Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES

v3.10.0.1
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES
6 Months Ended
Jun. 30, 2018
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES

“Agency” residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). “Non-Agency” RMBS are issued by either public trusts or private label securitization entities.

Activities related to New Residential’s investments in real estate and other securities were as follows:
 
Six Months Ended June 30, 2018
 
(in millions)
 
Treasury
 
Agency
 
Non-Agency
Purchases
 
 
 
 
 
Face
$

 
$
2,207.5

 
$
3,888.5

Purchase Price
$

 
$
2,215.1

 
$
1,184.9

 
 
 
 
 
 
Sales
 
 
 
 
 
Face
$
862.0

 
$
2,162.4

 
$
85.0

Amortized Cost
$
858.0

 
$
2,182.1

 
$
66.8

Sale Price
$
849.8

 
$
2,152.2

 
$
66.2

Gain (Loss) on Sale
$
(8.2
)
 
$
(29.9
)
 
$
(0.6
)


As of June 30, 2018, New Residential had sold and purchased $1.1 billion and $1.1 billion face amount of Agency RMBS for $1.1 billion and $1.1 billion, respectively, and purchased $40.8 million face amount of Non-Agency RMBS for $39.2 million, which had not yet been settled. These unsettled sales and purchases were recorded on the balance sheet on trade date as Trades Receivable and Trades Payable.

New Residential has exercised its call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO contained in such trusts prior to their termination. In certain cases, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. Refer to Note 8 for further details on these transactions.

The following is a summary of New Residential’s real estate and other securities, 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 and except for securities which New Residential elected to carry at fair value and record changes to valuation through the income statement.
 
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
 
 
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Gains
 
Losses
 
Carrying Value(A)
 
Number of Securities
 
Rating(B)
 
Coupon(C)
 
Yield
 
Life (Years)(D)
 
Principal Subordination(E)
 
Carrying Value
Treasury
 
$

 
$

 
$

 
$

 
$

 

 
N/A
 
%
 
%
 
 
N/A

 
$
852,734

Agency
  RMBS(F) (G)
 
1,205,334

 
1,231,112

 
539

 
(132
)
 
1,231,519

 
61

 
AAA
 
3.97
%
 
3.43
%
 
4.3
 
N/A

 
1,243,617

Non-Agency
  RMBS(H) (I)
 
15,548,362

 
6,388,332

 
519,637

 
(54,561
)
 
6,853,408

 
806

 
CCC
 
2.87
%
 
5.89
%
 
7.2
 
9.5
%
 
5,974,789

Total/
   Weighted
    Average
 
$
16,753,696

 
$
7,619,444

 
$
520,176

 
$
(54,693
)
 
$
8,084,927

 
867

 
B
 
3.03
%
 
5.49
%
 
6.8
 
 
 
$
8,071,140

 
(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 226 bonds with a carrying value of $537.6 million which either have never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency 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)
Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $208.6 million and $0.0 million, respectively, for which no coupon payment is expected.
(D)
The weighted average life is based on the timing of expected principal reduction on the assets.
(E)
Percentage of the amortized cost basis of securities that is subordinate to New Residential’s investments, excluding fair value option securities.
(F)
Includes securities issued or guaranteed by U.S. Government agencies such as Fannie Mae or Freddie Mac.
(G)
The total outstanding face amount was $1.1 billion for fixed rate securities and $0.1 billion for floating rate securities as of June 30, 2018.
(H)
The total outstanding face amount was $2.1 billion (including $1.4 billion of residual and fair value option notional amount) for fixed rate securities and $13.4 billion (including $5.6 billion of residual and fair value option notional amount) for floating rate securities as of June 30, 2018.
(I)
Includes other asset backed securities (“ABS”) consisting primarily of (i) interest-only securities and servicing strips (fair value option securities) which New Residential elected to carry at fair value and record changes to valuation through the income statement, (ii) bonds backed by MSRs and (iii) bonds backed by consumer loans.
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Gains
 
Losses
 
Carrying Value
 
Number of Securities
 
Rating
 
Coupon
 
Yield
 
Life (Years)
 
Principal Subordination
Corporate debt
 
$
85,000

 
$
85,000

 
$

 
$
(1,700
)
 
$
83,300

 
1

 
B-
 
8.25
%
 
8.25
%
 
6.8
 
N/A
Consumer loan bonds
 
58,212

 
39,044

 
42

 
(2,811
)
 
36,275

 
4

 
N/A
 
N/A

 
25.50
%
 
1.4
 
N/A
MSR bonds
 
100,000

 
100,000

 
563

 

 
100,563

 
1

 
BBB-
 
4.94
%
 
7.03
%
 
8.9
 
N/A
Fair Value Option Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-only securities
 
4,983,445

 
228,691

 
16,682

 
(11,084
)
 
234,289

 
62

 
AA
 
1.50
%
 
7.43
%
 
3.1
 
N/A
Servicing Strips
 
1,023,140

 
8,814

 
1,326

 
(212
)
 
9,928

 
23

 
N/A
 
0.21
%
 
14.09
%
 
6.1
 
N/A


Unrealized losses that are considered other-than-temporary and are attributable to credit losses are recognized currently in earnings. During the six months ended June 30, 2018, New Residential recorded OTTI charges of $19.3 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 its 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, 2018.
 
 
 
 
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 12 Months
 
$
3,392,071

 
$
1,404,921

 
$
(2,106
)
 
$
1,402,815

 
$
(30,644
)
 
$
1,372,171

 
166

 
B-
 
3.26
%
 
5.28
%
 
5.6
12 or More Months
 
1,588,531

 
493,005

 
(10,525
)
 
482,480

 
(24,049
)
 
458,431

 
94

 
BBB+
 
2.00
%
 
5.74
%
 
5.3
Total/Weighted Average
 
$
4,980,602

 
$
1,897,926

 
$
(12,631
)
 
$
1,885,295

 
$
(54,693
)
 
$
1,830,602

 
260

 
B+
 
2.94
%
 
5.40
%
 
5.6
 
(A)
This amount represents OTTI recorded on securities that are in an unrealized loss position as of June 30, 2018.
(B)
The weighted average rating of securities in an unrealized loss position for less than 12 months excludes the rating of 35 bonds which either have never been rated or for which rating information is no longer provided. The weighted average rating of securities in an unrealized loss position for 12 or more months excludes the rating of 13 bonds which either have never been rated or for which rating information is no longer provided.

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, 2018
 
 
 
 
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost Basis After Impairment
 
Credit(A)
 
Non-Credit(B)
Securities New Residential intends to sell(C)
$
95,719

 
$
95,719

 
$
(5,077
)
 
$

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
525,651

 
544,486

 
(7,554
)
 
(18,835
)
Non-credit impaired securities
1,209,232

 
1,245,090

 

 
(35,858
)
Total debt securities in an unrealized loss position
$
1,830,602

 
$
1,885,295

 
$
(12,631
)
 
$
(54,693
)
  
(A)
This amount is required to be recorded as OTTI through earnings. In measuring the portion of credit losses, New Residential 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 New Residential’s expectations of prepayment rates, 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, 2018.
(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, 2018
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
23,821

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
11,911

Additions for credit losses on securities for which an OTTI was not previously recognized
7,390

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

Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date

Reduction for securities sold during the period
(812
)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income
$
42,310


 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:
 
 
June 30, 2018
 
December 31, 2017
Geographic Location(A)
 
Outstanding Face Amount

Percentage of Total Outstanding
 
Outstanding Face Amount

Percentage of Total Outstanding
Western U.S.
 
$
5,702,939


37.0
%
 
$
4,882,136

 
38.4
%
Southeastern U.S.
 
3,693,161


24.0
%
 
3,005,519

 
23.6
%
Northeastern U.S.
 
3,101,220


20.1
%
 
2,555,514

 
20.1
%
Midwestern U.S.
 
1,709,037


11.1
%
 
1,337,980

 
10.5
%
Southwestern U.S.
 
1,081,426


7.0
%
 
927,647

 
7.3
%
Other(B)
 
117,367


0.8
%
 
18,871

 
0.1
%
 
 
$
15,405,150


100.0
%
 
$
12,727,667

 
100.0
%
  
(A)
Excludes $58.2 million and $29.7 million face amount of bonds backed by consumer loans and $85.0 million and $0.0 million face amount of bonds backed by corporate debt as of June 30, 2018 and December 31, 2017, respectively.
(B)
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, 2018, excluding residual and fair value option securities, the face amount of these real estate securities was $877.6 million, with total expected cash flows of $723.3 million and a fair value of $533.4 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, excluding residual and fair value option securities:
 
Outstanding Face Amount
 
Carrying Value
June 30, 2018
$
5,921,325

 
$
3,875,742

December 31, 2017
5,364,847

 
3,493,723



The following is a summary of the changes in accretable yield for these securities:
 
Six Months Ended June 30, 2018
Balance at December 31, 2017
$
2,000,266

Additions
189,915

Accretion
(120,455
)
Reclassifications from (to) non-accretable difference
51,419

Disposals
(3,277
)
Balance at June 30, 2018
$
2,117,868



See Note 11 regarding the financing of real estate securities.