Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

v3.5.0.2
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
9 Months Ended
Sep. 30, 2016
Transfers and Servicing [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 
The following table presents activity related to the carrying value of New Residential’s investments in Excess MSRs:
 
 
Servicer
 
 
Nationstar
 
SLS(A)
 
Ocwen(B)
 
Total
Balance as of December 31, 2015
 
$
698,304

 
$
5,307

 
$
877,906

 
$
1,581,517

Purchases
 

 

 

 

Interest income
 
47,049

 
(16
)
 
59,815

 
106,848

Other income
 
2,188

 

 

 
2,188

Proceeds from repayments
 
(111,999
)
 
(796
)
 
(149,309
)
 
(262,104
)
Change in fair value
 
(9,521
)
 
(86
)
 
(14,790
)
 
(24,397
)
Balance as of September 30, 2016
 
$
626,021

 
$
4,409

 
$
773,622

 
$
1,404,052


(A)
Specialized Loan Servicing LLC (“SLS”).
(B)
Ocwen Loan Servicing LLC, a subsidiary of Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), services the loans underlying the Excess MSRs and Servicer Advances acquired from HLSS.

On January 4, 2016, New Residential invested the remaining $2.0 million to complete its acquisition of a 66.7% interest in the Excess MSRs on a portfolio of Fannie Mae residential mortgage loans with an aggregate UPB of $17.2 billion. Nationstar agreed to acquire the remaining 33.3% interest in the Excess MSRs.

Nationstar, SLS or Ocwen, as applicable, as servicer, performs all servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in each portfolio.

New Residential has entered into a “recapture agreement” with respect to each of the Excess MSR investments serviced by Nationstar and SLS, including those Excess MSR investments made through investments in joint ventures (Note 5). 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 or SLS, as applicable, of a loan in the original portfolio. New Residential has a similar recapture agreement with Ocwen; however, this agreement allows for Ocwen to retain the Excess MSR on recaptured loans up to a specified threshold and no payments have been made to New Residential under such arrangement to date. 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, 2016
 
December 31, 2015
 
UPB of Underlying Mortgages
 
Interest in Excess MSR
 
Weighted Average Life Years(A)
 
Amortized Cost Basis(B)
 
Carrying Value(C)
 
Carrying Value(C)
 
 
 
New Residential(D)
 
Fortress-managed funds
 
Nationstar
 
 
 
 
 
 
 
 
Agency
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
82,159,586

 
32.5% - 66.7% (53.3%)
 
0.0% - 40.0%

 
20.0% - 35.0%

 
5.9
 
$
302,541

 
$
333,816

 
$
378,083

Recapture Agreements

 
32.5% - 66.7% (53.3%)
 
0.0% - 40.0%

 
20.0% - 35.0%

 
11.9
 
28,417

 
54,948

 
59,118

 
82,159,586

 
 
 
 
 
 
 
6.4
 
330,958

 
388,764

 
437,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency(E)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
82,010,764

 
33.3% - 80.0% (59.3%)
 
0.0% - 50.0%

 
0.0% - 33.3%

 
5.3
 
$
190,184

 
$
227,883

 
$
250,662

Recapture Agreements

 
33.3% - 80.0% (59.3%)
 
0.0% - 50.0%

 
0.0% - 33.3%

 
12.1
 
12,210

 
13,783

 
15,748

Ocwen Serviced Pools
126,120,662

 
100.0%
 
%
 
%
 
6.4
 
746,933

 
773,622

 
877,906

 
208,131,426

 
 
 
 
 
 
 
6.3
 
949,327

 
1,015,288

 
1,144,316

Total
$
290,291,012

 
 
 
 
 
 
 
6.3
 
$
1,280,285

 
$
1,404,052

 
$
1,581,517

 
(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)
Amounts in parentheses represent weighted averages.
(E)
New Residential also invested in the related Servicer Advances, including the basic fee component of the related MSR as of September 30, 2016 (Note 6) on $194.2 billion UPB underlying these Excess MSRs.

Changes in fair value recorded in other income are comprised of the following:
 
 
Three Months Ended September 30,
 
Nine Months Ended  
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Original and Recaptured Pools

$
(15,395
)
 
$
1,485

 
$
(28,392
)
 
$
(3,933
)
Recapture Agreements

(1,665
)
 
(354
)
 
3,995

 
3,659

 
 
$
(17,060
)
 
$
1,131

 
$
(24,397
)
 
$
(274
)


In the third quarter of 2016, a weighted average discount rate of 9.8% 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, 2016
 
December 31, 2015
California
 
26.4
%
 
26.7
%
Florida
 
8.8
%
 
8.9
%
New York
 
8.1
%
 
7.8
%
Texas
 
4.2
%
 
4.3
%
New Jersey
 
4.1
%
 
4.1
%
Maryland
 
3.8
%
 
3.8
%
Illinois
 
3.4
%
 
3.4
%
Virginia
 
3.1
%
 
3.1
%
Massachusetts
 
2.7
%
 
2.7
%
Washington
 
2.6
%
 
2.7
%
Other U.S.
 
32.8
%
 
32.5
%
 
 
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.