Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v2.4.0.8
FAIR VALUE OF FINANCIAL INSTRUMENTS
9 Months Ended
Sep. 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 September 30, 2014 were as follows:
 
 
 
 
 
Fair Value
 
Principal Balance or Notional Amount
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
Investments in:
 
 
 
 
 
 
 
 
 
 
 
     Excess mortgage servicing rights, at fair
value
(A)
$
99,041,165

 
$
409,236

 
$

 
$

 
$
409,236

 
$
409,236

     Excess mortgage servicing rights, equity
method investees, at fair value
(A)
152,436,227

 
342,538

 

 

 
342,538

 
342,538

     Servicer advances
3,041,905

 
3,214,113

 

 

 
3,214,113

 
3,214,113

     Real estate securities, available-for-sale
2,130,370

 
2,079,712

 

 
1,785,083

 
294,629

 
2,079,712

     Residential mortgage loans, held for
          investment(B)(C)
843,265

 
626,941

 

 

 
638,901

 
638,901

     Residential mortgage loans, held for
          sale(C)
463,639

 
490,250

 

 

 
491,575

 
491,575

     Non-hedge derivatives(D)
1,462,561

 
28,686

 

 
1,115

 
27,571

 
28,686

     Cash and cash equivalents
187,601

 
187,601

 
187,601

 

 

 
187,601

     Restricted cash
29,962

 
29,962

 
29,962

 

 

 
29,962

 
 
 
$
7,409,039

 
$
217,563

 
$
1,786,198

 
$
5,418,563

 
$
7,422,324

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
     Repurchase agreements
$
2,738,349

 
$
2,738,349

 
$

 
$
1,725,737

 
$
1,012,612

 
$
2,738,349

     Notes payable
2,847,251

 
2,847,251

 

 
1,081,673

 
1,768,743

 
2,850,416

     Derivative liabilities
1,595,000

 
345

 

 
345

 

 
345

 
 
 
$
5,585,945

 
$

 
$
2,807,755

 
$
2,781,355

 
$
5,589,110

 
(A)
The notional amount represents the total unpaid principal balance of the mortgage loans underlying the Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.
(B)
The notional amount represents the total unpaid principal balance of the mortgage loans for residential mortgage loans, held for investment.
(C)
Carrying value excludes accrued interest receivable.
(D)
The notional amount for linked transactions consists of the aggregate UPB amount of the loans that comprise the asset portion of the linked transaction.

New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed during the nine months ended September 30, 2014 as follows:
 
Level 3
 
 
 
Excess MSRs(A)
 
Excess MSRs in Equity Method Investees(A)(B)
 
 
 
 
 
 
 
 
 
Agency
 
Non-Agency
 
Agency
 
Non-Agency
 
Servicer Advances
 
Non-Agency RMBS
 
Linked Transactions
 
Total
Balance at December 31, 2013
$
144,660

 
$
179,491

 
$
245,399

 
$
107,367

 
$
2,665,551

 
$
570,425

 
$
35,926

 
$
3,948,819

Transfers(C)


 


 


 


 


 


 


 


Transfers from Level 3

 

 

 

 

 

 

 

Transfers to Level 3

 

 

 

 

 

 

 

Gains (losses) included in net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in other-than-temporary
    impairment (“OTTI”) on securities(D)

 

 

 

 

 
(479
)
 

 
(479
)
Included in change in fair value of
    investments in excess mortgage
    servicing rights(D)
19,590

 
21,080

 

 

 

 

 

 
40,670

Included in change in fair value of
    investments in excess mortgage
    servicing rights, equity method
    investees(D)

 

 
15,062

 
8,825

 

 

 

 
23,887

Included in change in fair value of
    investments in servicer advances

 

 

 

 
105,825

 

 

 
105,825

Included in gain on settlement of
    investments

 

 

 

 

 
60,296

 

 
60,296

Included in other income(D)
323

 

 

 

 

 

 
4,840

 
5,163

Gains (losses) included in other
    comprehensive income, net of tax(E)

 

 

 

 

 
3,753

 

 
3,753

Interest income
15,808

 
21,895

 
18,847

 
8,216

 
153,790

 
16,972

 

 
235,528

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases
56,074

 
19,132

 

 

 
5,569,238

 
977,877

 
9,758

 
6,632,079

Purchase adjustments
(59
)
 
405

 

 

 

 

 

 
346

Proceeds from sales

 

 

 

 

 
(1,273,191
)
 
(1,495
)
 
(1,274,686
)
Proceeds from repayments
(30,046
)
 
(39,117
)
 
(41,406
)
 
(19,772
)
 
(5,280,291
)
 
(61,024
)
 
(9,001
)
 
(5,480,657
)
Transfers to REO(F)

 

 

 

 

 

 
(12,457
)
 
(12,457
)
Balance at September 30, 2014
$
206,350

 
$
202,886

 
$
237,902

 
$
104,636

 
$
3,214,113

 
$
294,629

 
$
27,571

 
$
4,288,087

 
(A)
Includes the Recapture Agreement for each respective pool.
(B)
Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New Residential has a 50% interest.
(C)
Transfers are assumed to occur at the beginning of the respective period.
(D)
The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates.
(E)
These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.
(F)
Represents value of residential mortgage loans transferred to REO net of associated repurchase financing agreements.

Investments in Excess MSRs and Excess MSRs Equity Method Investees Valuation
 
The following table summarizes certain information regarding the weighted average inputs used in valuing the Excess MSRs owned directly and through equity method investees as of September 30, 2014:
 
 
Significant Inputs(A)
Directly Held (Note 4)
 
Prepayment Speed(B)
 
Delinquency(C)
 
Recapture Rate(D)
 
Excess Mortgage Servicing Amount
(bps)(E)
Agency

 
 
 
 
 
 
 
Original and Recaptured Pools

11.9
%
 
8.2
%
 
30.8
%
 
22

Recapture Agreement

8.1
%
 
4.6
%
 
35.0
%
 
20



11.6
%
 
7.9
%
 
31.1
%
 
22

Non-Agency(F)

 
 
 
 
 
 
 
Original and Recaptured Pools

11.9
%
 
N/A

 
9.9
%
 
15

Recapture Agreement

8.0
%
 
N/A

 
35.0
%
 
21



11.6
%
 
N/A

 
11.6
%
 
15

Total/Weighted Average--Directly Held

11.6
%
 
7.9
%
 
20.7
%
 
18



 
 
 
 
 
 
 
Held through Equity Method Investees (Note 5)

 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
Original and Recaptured Pools

14.3
%
 
7.2
%
 
32.8
%
 
19

Recapture Agreement

8.0
%
 
5.0
%
 
35.0
%
 
22



13.1
%
 
6.8
%
 
33.2
%
 
19

Non-Agency(F)

 
 
 
 
 
 
 
Original and Recaptured Pools

11.9
%
 
N/A

 
9.9
%
 
12

Recapture Agreement

8.0
%
 
N/A

 
35.0
%
 
19



11.6
%
 
N/A

 
11.5
%
 
12

Total/Weighted Average--Held through Investees

12.6
%
 
6.8
%
 
25.9
%
 
17

 
 
 
 
 
 
 
 
 
Total/Weighted Average--All Pools
 
12.2
%
 
7.1
%
 
24.1
%
 
17


(A)
Weighted by amortized cost basis of the mortgage loan portfolio.
(B)
Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(C)
Projected percentage of mortgage loans in the pool that will miss their mortgage payments.
(D)
Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar.
(E)
Weighted average total mortgage servicing amount in excess of the basic fee.
(F)
For certain pools, the Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO). For these pools, no delinquency assumption is used.

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).
 
Investments in Servicer Advances Valuation
 
The following table summarizes certain information regarding the inputs used in valuing the servicer advances:
 
Significant Inputs
 
Weighted Average
 
 
 
 
 
Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans
 
Prepayment Speed
 
Delinquency
 
Mortgage Servicing Amount(A)
 
Discount Rate
September 30, 2014
2.1
%
 
11.7
%
 
16.6
%
 
19.6

bps
5.5
%
December 31, 2013
2.7
%
 
13.2
%
 
20.0
%
 
21.2

bps
5.6
%


(A)
Mortgage servicing amount excludes the 2 basis points New Residential pays Nationstar as a monthly servicing fee.
 
Real Estate Securities Valuation
 
As of September 30, 2014, New Residential’s securities valuation methodology and results are further detailed as follows:
 
 
 
 
 
 
Fair Value
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Multiple Quotes(A)
 
Single Quote(B)
 
Total
 
Level
Agency RMBS
 
$
1,697,608

 
$
1,785,873

 
$
1,736,126

 
$
48,957

 
$
1,785,083

 
2

Non-Agency RMBS
 
432,762

 
287,211

 
281,375

 
13,254

 
294,629

 
3

Total
 
$
2,130,370

 
$
2,073,084

 
$
2,017,501

 
$
62,211

 
$
2,079,712

 
 

 
(A)
Management generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold New Residential the security) for Non-Agency RMBS. Management selected one of the quotes received as being most representative of the fair value and did not use an average of the quotes. Even if New Residential receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes New Residential receives. Management believes using an average of the quotes in these cases would not represent the fair value of the asset. Based on New Residential’s own fair value analysis, management selects one of the quotes which is believed to more accurately reflect fair value. New Residential never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” — meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price.
(B)
Management was unable to obtain quotations from more than one source on these securities. The one source was the seller (the party that sold New Residential the security).

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances such as when there is evidence of impairment. For residential mortgage loans held-for-sale and foreclosed real estate accounted for as REO, New Residential applies the lower of cost or fair value accounting and may be required, from time to time, to record a nonrecurring fair value adjustment.
The fair value of New Residential’s residential mortgage loans held-for-sale 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. 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. As of September 30, 2014, such assets did not show evidence of impairment and continued to be measured at cost.
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 September 30, 2014:
 
 
 
 
 
 
 
 
Significant Inputs
Loan Type
 
Carrying Value(A)
 
Fair Value(A)
 
Valuation Provision/ (Reversal) In Current Year
 
Discount Rate
 
Weighted Average Life (Years)(B)
Reverse Mortgage Loans
 
$
28,226

 
$
28,226

 
824

 
10.3
%
 
3.8
 
(A)
Represents a 70% interest New Residential holds in the reverse mortgage loans.
(B)
The weighted average life is based on the expected timing of the receipt of cash flows.

For performing loans, the significant inputs to these models include discount rates and market-based assumptions for prepayment speed and default.
Loan Type
 
Carrying Value
 
Fair Value
 
Discount Rate
 
Prepayment Rate
 
CDR(A)
Performing Loans
 
$
99,879

 
$
104,758

 
5.1
%
 
5.2
%
 
1.6
%

(A)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.

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.
Loan Type
 
Carrying Value
 
Fair Value
 
Discount Rate
 
CDR(A)
 
Loss Severity
Non-Performing Loans
 
$
498,836

 
$
505,917

 
6.0
%
 
3.0
%
 
31.1
%

(A)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.

Derivative Valuation

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 interest rate swaps and 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 September 30, 2014, these longer-term notes have an estimated fair value of $1,079 million and a carrying value of $1,082 million.