Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

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INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
9 Months Ended
Sep. 30, 2014
Transfers and Servicing [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 
Acquisitions

On January 17, 2014, New Residential completed an additional closing of Excess MSRs that it agreed to acquire as part of a previously committed transaction between Nationstar and First Tennessee Bank. New Residential invested approximately $19.1 million on loans with an aggregate UPB of approximately $8.1 billion.

On May 12, 2014 New Residential invested approximately $33.9 million to acquire a one-third interest in the Excess MSRs on each of three portfolios of Agency residential mortgage loans with an aggregate UPB of $12.8 billion. Fortress managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations.

On May 13, 2014, New Residential invested approximately $2.2 million to acquire a one-third interest in the Excess MSRs on a portfolio of Agency residential mortgage loans with an aggregate UPB of $0.7 billion. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations.

On July 8, 2014, New Residential invested approximately $14.2 million to acquire a 32.5% interest in the Excess MSRs on a portfolio of Agency residential mortgage loans with an aggregate UPB of $5.9 billion. Fortress-managed funds and Nationstar agreed to acquire a 32.5% and 35.0% interest in the Excess MSRs, respectively. New Residential also invested approximately $5.7 million to acquire a one-third interest in the Excess MSRs on a portfolio of Agency residential mortgage loans with an aggregate UPB of $2.1 billion. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in each of the portfolios. Under the terms of these investments, to the extent that any loans in the portfolios are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations.

New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments to date, including those Excess MSR investments made through investments in joint ventures (Note 5). As described above, under the Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. These Recapture Agreements do not apply to New Residential’s investments in servicer advances (Note 6).
 
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
 
The following is a summary of New Residential’s direct investments in Excess MSRs:
 
September 30, 2014
 
December 31, 2013
 
Unpaid Principal Balance ("UPB") of Underlying Mortgages
 
Interest in Excess MSR
 
Weighted Average Life Years(A)
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Carrying Value
Agency


 

 

 


 


 


Original and Recaptured Pools
$
46,264,414

 
32.5%-66.7%
 
5.5
 
$
134,087

 
$
176,482

 
$
120,271

Recapture Agreements

 
32.5%-66.7%
 
12.5
 
8,760

 
29,868

 
24,389

 
46,264,414

 

 
5.9
 
142,847

 
206,350

 
144,660

 
 
 
 
 

 
 
 
 
 
 
Non-Agency(D)


 

 
 
 


 


 


Original and Recaptured Pools
$
52,776,751

 
33.3%-80.0%
 
5.2
 
$
151,734

 
$
193,676

 
$
173,007

Recapture Agreements

 
33.3%-80.0%
 
12.7
 
11,265

 
9,210

 
6,484

 
52,776,751

 

 
5.7
 
162,999

 
202,886

 
179,491

Total
$
99,041,165

 

 
5.8
 
$
305,846

 
$
409,236

 
$
324,151

 
(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
The amortized cost basis of the Recapture Agreements is determined based on the relative fair values of the Recapture Agreements and related Excess MSRs at the time they were acquired.
(C)
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
(D)
Excess MSR investments in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of September 30, 2014 (Note 6).

Changes in fair value recorded in other income is comprised of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Original and Recaptured Pools

$
24,124

 
$
(238
)
 
$
34,012

 
$
36,240

Recapture Agreements

4,442

 
446

 
6,658

 
7,659

 
 
$
28,566

 
$
208

 
$
40,670

 
$
43,899


In the third quarter of 2014, a weighted average discount rate of 10.0% was used to value New Residential's investments in Excess MSRs (directly and through equity method investees).

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs:
 
 
Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration
 
September 30, 2014
 
December 31, 2013
California
 
31.2
%
 
31.5
%
Florida
 
7.8
%
 
9.8
%
New York
 
4.3
%
 
4.9
%
Maryland
 
4.1
%
 
3.5
%
Washington
 
4.0
%
 
3.9
%
Texas
 
3.6
%
 
4.0
%
Virginia
 
3.3
%
 
3.1
%
Arizona
 
3.2
%
 
3.5
%
New Jersey
 
3.2
%
 
3.3
%
Illinois
 
3.1
%
 
2.7
%
Other U.S.
 
32.2
%
 
29.8
%
 
 
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 Excess MSRs.