Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES

v3.20.1
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES
3 Months Ended
Mar. 31, 2020
Investments, Debt and Equity Securities [Abstract]  
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES

“Agency” residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as Fannie Mae or Freddie Mac. “Non-Agency” RMBS are issued by either public trusts or private label securitization entities.

As a result of current market conditions and consistent with the Company’s business strategy of using its Agency RMBS portfolio as a source of liquidity, the Company sold substantially all of its Agency RMBS portfolio in March 2020.

Effective January 1, 2020, for any new purchases of Non-Agency RMBS, New Residential elected to apply the fair value option. The fair value option provides an election which allows a company to irrevocably elect fair value for certain financial asset and liabilities on an instrument-by-instrument basis at initial recognition. The Company elected the fair value option for these securities to better align reported results with the underlying economic changes in value of the securities on the Company’s Condensed Consolidated Balance Sheets.

For securities for which the fair value option was elected, any unrealized gains (losses) from the change in fair value are recorded in Change in fair value of investments in real estate and other securities in the Condensed Consolidated Statements of Income.

For securities for which the fair value option was not elected, any unrealized gains (losses) from the change in fair value are recorded as a component of accumulated other comprehensive income in the Condensed Consolidated Statement of Changes in Stockholders’ Equity, to the extent impairment losses are considered non-credit related. Expected credit losses are reflected in the Provision (reversal) for credit losses in the Condensed Consolidated Statements of Income. The Company estimates expected credit losses using a discounted cash flow (“DCF”) approach. The DCF approach considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, default rates, and loss severities.

Realized gains (losses) on securities are recorded in gain (loss) on settlement of investments, net in the Condensed Consolidated Statements of Income. Interest income is recognized over the life the loan using the effective interest method and is recorded on the accrual basis.

Activities related to New Residential’s investments in real estate and other securities were as follows:
 
 
Three Months Ended March 31, 2020
 
Three Months Ended March 31, 2019
 
 
(in millions)
 
(in millions)
 
 
Agency
 
Non-Agency
 
Agency
 
Non-Agency
Purchases
 
 
 
 
 
 
 
 
Face
 
$
7,140.0

 
$
4,563.2

 
$
5,024.3

 
$
2,444.0

Purchase price
 
7,290.0

 
539.0

 
5,129.4

 
349.7

 
 
 
 
 
 
 
 
 
Sales
 
 
 
 
 
 
 
 
Face
 
$
17,395.0

 
$
7,200.0

 
$
6,778.8

 
$
228.0

Amortized cost
 
17,679.3

 
5,283.8

 
6,914.3

 
228.0

Sale price
 
17,869.1

 
4,358.9

 
6,979.4

 
228.0

Gain (loss) on sale
 
189.8

 
(924.9
)
 
65.1

 



As of March 31, 2020, New Residential had sold $2.8 billion and $6.1 billion face amount for $2.9 billion and $3.3 billion of Agency RMBS and Non-Agency RMBS, respectively, which had not yet been settled. As of March 31, 2019, New Residential had sold and purchased $6.8 billion and $0.2 billion face amount of Agency RMBS for $7.0 billion and $0.2 billion, respectively, and purchased $3.8 million face amount of Non-Agency RMBS for $3.4 million, which had not yet been settled. These unsettled sales and purchases were recorded on the Condensed Consolidated Balance Sheets on trade date as Trades Receivable and Trades Payable. Refer to Note 16 for further details on transactions with affiliates.

New Residential has exercised its call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO 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. Refer to Notes 8 and 16 for further details on these transactions.

The following is a summary of New Residential’s real estate and other securities:
 
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
 
 
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Gains
 
Losses
 
Carrying Value(A)
 
Number of Securities
 
Rating(B)
 
Coupon(C)
 
Yield
 
Life (Years)(D)
 
Principal Subordination(E)
 
Carrying Value
Agency
  RMBS(F) (G)
 
$
306,566

 
$
308,486

 
$
10,082

 
$

 
$
318,568

 
27

 
AAA
 
2.95
%
 
2.79
%
 
6.8
 
N/A

 
$
11,519,943

Non-Agency
  RMBS(H) (I)
 
20,528,139

 
2,239,021

 
69,347

 
(147,333
)
 
2,161,035

 
593

 
A-
 
3.16
%
 
5.00
%
 
8.0
 
13.3
%
 
7,957,785

Total/
   Weighted
    Average
 
$
20,834,705

 
$
2,547,507

 
$
79,429

 
$
(147,333
)
 
$
2,479,603

 
620

 
A
 
3.11
%
 
4.74
%
 
7.8
 
 
 
$
19,477,728

 
(A)
Fair value, which is equal to carrying value for all securities. See Note 12 regarding the estimation of fair value.
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. This excludes the ratings of the collateral underlying 337 bonds with a carrying value of $971.6 million which either have never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were determined by third party rating agencies and represent the most recent credit ratings available as of the reporting date and may not be current.
(C)
Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $29.5 million and $4.3 million, respectively, for which no coupon payment is expected.
(D)
The weighted average life is based on the timing of expected principal reduction on the assets.
(E)
Percentage of the amortized cost basis of securities that is subordinate to New Residential’s investments, excluding fair value option securities.
(F)
Includes securities issued or guaranteed by U.S. Government agencies such as Fannie Mae or Freddie Mac.
(G)
The total outstanding face amount was $0.3 billion for fixed rate securities as of March 31, 2020.
(H)
The total outstanding face amount was $11.1 billion (including $9.7 billion of residual and fair value option notional amount) for fixed rate securities and $9.4 billion (including $8.2 billion of residual and fair value option notional amount) for floating rate securities as of March 31, 2020.
(I)
Includes other asset-backed securities (“ABS”) consisting primarily of (i) interest-only securities and servicing strips (fair value option securities) which New Residential elected to carry at fair value and record changes to valuation through the income statement, (ii) bonds backed by consumer loans, and (iii) corporate debt.
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding Face Amount
 
Amortized Cost Basis
 
Gains
 
Losses
 
Carrying Value
 
Number of Securities
 
Rating
 
Coupon
 
Yield
 
Life (Years)
 
Principal Subordination
Corporate debt
 
$
23,250

 
$
18,484

 
$

 
$

 
$
18,484

 
1

 
B-
 
8.25
%
 
8.25
%
 
5.0
 
N/A
Consumer loan bonds
 
20,114

 
13,268

 
232

 
(458
)
 
13,042

 
6

 
N/A
 
N/A

 
N/A

 
N/A
 
N/A
Fair value option securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-only securities
 
11,698,718

 
305,697

 
22,129

 
(23,984
)
 
303,842

 
130

 
AA
 
1.30
%
 
9.36
%
 
3.1
 
N/A
Servicing strips
 
4,984,912

 
56,798

 
2,480

 
(11,292
)
 
47,986

 
53

 
N/A
 
0.90
%
 
8.11
%
 
5.5
 
N/A


Unrealized losses attributable to credit impairment are recognized in earnings. During the three months ended March 31, 2020, New Residential recorded credit impairment charges of $44.1 million with respect to real estate securities. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using its best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell and is not more likely than not to be required to sell these securities.
 
The following table summarizes New Residential’s securities in an unrealized loss position as of March 31, 2020.
 
 
 
 
Amortized Cost Basis
 
 
 
 
 
 
 
Weighted Average
Securities in an Unrealized Loss Position
 
Outstanding Face Amount
 
Before Credit Impairment
 
Credit Impairment(A)
 
After Credit Impairment
 
Gross Unrealized Losses
 
Carrying Value
 
Number of Securities
 
Rating
 
Coupon
 
Yield
 
Life
(Years)
Less than 12 Months
 
$
8,525,893

 
$
1,482,309

 
$
(30,161
)
 
$
1,452,148

 
$
(133,907
)
 
$
1,318,241

 
262

 
A-
 
3.57
%
 
4.45
%
 
10.0
12 or More Months
 
1,903,679

 
119,591

 
(13,988
)
 
105,603

 
(13,426
)
 
92,177

 
59

 
A-
 
2.63
%
 
5.26
%
 
3.3
Total/Weighted Average
 
$
10,429,572

 
$
1,601,900

 
$
(44,149
)
 
$
1,557,751

 
$
(147,333
)
 
$
1,410,418

 
321

 
A-
 
3.50
%
 
4.51
%
 
9.5
 
(A)
Represents credit impairment on securities in an unrealized loss position as of March 31, 2020.

New Residential performed an assessment of all debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of credit impairment, exceeds its fair value) and determined the following:
 
March 31, 2020
 
December 31, 2019
 
 
 
 
 
Gross Unrealized Losses
 
 
 
 
 
Gross Unrealized Losses
 
Fair Value
 
Amortized Cost Basis After Credit Impairment
 
Credit(A)
 
Non-Credit(B)
 
Fair Value
 
Amortized Cost Basis After Credit Impairment
 
Credit(A)
 
Non-Credit(B)
Securities New Residential intends to sell
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$

Securities New Residential is more likely than not to be required to sell(C)

 

 

 
N/A

 

 

 

 
N/A

Securities New Residential has no intent to sell and is not more likely than not to be required to sell:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit impaired securities
560,375

 
598,610

 
(44,149
)
 
(38,235
)
 
228,228

 
237,626

 
(3,232
)
 
(9,398
)
Non-credit impaired securities
850,043

 
959,141

 

 
(109,098
)
 
4,726,409

 
4,767,837

 

 
(41,428
)
Total debt securities in an unrealized loss position
$
1,410,418

 
$
1,557,751

 
$
(44,149
)
 
$
(147,333
)
 
$
4,954,637

 
$
5,005,463

 
$
(3,232
)
 
$
(50,826
)
  
(A)
This amount is required to be recorded through earnings. In measuring the portion of credit losses, New Residential estimates the expected cash flow for each of the securities. This evaluation included a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and
the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows included New Residential’s expectations of prepayment rates, default rates and loss severities. Credit losses were measured as the decline in the present value of the expected future cash flows discounted at the security’s effective interest rate.
(B)
This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income.
(C)
New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.

The following table summarizes the activity related to the allowance for credit losses on debt securities as of March 31, 2020:
 
Purchased Credit Deteriorated
 
Non-Purchased Credit Deteriorated
 
Total
Beginning balance of the allowance for credit losses on available-for-sale debt securities
$

 
$

 
$

Additions to the allowance for credit losses on securities for which credit losses were not previously recorded

 

 

Additions to the allowance for credit losses arising from purchases of available-for-sale debt securities accounted for as purchased financial assets with credit deterioration

 

 

Reductions for securities sold during the period

 

 

Reductions in the allowance for credit losses because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis

 

 

Additional increases (decreases) to the allowance for credit losses on securities that had credit losses or an allowance recorded in a previous period
24,121

 
20,028

 
44,149

Write-offs charged against the allowance

 

 

Recoveries of amounts previously written off

 

 

Ending balance of the allowance for credit losses on available-for-sale debt securities
$
24,121

 
$
20,028

 
44,149


 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:
 
 
March 31, 2020
 
December 31, 2019
Geographic Location(A)
 
Outstanding Face Amount

Percentage of Total Outstanding
 
Outstanding Face Amount

Percentage of Total Outstanding
Western U.S.
 
$
7,276,817


35.5
%
 
$
9,048,847

 
36.6
%
Southeastern U.S.
 
5,337,487


26.1
%
 
5,983,966

 
24.2
%
Northeastern U.S.
 
4,532,153


22.1
%
 
5,416,137

 
21.9
%
Midwestern U.S.
 
2,176,968


10.6
%
 
2,562,269

 
10.4
%
Southwestern U.S.
 
1,143,615


5.6
%
 
1,440,467

 
5.8
%
Other(B)
 
17,735


0.1
%
 
296,273

 
1.1
%
 
 
$
20,484,775


100.0
%
 
$
24,747,959

 
100.0
%
  
(A)
Excludes $20.1 million and $25.0 million face amount of bonds backed by consumer loans and $23.3 million and $85.0 million face amount of bonds backed by corporate debt as of March 31, 2020 and December 31, 2019, respectively.
(B)
Represents collateral for which New Residential was unable to obtain geographic information.

New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments.

The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, excluding residual and fair value option securities:
 
Outstanding Face Amount
 
Carrying Value
March 31, 2020
$
1,179,074

 
$
528,741

December 31, 2019
5,701,736

 
3,830,369



The following is a summary of the changes in accretable yield for these securities:
 
Three Months Ended March 31, 2020
Balance at December 31, 2019
$
1,882,476

Additions
67,194

Accretion
(46,906
)
Reclassifications from (to) non-accretable difference
(2,841,574
)
Disposals
1,287,097

Balance at March 31, 2020
$
348,287



See Note 11 regarding the financing of real estate securities.