Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.5.0.2
FAIR VALUE OF FINANCIAL INSTRUMENTS
9 Months Ended
Sep. 30, 2016
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 and liabilities recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of September 30, 2016 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)
$
290,291,012

 
$
1,404,052

 
$

 
$

 
$
1,404,052

 
$
1,404,052

Excess mortgage servicing rights, equity method investees, at fair value(A)
63,834,062

 
195,904

 

 

 
195,904

 
195,904

Servicer advances
6,017,968

 
6,043,369

 

 

 
6,043,369

 
6,043,369

Real estate securities, available-for-sale
8,027,852

 
4,991,242

 

 
1,434,308

 
3,556,934

 
4,991,242

Residential mortgage loans, held-for-investment

 

 

 

 

 

Residential mortgage loans, held-for-sale
927,523

 
705,481

 

 

 
733,879

 
733,879

Consumer loans, held-for-investment
1,833,558

 
1,821,979

 

 

 
1,852,118

 
1,852,118

Derivative assets
2,435,000

 
2,088

 

 
2,088

 

 
2,088

Cash and cash equivalents
388,674

 
388,674

 
388,674

 

 

 
388,674

Restricted cash
153,127

 
153,127

 
153,127

 

 

 
153,127

Other Assets
729,193

 
3,255

 

 

 
3,255

 
3,255

 
 
 
$
15,709,171

 
$
541,801

 
$
1,436,396

 
$
13,789,511

 
$
15,767,708

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
4,931,731

 
$
4,929,944

 
$

 
$
4,931,731

 
$

 
$
4,931,731

Notes and bonds payable
7,850,985

 
7,833,209

 

 

 
7,864,545

 
7,864,545

Derivative liabilities
6,130,300

 
24,085

 

 
24,085

 

 
24,085

 
 
 
$
12,787,238

 
$

 
$
4,955,816

 
$
7,864,545

 
$
12,820,361

 
(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.

New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:
 
Level 3
 
 
 
Excess MSRs(A)
 
Excess MSRs in Equity Method Investees(A)(B)
 
 
 
 
 
 
 
Agency
 
Non-Agency
 
Agency
 
Servicer Advances
 
Non-Agency RMBS
 
Total
Balance at December 31, 2015
$
437,201

 
$
1,144,316

 
$
217,221

 
$
7,426,794

 
$
1,584,283

 
$
10,809,815

Transfers(C)
 
 
 
 
 
 
 
 
 
 
 
Transfers from Level 3

 

 

 

 

 

Transfers to Level 3

 

 

 

 

 

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

 

 

 

 
(7,838
)
 
(7,838
)
Included in change in fair value of investments in excess mortgage servicing rights(D)
(7,292
)
 
(17,105
)
 

 

 

 
(24,397
)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(D)

 

 
8,608

 

 

 
8,608

Included in change in fair value of investments in Servicer Advances

 

 

 
4,328

 

 
4,328

Included in gain (loss) on settlement of investments, net

 

 

 

 
(20,950
)
 
(20,950
)
Included in other income (loss), net(D)
1,930

 
258

 

 

 
(2,779
)
 
(591
)
Gains (losses) included in other comprehensive income(E)

 

 

 

 
105,031

 
105,031

Interest income
25,156

 
81,692

 

 
257,877

 
133,589

 
498,314

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 
11,588,537

 
2,298,446

 
13,886,983

Proceeds from sales

 

 

 

 
(95,430
)
 
(95,430
)
Proceeds from repayments
(68,231
)
 
(193,873
)
 
(29,925
)
 
(13,234,167
)
 
(437,418
)
 
(13,963,614
)
Balance at September 30, 2016
$
388,764

 
$
1,015,288

 
$
195,904

 
$
6,043,369

 
$
3,556,934

 
$
11,200,259

 
(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 each 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 and realized gains (losses) recorded during the period.
(E)
These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.

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, 2016:
 
 
Significant Inputs(A)
Directly Held (Note 4)
 
Prepayment
Rate(B)
 
Delinquency(C)
 
Recapture
Rate(D)
 
Excess Mortgage Servicing Amount
(bps)(E)
 
Collateral Weighted Average Maturity (Years)(F)
Agency

 
 
 
 
 
 
 
 
 
Original Pools

10.6
%
 
3.3
%
 
32.5
%
 
21

 
24
Recaptured Pools
 
7.6
%
 
4.8
%
 
20.9
%
 
21

 
25
Recapture Agreement

7.6
%
 
4.9
%
 
20.0
%
 
22

 


9.8
%
 
3.7
%
 
29.2
%
 
21

 
24
Non-Agency(G)

 
 
 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
Original Pools

11.9
%
 
N/A

 
10.6
%
 
14

 
24
Recaptured Pools
 
8.1
%
 
N/A

 
20.0
%
 
20

 
24
Recapture Agreement

7.5
%
 
N/A

 
20.0
%
 
20

 
Ocwen Serviced Pools
 
9.6
%
 
N/A

 
%
 
14

 
25


10.0
%
 
N/A

 
2.7
%
 
14

 
25
Total/Weighted Average--Directly Held

9.9
%
 
3.7
%
 
10.0
%
 
16

 
25


 
 
 
 
 
 
 
 
 
Held through Equity Method Investees (Note 5)

 
 
 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
 
 
Original Pools

12.4
%
 
5.3
%
 
35.0
%
 
19

 
23
Recaptured Pools
 
7.8
%
 
5.0
%
 
20.0
%
 
23

 
25
Recapture Agreement

7.7
%
 
4.9
%
 
20.0
%
 
23

 
Total/Weighted Average--Held through Investees

10.4
%
 
5.2
%
 
28.6
%
 
21

 
24
 
 
 
 
 
 
 
 
 
 
 
Total/Weighted Average--All Pools
 
10.0
%
 
4.0
%
 
13.9
%
 
17

 
25

(A)
Weighted by fair value of the 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 for which the borrower will miss its mortgage payments.
(D)
Percentage of voluntarily prepaid loans that are expected to be refinanced by the related servicer.
(E)
Weighted average total mortgage servicing amount in excess of the basic fee, measured in basis points (bps).
(F)
Weighted average maturity of the underlying mortgage loans in the pool.
(G)
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.

As of September 30, 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).
 
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 Rate(A)
 
Delinquency
 
Mortgage Servicing Amount(B)
 
Discount Rate
 
Collateral Weighted Average Maturity (Years)(C)
September 30, 2016
2.1
%
 
10.3
%
 
14.8
%
 
8.6

bps
5.4
%
 
24.7


(A)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B)
Mortgage servicing amount excludes the amounts New Residential pays its servicers as a monthly servicing fee.
(C)
Weighted average maturity of the underlying mortgage loans in the pool.
 
Real Estate Securities Valuation
 
As of September 30, 2016, 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
 
$
1,356,580

 
$
1,437,777

 
$
1,434,308

 
$

 
$
1,434,308

 
2

Non-Agency RMBS(C)
 
6,671,272

 
3,446,822

 
3,062,411

 
494,523

 
3,556,934

 
3

Total
 
$
8,027,852

 
$
4,884,599

 
$
4,496,719

 
$
494,523

 
$
4,991,242

 
 
 
(A)
New Residential generally obtains pricing service quotations or broker quotations from two sources, one of which is generally the seller (the party that sold New Residential the security) for Non-Agency RMBS. New Residential evaluates quotes received and determines one as being most representative of fair value, and does 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 it 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. New Residential 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, it selects one of the quotes which is believed to more accurately reflect fair value. New Residential has not adjusted any of the quotes received in the periods presented. 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. New Residential’s investments in Agency RMBS are classified within Level 2 of the fair value hierarchy because the market for these securities is very active and market prices are readily observable.

The third-party pricing services and brokers engaged by New Residential (collectively, “valuation providers”) use either the income approach or the market approach, or a combination of the two, in arriving at their estimated valuations of RMBS. Valuation providers using the market approach generally look at prices and other relevant information generated by market transactions involving identical or comparable assets. Valuation providers using the income approach create pricing models that generally incorporate such assumptions as discount rates, expected prepayment rates, expected default rates and expected loss severities. New Residential has reviewed the methodologies utilized by its valuation providers and has found them to be consistent with GAAP requirements. In addition to obtaining multiple quotations, when available, and reviewing the valuation methodologies of its valuation providers, New Residential creates its own internal pricing models for Level 3 securities and uses the outputs of these models as part of its process of evaluating the fair value estimates it receives from its valuation providers. These models incorporate the same types of assumptions as the models used by the valuation providers, but the assumptions are developed independently. These assumptions are regularly refined and updated at least quarterly by New Residential, and reviewed by its valuation group, which is separate from its investment acquisition and management group, to reflect market developments and actual performance.

For 67.6% of our Non-Agency RMBS, the ranges of assumptions used by New Residential’s valuation providers are summarized in the table below. The assumptions used by New Residential’s valuation providers with respect to the remainder of New Residential’s Non-Agency RMBS were not readily available.
 
 
Fair Value
 
Discount Rate
 
Prepayment Rate(a)
 
CDR(b)
 
Loss Severity(c)
Non-Agency RMBS
 
$
2,403,846

 
1.57% to 32.75%
 
0% to 20%
 
0.1% to 12.0%
 
5.0% to 100%

(a)
Represents the annualized rate of the prepayments as a percentage of the total principal balance of the pool.
(b)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance of the pool.
(c)
Represents the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding balance.

(B)
New Residential was unable to obtain quotations from more than one source on these securities. For approximately $462.7 million, the one source was the party that sold New Residential the security.
(C)
Includes New Residential’s investments in interest-only notes for which the fair value option for financial instruments was elected.

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.

At September 30, 2016, assets measured at fair value on a nonrecurring basis were $0.1 billion. The $0.1 billion includes approximately $110.4 million of residential mortgage loans held-for-sale and $38.8 million of REO. The fair value of New Residential’s mortgage loans, held-for-sale is estimated based on a discounted cash flow model analysis using internal pricing models and categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these loans as of September 30, 2016:
September 30, 2016
 
Fair Value and Carrying Value
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Residential Mortgage Loans
 
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
 
$
88,474

 
3.1
%
 
3.9
 
17.4
%
 
0.6
%
 
11.3
%
Non-performing Loans
 
21,895

 
6.5
%
 
3.2
 
3.0
%
 
3.0
%
 
30.0
%
Total/Weighted Average
 
$
110,369

 
3.8
%
 
3.8
 
14.5
%
 
 
 
15.0
%

(A)
The weighted average life is based on the expected timing of the receipt of cash flows.
(B)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.
(C)
Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.

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. These discounts to the broker price opinion generally range from 10% to 25%, depending on the information available to the broker.

The total change in the recorded value of assets for which a fair value adjustment was included in the Condensed Consolidated Statement of Income for the nine months ended September 30, 2016 was an increase in the net valuation allowance of approximately $11.4 million, consisting of a $13.6 million increase in the net valuation allowance for REO, offset by a reversal of prior valuation allowance of $2.2 million for residential mortgage loans held-for-sale.

Loans for Which Fair Value is Only Disclosed

The following table summarizes the inputs used in valuing certain loans as of September 30, 2016:
 
 
Carrying Value
 
Fair Value
 
Valuation and Loss Provision/ (Reversal) In Current Year
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Reverse Mortgage Loans(D)
 
$
11,836

 
$
13,707

 
$
73

 
7.0
%
 
4.5
 
N/A

 
N/A

 
10.8
%
Performing Loans
 
18,693

 
18,909

 
4

 
8.0
%
 
5.3
 
5.4
%
 
2.4
%
 
59.3
%
Non-performing Loans
 
564,583

 
590,894

 
N/A

 
7.4
%
 
2.8
 
2.4
%
 
3.0
%
 
30.0
%
Total/Weighted Average
 
$
595,112

 
$
623,510

 
$
77

 
7.4
%
 
2.9
 
 
 
 
 
30.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer Loans
 
$
1,821,979

 
$
1,852,118

 
$
4,001

 
9.3
%
 
4.0
 
15.2
%
 
5.5
%
 
88.0
%

(A)
The weighted average life is based on the expected timing of the receipt of cash flows.
(B)
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.
(C)
Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.
(D)
Carrying value and fair value represent a 70% participation interest New Residential holds in the portfolio of reverse mortgage loans.

Derivative Valuation

New Residential enters into economic hedges including interest rate swaps, caps and TBAs, which are categorized as Level 2 in the valuation hierarchy. New Residential 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 and bonds payable are not measured at fair value. They 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 and bonds payable have an estimated fair value equal to their carrying value due to their short duration and generally floating interest rates. Longer-term notes and bonds payable are valued based on internal models utilizing both observable and unobservable inputs.

The debt assumed in the SpringCastle Transaction (Notes 1 and 11) was recorded at its fair value of $1.8 billion on March 31, 2016. The fair value was estimated based on a discounted cash flow model using both observable and unobservable inputs to estimate the amount and timing of expected cash flows, interest rates and collateral funding spreads and, therefore, was categorized within Level 3 of the fair value hierarchy.