Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

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INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
9 Months Ended
Sep. 30, 2014
Receivables [Abstract]  
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

During the nine months ended September 30, 2014, New Residential acquired several portfolios of performing and non-performing residential mortgage loans as discussed below:

On April 4, 2014, New Residential purchased a portfolio of non-performing residential mortgage loans out of a securitization trust with a UPB of approximately $17.8 million at a price of approximately $15.5 million. New Residential recognized a loss for the difference between the price paid and fair value of the loans acquired of $11.3 million.
On May 27, 2014, New Residential exercised its cleanup call option related to sixteen Non-Agency RMBS deals and purchased performing and non-performing residential mortgage loans with a UPB of approximately $283.6 million at a price of approximately $288.5 million. New Residential securitized approximately $233.8 million in UPB of performing loans, which was recorded as a sale for accounting purposes, and recognized a net gain on settlement of investments of approximately $2.6 million. New Residential retained performing and non-performing loans with a UPB of approximately $48.4 million at a price of $40.1 million. Additionally, New Residential acquired $1.3 million of real estate owned.
On May 28, 2014, New Residential purchased a portfolio of non-performing residential mortgage loans with a UPB of approximately $500.3 million at a price of approximately $373.1 million.
On June 24, 2014, New Residential purchased a portfolio of performing and non-performing residential mortgage loans with a UPB of approximately $82.3 million at a price of approximately $58.9 million. Additionally, New Residential acquired approximately $2.1 million of real estate owned.
On August 12, 2014, New Residential purchased a portfolio of performing and non-performing residential mortgage loans with a UPB of approximately $111.8 million at a price of approximately $86.7 million.
On August 25, 2014, New Residential exercised its cleanup call option related to nineteen Non-Agency RMBS deals and purchased performing and non-performing residential mortgage loans with a UPB of approximately $530.1 million at a price of approximately $536.3 million. Additionally, New Residential acquired $3.0 million of real estate owned.

Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. Purchased loans that New Residential has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as held-for-investment. Alternatively, loans acquired with the intent to sell are classified as held-for-sale. New Residential accounts for loans based on the following categories:

Reverse Mortgage Loans
Performing Loans
Purchased Credit Impaired (“PCI”) Loans
Loans Held-for-Sale ("HFS")
Real Estate Owned ("REO")
Linked Transactions (treated as derivatives, Note 10)

The following table presents certain information regarding New Residential's residential mortgage loans outstanding by loan type, excluding REO and linked transactions at September 30, 2014 and December 31, 2013, respectively.


September 30, 2014
 



Outstanding Face Amount

Carrying
Value

Loan
Count

Weighted Average Yield

Weighted Average Life (Years)(A)

Floating Rate Loans as a % of Face Amount

Loan to Value Ratio ("LTV")(B)

Weighted Avg. Delinquency(C)

Weighted Average FICO(D)
 
December 31, 2013 Carrying Value
Loan Type


















 

Reverse Mortgage Loans(E)(F)

$
49,759


$
28,226


228


10.3
%

3.8

20.6
%

107
%

79.6
%

N/A

 
$
33,539

Performing Loans(G)(H)

127,824


100,856


697


5.1
%

4.3

12.8
%

108
%

3.9
%

608

 

Purchased Credit Impaired ("PCI") Loans(H)(I)

665,682


500,316


2,394


6.0
%

2.2

43.4
%

115
%

92.7
%

559

 

Total Residential Mortgage Loans, held-for-
    investment

$
843,265


$
629,398


3,319


6.1
%

2.6

37.4
%

113
%

78.5
%

567

 
$
33,539

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Loans, held-for-sale(H)
 
$
463,639

 
$
492,399

 
2,364

 
3.9
%
 
6.7
 
2.7
%
 
125
%
 
%
 
704

 
$


(A)
The weighted average life is based on the expected timing of the receipt of cash flows.
(B)
LTV refers to the ratio comparing the loan’s unpaid principal balance to the value of the collateral property.
(C)
Represents the percentage of the total principal balance that are 60+ days delinquent, none of which are on non-accrual status.
(D)
The weighted average FICO score is based on the weighted average of information updated and provided by the loan servicer on a monthly basis.
(E)
Represents a 70% interest New Residential holds in reverse mortgage loans. The average loan balance outstanding based on total UPB is $0.3 million. 78% of these loans have reached a termination event. As a result, the borrower can no longer make draws on these loans. Each loan matures upon the occurrence of a termination event.
(F)
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
(G)
Includes loans that are current or less than 30 days past due at acquisition.
(H)
Carrying value includes accrued interest receivable.
(I)
Includes loans that are 30 days or more past due at acquisition.

New Residential generally considers the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as its credit quality indicators. Delinquency status is a primary credit quality indicator as loans that are more than 30 days past due provide an early warning of borrowers who may be experiencing financial difficulties. For residential mortgage loans, the current LTV ratio is an indicator of the potential loss severity in the event of default. Finally, the geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific events will affect credit quality.

The table below summarizes the geographic distribution of the underlying residential mortgage loans as of September 30, 2014:
 
 
Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration
 
September 30, 2014
 
December 31, 2013
California
 
23.0
%
 
5.7
%
New York
 
16.7
%
 
22.0
%
New Jersey
 
8.3
%
 
6.9
%
Illinois
 
5.8
%
 
7.7
%
Florida
 
4.5
%
 
21.2
%
Maryland
 
4.0
%
 
2.8
%
Connecticut
 
3.3
%
 
3.9
%
Massachusetts
 
3.1
%
 
4.1
%
Washington
 
3.0
%
 
3.9
%
Pennsylvania
 
2.9
%
 
0.9
%
Other U.S.
 
25.4
%
 
20.9
%
 
 
100.0
%
 
100.0
%


Reverse Mortgage Loans
 
On February 27, 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in reverse mortgage loans with a UPB of approximately $83.1 million as of December 31, 2012. New Residential invested approximately $35.1 million to acquire a 70% interest in the reverse mortgage loans. Nationstar has co-invested on a pari passu basis with New Residential in 30% of the reverse mortgage loans and is the servicer of the loans performing all servicing and advancing functions and retaining the ancillary income, servicing obligations and liabilities as the servicer.

Performing Loans

Performing loans are carried at the aggregate unpaid principal balance adjusted for any unamortized premium or discount, deferred fees or expenses, allowance for loan losses, charge-offs and write-downs for impaired loans. Interest income on performing loans is accrued and recognized as interest income at their effective yield, which includes contractual interest and the amortization of discount (or premium) and deferred fees or expenses.

A loan is determined to be past due when a monthly payment is due and unpaid for 30 days or more. Loans, other than PCI loans, are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of collection. A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan.
The following table provides past due information for New Residential's Performing Loans, which is an important indicator of credit quality and the establishment of the allowance for loan losses:
September 30, 2014
Days Past Due
 
Delinquency Status(A)
Current
 
74.9
%
30-59
 
21.2
%
60-89
 
2.3
%
90-119(B)
 
0.8
%
120+
 
0.8
%
 
 
100.0
%

(A)
Represents the percentage of the total principal balance that corresponds to loans that are in each delinquency status.
(B)
Includes loans 90-119 days past due and still accruing because they are generally placed on nonaccrual status at 120 days or more past due.

Activities related to the carrying value of reverse mortgage loans and performing loans were as follows:
 
For the Nine Months Ended September 30, 2014
 
Reverse Mortgage Loans
 
Performing Loans
Balance at December 31, 2013
$
33,539

 
$

Purchases/additional fundings

 
107,626

Proceeds from repayments
(2,143
)
 
(9,205
)
Accretion of loan discount and other amortization
4,819

 
2,171

Transfer of loans to other assets
(7,165
)
 

Transfer of loans held for sale

 

Reversal of valuation provision on loans transferred to other assets
54

 

Allowance for loan losses
(878
)
 
(713
)
Balance at September 30, 2014
$
28,226

 
$
99,879



Impairment on loans, other than PCI loans, is indicated when it is deemed probable that New Residential will be unable to collect all amounts due according to the contractual terms of the loan and results in New Residential establishing a valuation provision or an allowance for loan losses.
Activities related to the valuation provision on reverse mortgage loans and allowance for loan losses on performing loans were as follows:
 
For the Nine Months Ended September 30, 2014
 
Reverse Mortgage Loans
 
Performing Loans
Balance at December 31, 2013
$
461

 
$

Charge-offs(A)

 

Reversal of valuation provision on loans transferred to other assets
(54
)
 

     Allowance for loan losses(B)
878

 
713

Balance at September 30, 2014
$
1,285

 
$
713


(A)
Loans, other than PCI loans, are generally charged off or charged down to the net realizable value of the collateral (i.e., fair value less costs to sell), with an offset to the allowance for loan losses, when available information confirms that loans are uncollectible.
(B)
Based on an analysis of collective borrower performance, credit ratings of borrowers, loan-to-value ratios, estimated value of the underlying collateral, key terms of the loans and historical and anticipated trends in defaults and loss severities at a pool level.

Purchased Credit Impaired Loans

New Residential determined at acquisition that the PCI loans acquired would be aggregated into pools based on common risk characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio) and aggregated a total of six pools. Loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows.

The following is the contractually required payments receivable, cash flows expected to be collected, and fair value at acquisition date for loans acquired during the nine months ended September 30, 2014:
 
 
Contractually Required Payments Receivable
 
Cash Flows Expected to be Collected
 
Fair Value
As of Acquisition Date
 
$
1,307,248

 
$
635,787

 
$
508,603



The following is the unpaid principal balance and carrying value for loans, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:
 
Unpaid Principal Balance
 
Carrying Value
September 30, 2014
$
665,682

 
$
500,316

December 31, 2013

 



The following is a summary of the changes in accretable yield for these loans:
 
For the Nine Months Ended September 30, 2014
Balance at December 31, 2013
$

Additions
127,184

Accretion
(16,772
)
Reclassifications from non-accretable difference(A)
5,322

Disposals(B)
(4,122
)
Balance at September 30, 2014(C)
$
111,612


(A)
Represents a probable and significant increase in cash flows previously expected to be uncollectible.
(B)
Includes sales of loans or foreclosures, which result in removal of the loan from the PCI loan pool at its carrying amount.
(C)
New Residential has not encountered probable decreases in expected cash flows and therefore, has no allowance for loan losses.

Loans Held-for-Sale
Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in other income. Interest income on loans held-for-sale is accrued and recognized based on the contractual rate of interest. Loans held-for-sale are subject to the nonaccrual policy described within the Performing Loans section. As loans held-for-sale are recognized at the lower of cost or fair value, New Residential’s allowance for loan losses and charge-off policies do not apply to these loans.
 
 
For the Nine Months Ended September 30, 2014
 
 
Loans Held-for-Sale
Balance at December 31, 2013
 
$

Purchases
 
490,806

Proceeds from repayments
 
(556
)
Valuation provision on loans
 

Balance at September 30, 2014
 
$
490,250



Real estate owned (REO)

New Residential recognizes REO assets at the completion of the foreclosure process or upon execution of a deed in lieu of foreclosure with the borrower. REO assets are managed for prompt sale and disposition at the best possible economic value.

During the nine months ended September 30, 2014, New Residential received properties in satisfaction of non-performing residential mortgage loans included in the PCI loan portfolio. In addition, New Residential acquired properties through its purchases of residential mortgage loan portfolios. As a result, New Residential has recognized REO assets totaling approximately $19.8 million as of September 30, 2014. As of September 30, 2014, New Residential had PCI residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $366.0 million. In addition, see below regarding REO acquired through linked transactions.
Linked Transactions
  
In the first quarter of 2014, New Residential invested in portfolios of non-performing loans and financed the transactions with the same counterparties from which it purchased them. New Residential accounts for the contemporaneous purchase of the investments and the associated financings as linked transactions. Accordingly, New Residential recorded a non-hedge derivative instrument on a net basis, with changes in market value recorded as Other Income in the Condensed Consolidated Statements of Income. For further information on the transactions, see below and Note 10.
 
On January 15, 2014, New Residential purchased a portfolio of non-performing residential mortgage loans with a UPB of approximately $65.6 million at a price of approximately $33.7 million. To finance this purchase, on January 15, 2014, New Residential entered into a $25.3 million repurchase agreement with Credit Suisse ("CS"). The repurchase agreement, which contains customary covenants and event of default provisions and is subject to margin calls, matures on January 15, 2015. This purchase was accounted for as a linked transaction (Note 10).
 
On March 28, 2014, New Residential purchased a portfolio of non-performing mortgage loans with a UPB of approximately $7.0 million at a price of approximately $3.8 million. The investment was financed with a $2.5 million master repurchase agreement with The Royal Bank of Scotland ("RBS"). The repurchase agreement, which contains customary covenants and event of default provisions and is subject to margin calls, matures on November 24, 2014. This acquisition is accounted for as a "linked transaction" (Note 10).

During the nine months ended September 30, 2014, New Residential received properties in satisfaction of non-performing residential mortgage loans included in the portfolios acquired from CS and RBS accounted for as linked transactions. As a result, New Residential has recognized REO assets totaling approximately $32.9 million, as of September 30, 2014. As of September 30, 2014 and December 31, 2013, New Residential had residential mortgage loans accounted for as linked transactions that were in the process of foreclosure with an unpaid principal balance of $126.5 million and $0.0 million, respectively.
On October 28, 2014, New Residential sold a portion of its linked transactions for net proceeds of approximately $23.7 million (Note 18).