB of approximately $7.9 billion for a purchase price of approximately $95.2 million. The Fannie Mae residential mortgage loans are being interim subserviced by the seller until they are transferred to Shellpoint as NRM’s designated subservicer.

On May 25, 2018, NRM entered into an agreement to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Freddie Mac and Fannie Mae residential mortgage loans with an aggregate total UPB of approximately $2.1 billion for a purchase price of approximately $26.3 million. The Freddie Mac and Fannie Mae residential mortgage loans were interim subserviced by the seller until they were transferred to Shellpoint, as NRM’s designated subservicer, on June 15, 2018 and July 2, 2018, respectively.

On May 31, 2018, NRM entered into an agreement to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Freddie Mac and Fannie Mae residential mortgage loans with an aggregate total UPB of approximately $4.7 billion for a purchase price of approximately $61.7 million. The Freddie Mac and Fannie Mae residential mortgage loans were interim subserviced by the seller until they were transferred to Shellpoint, as NRM’s designated subservicer, on June 15, 2018 and July 2, 2018, respectively.

On June 4, 2018, NRM entered into an agreement to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Freddie Mac and Fannie Mae residential mortgage loans with an aggregate total UPB of approximately $2.1 billion for a purchase price of approximately $19.3 million. The Freddie Mac and Fannie Mae residential mortgage loans were interim subserviced by the seller until they were transferred to Shellpoint, as NRM’s designated subservicer, on June 15, 2018 and July 2, 2018, respectively.

New Residential records its investments in MSRs at fair value at acquisition and has elected to subsequently measure at fair value pursuant to the fair value measurement method.

Servicing revenue, net recognized by New Residential related to its investments in MSRs was comprised of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2018
 
2017
 
2018
 
2017
Servicing fee revenue
$
131,286

 
$
120,432

 
$
250,509

 
$
185,901

Ancillary and other fees
27,714

 
24,982

 
51,061

 
27,170

Servicing fee revenue and fees
159,000

 
145,414

 
301,570

 
213,071

Amortization of servicing rights
(65,439
)
 
(64,305
)
 
(120,566
)
 
(90,601
)
Change in valuation inputs and assumptions
52,632

 
89,742

 
182,425

 
88,983

Servicing revenue, net
$
146,193

 
$
170,851

 
$
363,429

 
$
211,453



The following table presents activity related to the carrying value of New Residential’s investments in MSRs:
Balance as of December 31, 2017
 
$
1,735,504

Purchases
 
434,763

Amortization of servicing rights(A)
 
(120,566
)
Change in valuation inputs and assumptions
 
182,425

Balance as of June 30, 2018
 
$
2,232,126


(A)
Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the underlying residential mortgage loans.

The following is a summary of New Residential’s investments in MSRs as of June 30, 2018:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
Agency
$
199,993,032

 
6.4
 
$
1,790,527

 
$
2,232,126

Non-Agency
56,984

 
6.8
 

 

Total
$
200,050,016

 
6.4
 
$
1,790,527

 
$
2,232,126


(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Carrying Value represents fair value. As of June 30, 2018, a weighted average discount rate of 8.6% was used to value New Residential’s investments in MSRs.

Mortgage Servicing Rights Financing Receivable

In certain cases, New Residential has legally purchased MSRs or the right to the economic interest in MSRs, however, New Residential has determined that the purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in mortgage servicing rights financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential has elected to measure the investment at fair value, with changes in fair value flowing through change in fair value of investments in mortgage servicing rights financing receivables in the Condensed Consolidated Statements of Income.

PHH Transaction

As of June 30, 2018, MSRs purchased from PHH, and related servicer advances receivables, with respect to private-label residential mortgage loans of approximately $5.3 billion in total UPB with a purchase price of approximately $31.4 million had not been settled. As a result of the length of the initial term of the related subservicing agreement between NRM and PHH, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP. New Residential has entered into a recapture agreement with respect to each of its MSR investments subserviced by PHH. Under the recapture agreement, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by PHH of a loan in the original portfolio.

Ocwen Transaction

As of June 30, 2018, MSRs representing approximately $15.5 billion UPB of underlying loans have been transferred pursuant to the Ocwen Transaction. Economics related to the remaining MSRs subject to the Ocwen Transaction were transferred pursuant to the New Ocwen Agreements (described below). Through June 30, 2018, $334.2 million of related lump sum payments have been made or accrued by New Residential to Ocwen. Upon such transfer, or subsequent to the New Ocwen Agreements (described below), any interests already held by New Residential are reclassified (from Excess MSRs or Servicer Advance Investments) to become part of the basis of the MSR financing receivables or servicer advances receivable, as appropriate, held by NRM. As a result of the length of the initial term of the related subservicing agreement between NRM and Ocwen, although the MSRs transferred pursuant to the Ocwen Transaction were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP.

During July 2017, New Residential and Ocwen entered into the Ocwen Transaction. While New Residential continues the process of obtaining the third party consents necessary to transfer the related MSRs to New Residential’s subsidiary, NRM, Ocwen and New Residential have entered into new agreements, which have accelerated the implementation of certain parts of the Ocwen Transaction in order to achieve its intent sooner. These new agreements are described in further detail below.

On January 18, 2018, New Residential entered into a new agreement regarding the rights to MSRs (the “New Ocwen RMSR Agreement”) including a servicing addendum thereto (the “Ocwen Servicing Addendum”), Amendment No. 1 to Transfer Agreement (the “New Ocwen Transfer Agreement”) and a Brokerage Services Agreement (the “Ocwen Brokerage Services Agreement” and, collectively, the “New Ocwen Agreements”) with Ocwen. The New Ocwen Agreements modify and supplement the arrangements among the parties set forth in the Original Ocwen Agreements, the Ocwen Master Agreement, the Ocwen Transfer Agreement, and the Ocwen Subservicing Agreement (together with the Original Ocwen Agreements, the Ocwen Master Agreement, and the Ocwen Transfer Agreement, the “Existing Ocwen Agreements”). NRM made a lump-sum “Fee Restructuring Payment” of $279.6 million to Ocwen on January 18, 2018, the date of the New Ocwen RMSR Agreement, with respect to such Existing Ocwen Subject MSRs.

Under the Existing Ocwen Agreements, Ocwen sold and transferred to New Residential certain “Rights to MSRs” and other assets related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion as of the opening balances in January 2018 (the “Existing Ocwen Subject MSRs”).

Pursuant to the New Ocwen Agreements, Ocwen will continue to service the mortgage loans related to the Existing Ocwen Subject MSRs until the necessary third party consents are obtained in order to transfer the Existing Ocwen Subject MSRs in accordance with the New Ocwen Agreements.

The New Ocwen RMSR Agreement provides, among other things:

the Existing Ocwen Subject MSRs will remain in the parties’ ownership structure under the Existing Ocwen Agreements while they continue to seek third party consents to transfer Ocwen’s remaining rights to the Existing Ocwen Subject MSRs to New Residential or any permitted assignee of New Residential;
Ocwen will continue to service the related mortgage loans pursuant to the terms of the Ocwen Servicing Addendum until the transfer of the Existing Ocwen Subject MSRs;
under the arrangements contemplated by the New Ocwen RMSR Agreement, Ocwen will receive substantially identical compensation for servicing the related mortgage loans underlying the Existing Ocwen Subject MSRs that it would receive if the Existing Ocwen Subject MSRs had been transferred to NRM as named servicer and Ocwen subserviced such mortgage loans for NRM as named servicer;
in the event that the required third party consents are not obtained with respect to any Existing Ocwen Subject MSRs by certain dates specified in the New Ocwen RMSR Agreement, in accordance with the process set forth in the New Ocwen RMSR Agreement, the Rights to MSRs (as defined in the Existing Ocwen Agreements) related to such Existing Ocwen Subject MSRs could either: (i) remain subject to the New Ocwen RMSR Agreement at the option of New Residential, (ii) if New Residential does not opt for the New Ocwen RMSR Agreement to remain in place with respect to certain Existing Ocwen Subject MSRs, Ocwen may acquire such Existing Ocwen Subject MSRs at a price determined in accordance with the terms of the New Ocwen RMSR Agreement, or (iii) if Ocwen does not acquire such Existing Ocwen Subject MSRs, be sold to a third party in accordance with the terms of the New Ocwen RMSR Agreement, as determined pursuant to the terms of the New Ocwen RMSR Agreement;
New Residential agreed to waive any rights New Residential may have had under the Existing Ocwen Agreements to replace Ocwen as named servicer with respect to the Existing Ocwen Subject MSRs based on Ocwen’s residential servicer rating agency related downgrades; and
Ocwen will offer refinancing opportunities to borrowers and New Residential is entitled to the MSRs on any initial or subsequent refinancing by Ocwen of a loan in the original portfolio.

Pursuant to the Ocwen Servicing Addendum, Ocwen will service the mortgage loans related to the Existing Ocwen Subject MSRs. In consideration of servicing such mortgage loans, Ocwen will receive a servicing fee based on the unpaid principal balance as of the first of each month as set forth in the Ocwen Servicing Addendum. The initial term of the Ocwen Servicing Addendum is for the five years following July 23, 2017. At any time during the initial term, New Residential may terminate the Ocwen Servicing Addendum for convenience, subject to Ocwen’s right to receive a termination fee calculated in accordance with the Ocwen Servicing Addendum and specified notice. Following the initial term, (i) New Residential may extend the term of the Ocwen Servicing Addendum for additional three-month periods by delivering written notice to Ocwen of its desire to extend such contract thirty days prior to the end of such three-month period and (ii) the Ocwen Servicing Addendum may be terminated by Ocwen on an annual basis. In addition, New Residential and Ocwen will have the right to terminate the Ocwen Servicing Addendum for cause if certain conditions specified in the Ocwen Servicing Addendum occur. If the Ocwen Servicing Addendum is terminated or not renewed in accordance with these provisions, New Residential will have the right to direct the transfer of servicing to a third party, subject to Ocwen’s option to purchase the Existing Ocwen Subject MSRs and related assets in certain cases. To the extent that servicing of the loans cannot be transferred in accordance with these provisions, the Ocwen Servicing Addendum will remain in place with respect to the servicing of any remaining loans.

Pursuant to the Ocwen Brokerage Services Agreement, Ocwen will engage NRZ Brokerage to perform brokerage and marketing services for all REO properties serviced by Ocwen pursuant to the Subject Servicing Agreements as defined in the New Ocwen RMSR Agreement. Such REO properties are subject to the Altisource Brokerage Agreement and Altisource Letter Agreement.

Ginnie Mae Transactions

During the first and second quarters of 2018, New Residential entered into several transactions with New Penn to acquire the rights to the economic value of the servicing rights related to MSRs owned by New Penn with respect to certain mortgage loans guaranteed by Ginnie Mae, together with existing servicer advances and the obligation to fund future servicer advances. New Residential acquired these economic rights related to approximately $11.4 billion UPB of Ginnie Mae guaranteed residential mortgage loans serviced by New Penn for an aggregate purchase price of $139.1 million. As a result of New Penn continuing to own the MSRs and remaining the named servicer of the Ginnie Mae guaranteed residential mortgage loans, although the rights to the economic value of the MSRs were legally sold, solely for accounting purposes, New Residential determined that each purchase agreement would not be treated as a sale under GAAP.

Interest income from investments in mortgage servicing rights financing receivables was comprised of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2018
 
2017
 
2018
 
2017
Servicing fee revenue
$
192,462

 
$
2,675

 
$
394,414

 
$
2,675

Ancillary and other fees
40,360

 
75

 
70,595

 
75

Less: subservicing expense
(65,115
)
 
(294
)
 
(130,821
)
 
(294
)
Interest income, investments in mortgage servicing rights financing receivables
$
167,707

 
$
2,456

 
$
334,188

 
$
2,456


Change in fair value of investments in mortgage servicing rights financing receivables was comprised of the following:
 
Three Months Ended 
 June 30,
 
Six Months Ended  
 June 30,
 
2018
 
2017
 
2018
 
2017
Amortization of servicing rights
$
(56,840
)
 
$
(1,127
)
 
$
(105,543
)
 
$
(1,127
)
Change in valuation inputs and assumptions
(62,263
)
 
6,723

 
257,516

 
6,723

Change in fair value of investments in mortgage servicing rights financing receivables
$
(119,103
)
 
$
5,596

 
$
151,973

 
$
5,596



The following table presents activity related to the carrying value of New Residential’s investments in mortgage servicing rights financing receivables:
Balance as of December 31, 2017
 
$
598,728

Investments made
 
138,993

New Ocwen Agreements
 
1,017,993

Proceeds from sales
 
(2,768
)
Amortization of servicing rights(A)
 
(105,543
)
Change in valuation inputs and assumptions
 
257,516

Balance as of June 30, 2018
 
$
1,904,919


(A)
Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the underlying residential mortgage loans.

The following is a summary of New Residential’s investments in mortgage servicing rights financing receivables as of June 30, 2018:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
Agency
$
45,771,115

 
5.9
 
$
396,305

 
$
478,133

Non-Agency
94,727,185

 
6.8
 
1,004,298

 
1,291,498

Ginnie Mae
11,160,791

 
8.0
 
137,216

 
135,288

Total
$
151,659,091

 
6.6
 
$
1,537,819

 
$
1,904,919


(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Carrying Value represents fair value. As of June 30, 2018, a weighted average discount rate of 10.2% was used to value New Residential’s investments in mortgage servicing rights financing receivables.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs and mortgage servicing rights financing receivables:
 
 
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration
 
June 30, 2018
 
December 31, 2017
California
 
20.0
%
 
19.0
%
New York
 
7.9
%
 
6.3
%
Florida
 
6.9
%
 
6.0
%
Texas
 
5.3
%
 
5.7
%
New Jersey
 
4.9
%
 
5.2
%
Illinois
 
4.0
%
 
4.1
%
Massachusetts
 
3.8
%
 
3.8
%
Maryland
 
3.4
%
 
2.8
%
Pennsylvania
 
3.2
%
 
3.3
%
Virginia
 
3.2
%
 
3.1
%
Other U.S.
 
37.4
%
 
40.7
%
 
 
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 MSRs.

Servicer Advances Receivable

In connection with its investments in MSRs and MSR financing receivables, New Residential generally acquires any related outstanding servicer advances (not included in the purchase prices described above), which it records at fair value within servicer advances receivable upon acquisition.

In addition to receiving cash flows from the MSRs, NRM, as servicer, has the obligation to fund future servicer advances on the underlying pool of mortgages (Note 14). These servicer advances are recorded when advanced and are included in servicer advances receivable.

The following types of advances are included in the Servicer Advances Receivable:
 
 
June 30, 2018
 
December 31, 2017
Principal and interest advances
 
$
832,272

 
$
172,467

Escrow advances (taxes and insurance advances)
 
2,143,021

 
482,884

Foreclosure advances
 
226,916

 
16,017

Total(A) (B)
 
$
3,202,209

 
$
671,368


(A)
Includes $172.3 million and $167.9 million of servicer advances receivable related to Agency MSRs, respectively, recoverable from the Agencies.
(B)
Net of $13.2 million and $4.2 million, respectively, in unamortized discount and accrual for advance recoveries.

New Residential’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority (i.e., “top of the waterfall”) and New Residential is generally entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. Furthermore, to the extent that advances are not recoverable by New Residential as a result of the subservicer’s failure to comply with applicable requirements in the relevant servicing agreements, New Residential has a contractual right to be reimbursed by the subservicer. New Residential assesses the recoverability of Servicer Advance Receivables periodically and as of June 30, 2018 and December 31, 2017, expected full recovery of the Servicer Advance Receivables.

See Note 11 regarding the financing of MSRs.