Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

v3.10.0.1
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
9 Months Ended
Sep. 30, 2018
Receivables [Abstract]  
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

New Residential accumulated its residential mortgage loan portfolio through various bulk acquisitions and the execution of call rights. As a result of the Shellpoint Acquisition, New Residential, through its wholly owned subsidiary, New Penn, originates residential mortgage loans for sale and securitization to third parties and generally retains the servicing rights on the underlying loans.

Loans are accounted for based on New Residential’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. New Residential accounts for loans based on the following categories:

Loans Held-for-Investment (which may include PCD Loans)
Loans Held-for-Investment, at fair value
Loans Held-for-Sale
Loans Held-for-Sale, at fair value
Real Estate Owned (“REO”)

The following table presents certain information regarding New Residential’s residential mortgage loans outstanding by loan type, excluding REO:


September 30, 2018
 
December 31, 2017


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)
 
Carrying Value
Loan Type


















 

Performing Loans(G) (J)

$
665,939


$
620,303


8,968


7.3
%

5.0

16.8
%

79.4
%

7.1
%

672

 
$
507,615

Purchased Credit Deteriorated Loans(H)
 
211,564

 
156,020

 
1,828

 
7.7
%
 
3.1
 
15.9
%
 
85.6
%
 
75.5
%
 
595

 
183,540

Total Residential Mortgage Loans, held-for-investment

$
877,503

 
$
776,323

 
10,796


7.4
%

4.5

16.6
%

80.9
%

23.6
%

653

 
$
691,155

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reverse Mortgage Loans(E) (F)
 
$
15,271

 
$
6,813

 
41

 
7.9
%
 
4.9
 
10.1
%
 
135.1
%
 
70.0
%
 
N/A

 
$
6,870

Performing Loans(G) (I)
 
1,558,201

 
1,582,174

 
13,155

 
4.1
%
 
4.3
 
55.6
%
 
62.0
%
 
3.9
%
 
713

 
1,071,371

Non-Performing Loans(H) (I)
 
518,317

 
407,316

 
4,605

 
6.0
%
 
2.9
 
17.9
%
 
89.7
%
 
73.2
%
 
589

 
647,293

Total Residential Mortgage Loans, held-for-sale
 
$
2,091,789

 
$
1,996,303

 
17,801

 
4.6
%
 
3.9
 
45.9
%
 
69.4
%
 
21.6
%
 
682

 
$
1,725,534

Originated Loans
 
514,516

 
524,863

 
1,948

 
4.9
%
 
28.8
 
96.0
%
 
80.9
%
 
4.0
%
 
717

 

Total Residential Mortgage Loans, held-for-sale, at fair value(K)
 
$
514,516

 
$
524,863

 
1,948

 
4.9
%
 
28.8
 
96.0
%
 
80.9
%
 
4.0
%
 
717

 
$


(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 is 60+ days delinquent.
(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% participation interest that New Residential holds in a portfolio of reverse mortgage loans. Nationstar holds the other 30% interest and services the loans. The average loan balance outstanding based on total UPB was $0.5 million. Approximately 52% of these loans have reached a termination event. As a result of the termination event, each such loan has matured and the borrower can no longer make draws on these loans.
(F)
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
(G)
Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due.
(H)
Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments. As of September 30, 2018, New Residential has placed Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below.
(I)
Includes $25.7 million and $56.5 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively, on accrual status as contractual cash flows are guaranteed by the FHA.
(J)
Includes $124.4 million UPB of non-agency mortgage loans underlying the SAFT 2013-1 securitization, which are carried at fair value based on New Residential’s election of the fair value option. Interest earned on loans measured at fair value are reported in other income.
(K)
New Residential elected the fair value option to measure these loans at fair value on a recurring basis. Interest earned on loans measured at fair value are reported in other income.

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 60 days past due provide an early warning of borrowers who may be experiencing financial difficulties. 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:
 
 
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration
 
September 30, 2018
 
December 31, 2017
California
 
19.3
%
 
9.1
%
New York
 
12.0
%
 
12.8
%
Florida
 
6.3
%
 
8.2
%
Texas
 
5.6
%
 
6.6
%
New Jersey
 
5.2
%
 
5.2
%
Illinois
 
3.2
%
 
3.9
%
Pennsylvania
 
2.9
%
 
3.4
%
Massachusetts
 
2.8
%
 
2.7
%
Maryland
 
2.4
%
 
2.7
%
Washington
 
1.7
%
 
1.7
%
Other U.S.
 
38.6
%
 
43.7
%
 
 
100.0
%
 
100.0
%


See Note 11 regarding the financing of residential mortgage loans and related assets.

Call Rights

New Residential has executed calls with respect to the following Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO assets 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. The following table summarizes these transactions (dollars in millions).
 
 
 
 
Securities Owned Prior
 
Assets Acquired
 
 
 
Loans Sold (C)
 
Retained Bonds
 
Retained Assets (C)
Date of Call (A)
 
Number of Trusts Called
 
Face Amount
 
Amortized Cost Basis
 
Loan UPB
 
Loan Price (B)
 
REO & Other Price (B)
 
Date of Securitization
 
UPB
 
Gain (Loss)
 
Basis
 
Loan UPB
 
Loan Price
 
REO & Other Price
January 2018
 

 
$

 
$

 
$

 
$

 
$

 
Jan 2018
 
$
726.5

 
$
(17.8
)
 
$
76.8

 
$
265.3

 
$
239.0

 
$
14.4

January 2018
 
7

 
0.4

 
0.2

 
32.5

 
32.8

 
0.1

 
 N/A(C)
 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

March 2018
 
25

 
85.9

 
75.4

 
458.8

 
461.4

 
4.1

 
May 2018
 
435.3

 
(6.7
)
 
52.9

 
56.0

 
46.8

 
4.6

April 2018
 
8

 
5.8

 
4.8

 
218.8

 
222.3

 
2.0

 
 N/A(C)
 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

May 2018
 
12

 
6.7

 
4.7

 
475.6

 
473.5

 
3.2

 
 N/A(C)
 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

June 2018
 
12

 
32.3

 
19.4

 
409.0

 
400.6

 
3.6

 
August 2018
 
658.5

 
(12.4
)
 
535.8

 
521.8

 
499.1

 
8.7

August 2018
 
6

 
9.6

 
6.7

 
145.5

 
142.8

 
0.9

 
 N/A(C)
 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

September 2018
 
4

 
14.7

 
9.1

 
104.8

 
105.2

 
2.0

 
 N/A(C)
 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)

 
 N/A(C)


(A)
Any related securitization may occur on the same or a subsequent date, depending on market conditions and other factors.
(B)
Price includes par amount paid for all underlying residential mortgage loans of the trusts, plus the basis of the exercised call rights, plus advances and costs incurred (including MSR Fund Payments, as defined in Note 15) in exercising such call rights.
(C)
Loans were sold through a securitization which was treated as a sale for accounting purposes. Retained assets are reflected as of the date of the relevant securitization. The loans from the fourth quarter of 2017 calls were securitized in January 2018. The May 2018 securitization primarily included loans from the January 2018 and March 2018 calls, but also included $33.5 million of previously acquired loans. The August 2018 securitization primarily included loans from April, May, and June 2018 calls, but also included $78.3 million of previously acquired loans. No loans from the December 2016 call, January 2017 calls, the last two June 2017 calls, the August 2018 calls or the September 2018 calls were securitized by September 30, 2018.  

Performing Loans

The following table provides past due information regarding New Residential’s Performing Loans, which is an important indicator of credit quality and the establishment of the allowance for loan losses:
September 30, 2018
Days Past Due
 
Delinquency Status(A)
Current
 
83.9
%
30-59
 
7.0
%
60-89
 
2.2
%
90-119(B)
 
1.1
%
120+(C)
 
5.8
%
 
 
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 interest because they are generally placed on nonaccrual status at 120 days or more past due.
(C)
Represents nonaccrual loans.

Activities related to the carrying value of residential mortgage loans held-for-investment were as follows:
 
Performing Loans
Balance at December 31, 2017
$
507,615

Shellpoint acquisition
125,350

Purchases/additional fundings
55,993

Proceeds from repayments
(77,646
)
Accretion of loan discount (premium) and other amortization(A)
12,964

Provision for loan losses
(604
)
Transfer of loans to other assets(B)

Transfer of loans to real estate owned
(2,768
)
Transfers of loans to held for sale
(1,248
)
Fair value adjustment
647

Balance at September 30, 2018
$
620,303


(A)
Includes accelerated accretion of discount on loans paid in full and on loans transferred to other assets.
(B)
Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other Assets (Note 2).

Activities related to the valuation and loss provision on reverse mortgage loans and allowance for loan losses on performing loans held-for-investment were as follows:
 
Performing Loans
Balance at December 31, 2017
$
196

Provision for loan losses(A)
604

Charge-offs(B)
(800
)
Balance at September 30, 2018
$


(A)
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.
(B)
Loans, other than PCD 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.

Purchased Credit Deteriorated Loans

New Residential determined at acquisition that the PCD loans acquired would be aggregated into pools based on common risk characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio). 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, including consideration of involuntary prepayments.

Activities related to the carrying value of PCD loans held-for-investment were as follows:
Balance at December 31, 2017
$
183,540

Purchases/additional fundings
29,785

Sales

Proceeds from repayments
(30,261
)
Accretion of loan discount and other amortization
18,282

(Allowance) reversal for loan losses(A)

Transfer of loans to real estate owned
(20,215
)
Transfer of loans to held-for-sale
(25,111
)
Balance at September 30, 2018
$
156,020



(A)
An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected. A reversal results from an increase to expected cash flows that reverses a prior allowance.

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, 2018
$
211,564

 
$
156,020

December 31, 2017
249,254

 
183,540



The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2017
$
88,631

Additions
16,523

Accretion
(18,282
)
Reclassifications from (to) non-accretable difference(A)
(3,414
)
Disposals(B)
(5,235
)
Transfer of loans to held-for-sale(C)
(8,437
)
Balance at September 30, 2018
$
69,786


(A)
Represents a probable and significant increase (decrease) in cash flows previously expected to be uncollectible.
(B)
Includes sales of loans or foreclosures, which result in removal of the loan from the PCD loan pool at its carrying amount.
(C)
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has the intent to hold for the foreseeable future, or until maturity or payoff.

Loans Held-for-Sale

Activities related to the carrying value of loans held-for-sale were as follows:
Balance at December 31, 2017
 
$
1,725,534

Purchases(A)
 
3,295,432

Transfer of loans from held-for-investment(B)
 
26,359

Sales
 
(2,858,074
)
Transfer of loans to other assets(C)
 
(6,254
)
Transfer of loans to real estate owned
 
(44,252
)
Proceeds from repayments
 
(151,942
)
Valuation (provision) reversal on loans(D)
 
9,500

Balance at September 30, 2018
 
$
1,996,303


(A)
Represents loans acquired with the intent to sell.
(B)
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has the intent to hold for the foreseeable future, or until maturity or payoff.
(C)
Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other Assets (Note 2).
(D)
Represents the fair value adjustments to loans upon transfer to held-for-sale and provision recorded on certain purchased held-for-sale loans, including an aggregate of $14.0 million of provision related to the call transactions executed during the nine months ended September 30, 2018.

Loans Held-for-Sale, at Fair Value

Activities related to the carrying value of loans held-for-sale, at fair value were as follows:
Balance at December 31, 2017
 
$

Shellpoint acquisition
 
488,233

Originations
 
1,678,606

Sales
 
(1,635,220
)
Proceeds from repayments
 
(3,747
)
Change in fair value
 
(3,009
)
Balance at September 30, 2018
 
$
524,863



Gain on Sale of Originated Mortgage Loans, Net

New Penn, a wholly owned subsidiary of New Residential, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The GSEs or Ginnie Mae guarantee conventional and government insured mortgage securitizations and mortgage investors issue nonconforming private label mortgage securitizations while New Penn generally retains the right to service the underlying residential mortgage loans. In connection with the transfer of loans to the GSEs or mortgage investors, New Residential reports gain on sale of originated mortgage loans, net in the condensed consolidated statements of income.

Gain on sale of originated mortgage loans, net is summarized below:
Gain on loans originated and sold(A)
 
$
24,684

Gain (loss) on settlement of mortgage loan origination derivative instruments(B)
 
(2,757
)
MSRs retained on transfer of loans(C)
 
17,282

Other(D)
 
6,523

Gain on sale of originated mortgage loans, net
 
$
45,732


(A)
Includes loan origination fees and direct loan origination costs. Other indirect costs related to loan origination are included within general and administrative expenses.
(B)
Represents settlement of forward securities delivery commitments utilized as an economic hedge for mortgage loans not included within forward loan sale commitments.
(C)
Represents the initial fair value of the capitalized mortgage servicing rights upon loan sales with servicing retained.
(D)
Includes fees for services associated with the loan origination process.

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.
 
 
Real Estate Owned
Balance at December 31, 2017
 
$
128,295

Purchases
 
26,807

Transfer of loans to real estate owned
 
83,844

Sales
 
(123,573
)
Valuation (provision) reversal on REO
 
(213
)
Balance at September 30, 2018
 
$
115,160



As of September 30, 2018, New Residential had residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $303.8 million.

In addition, New Residential has recognized $20.1 million in unpaid claims receivable from FHA on Ginnie Mae EBO loans and reverse mortgage loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim.

Variable Interest Entities

A wholly owned subsidiary of New Penn, Shelter Mortgage Company LLC (“Shelter”) is a mortgage originator specializing in retail origination. Shelter operates its business through a series of joint ventures and was deemed to be the primary beneficiary of the joint ventures as a result of its ability to direct activities that most significantly impact the economic performance of the entities and its ownership of a significant equity investment.

The following table presents information on the assets and liabilities of the Shelter JVs.
 
 
September 30, 2018
Assets
 
 
Cash and cash equivalents
 
$
17,421

Property and equipment, net
 
157

Intangible assets, net
 
74

Prepaid expenses and other assets
 
1,309

Total assets
 
$
18,961

 
 
 
Liabilities
 
 
Accounts payable and accrued expenses
 
$
1,514

Reserve for sales recourse
 
921

Total liabilities
 
$
2,435



Noncontrolling Interests
Noncontrolling interests in the equity of the Shelter JVs is computed as follows:
 
 
September 30, 2018
Total consolidated equity of JVs
 
$
16,526

Noncontrolling ownership interest
 
50.6
%
Noncontrolling equity interest in consolidated JVs
 
$
8,362

 
 
 
Total consolidated net income of JVs
 
$
2,306

Noncontrolling ownership interest in net income
 
50.6
%
Noncontrolling interest in net income of consolidated JVs
 
$
1,167



As described in “Call Rights” above, New Residential has issued securitizations which were treated as sales under GAAP. New Residential has no obligation to repurchase any loans from these securitizations and its exposure to loss is limited to the carrying amount of its retained interests in the securitization entities. These securitizations are conducted through variable interest entities, of which New Residential is not the primary beneficiary. Additionally, New Penn, a wholly owned subsidiary of New Residential, was deemed to be the primary beneficiary of the SAFT 2013-1 securitization entity as a result of its ability to direct activities that most significantly impact the economic performance of the entity in its role as servicer and its ownership of subordinate retained interests. The following table summarizes certain characteristics of the underlying residential mortgage loans, and related financing, in these securitizations as of September 30, 2018:
Residential mortgage loan UPB
 
$
6,878,247

Weighted average delinquency(A)
 
1.88
%
Net credit losses for the nine months ended September 30, 2018
 
$
6,486

Face amount of debt held by third parties(B)
 
$
956,125

 
 
 
Carrying value of bonds retained by New Residential(C)
 
$
1,230,214

Cash flows received by New Residential on these bonds for the nine months ended September 30, 2018
 
$
113,325


(A)
Represents the percentage of the UPB that is 60+ days delinquent.
(B)
Excludes bonds retained by New Residential.
(C)
Includes bonds retained pursuant to required risk retention regulations.