Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS AND REAL ESTATE OWNED

v3.20.1
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS AND REAL ESTATE OWNED
3 Months Ended
Mar. 31, 2020
Receivables [Abstract]  
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS AND REAL ESTATE OWNED
INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS AND REAL ESTATE OWNED

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

Upon adoption of ASU 2016-13 on January 1, 2020, New Residential elected to apply the fair value option for all held-for-investment residential mortgage loans. The fair value option provides an election which allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis. The Company elected the fair value option for these loans to better align reported results with the underlying economic changes in value of the loans on the Company’s Condensed Consolidated Balance Sheets.

The election of the fair value option resulted in the Company recognizing an adjustment of $6.0 million to reduce retained earnings attributable to the change in the fair value of residential mortgage loans. Unrealized gains (losses) from the change in fair value of residential mortgage loans are recognized in Change in fair value of investments in residential mortgage loans in the Condensed Consolidated Statements of Income. Realized gains (losses) are recorded in Other income (loss), net in the Condensed Consolidated Statements of Income.

Residential mortgage loans for which the fair value option has been elected are not evaluated for credit impairment as changes in fair value are recorded in the Condensed Consolidated Statements of Income.

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. As of March 31, 2020, 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, at lower of cost or fair value
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:


March 31, 2020
 
December 31, 2019


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


















 

Total Residential Mortgage Loans, held-for-investment, at fair value

$
919,461

 
$
824,183

 
14,164


8.2
%

6.5

9.0
%

72.1
%

17.8
%

642

 
$
925,706

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Reverse Mortgage Loans(E) (F)
 
$
12,333

 
$
6,220

 
29

 
7.9
%
 
5.0
 
5.5
%
 
153.3
%
 
70.7
%
 
N/A

 
$
5,844

Acquired Performing Loans(G) (I)
 
828,323

 
753,288

 
11,853

 
6.1
%
 
4.2
 
65.9
%
 
51.1
%
 
8.6
%
 
684

 
857,821

Acquired Non-Performing Loans(H) (I)
 
629,948

 
505,025

 
4,822

 
8.3
%
 
3.2
 
10.9
%
 
76.6
%
 
73.1
%
 
581

 
565,387

Total Residential Mortgage Loans, held-for-sale
 
$
1,470,604

 
$
1,264,533

 
16,704

 
7.1
%
 
3.8
 
41.8
%
 
62.9
%
 
36.8
%
 
639

 
$
1,429,052

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired Performing Loans(G) (I)
 
$
2,046,090

 
$
1,804,443

 
12,925

 
5.9
%
 
7.9
 
6.9
%
 
67.3
%
 
30.5
%
 
644

 
$
3,024,288

Originated Loans
 
1,430,577

 
1,479,530

 
4,769

 
3.7
%
 
28.0
 
2.9
%
 
72.7
%
 
0.1
%
 
732

 
1,589,324

Total Residential Mortgage Loans, held-for-sale, at fair value
 
$
3,476,667

 
$
3,283,973

 
17,694

 
5.0
%
 
16.2
 
5.3
%
 
69.5
%
 
18.0
%
 
680

 
$
4,613,612


(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. Mr. Cooper holds the other 30% interest and services the loans. The average loan balance outstanding based on total UPB was $0.6 million. Approximately 47% 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)
As of March 31, 2020, New Residential has placed Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below.
(I)
Includes $35.1 million and $26.6 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively, on accrual status as contractual cash flows are guaranteed by the FHA.

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
 
March 31, 2020
 
December 31, 2019
California
 
16.8
%
 
16.1
%
New York
 
9.9
%
 
9.0
%
Florida
 
7.7
%
 
8.4
%
Texas
 
7.5
%
 
7.1
%
Georgia
 
4.6
%
 
4.8
%
New Jersey
 
4.6
%
 
4.2
%
Illinois
 
3.4
%
 
3.6
%
Maryland
 
3.1
%
 
3.3
%
Pennsylvania
 
3.1
%
 
2.9
%
Virginia
 
2.7
%
 
2.7
%
Other U.S.
 
36.6
%
 
37.9
%
 
 
100.0
%
 
100.0
%


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

The following table summarizes the difference between the aggregate unpaid principal balance and the aggregate fair value of loans as of March 31, 2020:
Days Past Due
 
Unpaid Principal Balance
 
Fair Value
 
Fair Value Over (Under) Unpaid Principal Balance
90 to 119
 
$
336,910

 
$
275,597

 
$
(61,313
)
120+
 
291,390

 
267,673

 
(23,717
)
 
 
$
628,300

 
$
543,270

 
$
(85,030
)


Call Rights

New Residential has executed calls with respect to 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. For the three months ended March 31, 2020, New Residential executed calls on a total of 15 trusts and recognized $12.0 million of interest income on securities held in the collapsed trusts and $42.6 million of gain on securitizations accounted for as sales. For the three months ended March 31, 2019, New Residential executed calls on a total of 19 trusts and recognized $32.5 million of interest income on securities held in the collapsed trusts and $2.8 million of loss on securitizations accounted for as sales. Refer to Note 16 for transactions with affiliates.

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 credit losses:
 
 
December 31, 2019
Days Past Due
Delinquency Status(A)
Current
 
86.5
%
30-59
 
7.0
%
60-89
 
2.7
%
90-119(B)
 
0.7
%
120+(C)
 
3.1
%
 
 
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:
Balance at December 31, 2019
$
925,706

Fair value adjustment due to fair value option
(6,020
)
Purchases/additional fundings

Proceeds from repayments
(31,233
)
Transfer of loans to other assets(A)

Transfer of loans to real estate owned
(2,410
)
Transfers of loans to held for sale

Fair value adjustment
(61,860
)
Balance at March 31, 2020
$
824,183


(A)
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).

Loans Held-for-Sale, at Fair Value

Activities related to the carrying value of originated loans held-for-sale, at fair value were as follows:
Balance at December 31, 2019
 
$
1,414,528

Originations
 
11,440,093

Sales
 
(11,358,767
)
Proceeds from repayments
 
(170
)
Transfer of loans to real estate owned
 

Transfer of loans to other assets
 
(1,707
)
Fair value adjustment
 
(14,447
)
Balance at March 31, 2020
 
$
1,479,530



Activities related to the carrying value of acquired loans held-for-sale, at fair value were as follows:
Balance at December 31, 2019
 
$
3,199,084

Purchases(A)
 
878,049

Sales
 
(2,028,620
)
Proceeds from repayments
 
(47,200
)
Transfer of loans to real estate owned
 
(2,997
)
Transfer of loans to other assets

 
(4,936
)
Fair value adjustment
 
(188,937
)
Balance at March 31, 2020
 
$
1,804,443


(A)
Includes an acquisition date fair value adjustment increase of $0.4 million on loans acquired through call transactions executed during the three months ended March 31, 2020.

Activities related to the carrying value of acquired loans held-for-sale, at lower cost or fair value were as follows:
Balance at December 31, 2019
 
$
1,429,052

Purchases
 
109,666

Transfer of loans from held-for-investment
 

Sales
 
(103,327
)
Transfer of loans to real estate owned
 
(12,238
)
Transfer of loans to other assets

 
(390
)
Proceeds from repayments
 
(59,526
)
Valuation provision on loans
 
(98,704
)
Balance at March 31, 2020
 
$
1,264,533



Net Interest Income
 
 
Three Months Ended  
 March 31,
 
 
2020
 
2019
Interest Income:
 
 
 
 
Acquired Residential Mortgage Loans, held-for-investment
 
$
15,109

 
$
17,203

Acquired Residential Mortgage Loans, held-for-sale
 
17,780

 
15,179

Acquired Residential Mortgage Loans, held-for-sale, at fair value
 
27,032

 
25,807

Originated Residential Mortgage Loans, held-for-sale, at fair value
 
16,735

 
5,584

Total Interest Income on Residential Mortgage Loans
 
76,656

 
63,773

 
 
 
 
 
Interest Expense:
 
 
 
 
Acquired Residential Mortgage Loans, held-for-investment
 
5,200

 
6,005

Acquired Residential Mortgage Loans, held-for-sale
 
8,530

 
8,808

Acquired Residential Mortgage Loans, held-for-sale, at fair value
 
17,043

 
21,038

Originated Residential Mortgage Loans, held-for-sale, at fair value
 
13,427

 
5,158

Total Interest Expense on Residential Mortgage Loans
 
44,200

 
41,009

 
 
 
 
 
Total Net Interest Income on Residential Mortgage Loans
 
$
32,456

 
$
22,764



Gain on originated mortgage loans, held-for-sale, net

NewRez, a wholly owned subsidiary of New Residential, originates, or has in the past originated, 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 NewRez 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 originated mortgage loans, held-for-sale, net in the Condensed Consolidated Statements of Income.

Gain on originated mortgage loans, held-for-sale, net is summarized below:
 
 
Three Months Ended  
 March 31,
 
 
2020
 
2019
Gain on loans originated and sold, net(A)
 
$
39,289

 
$
27,542

Gain (loss) on settlement of mortgage loan origination derivative instruments(B)
 
(46,314
)
 
(11,423
)
MSRs retained on transfer of loans(C)
 
195,896

 
36,429

Other(D)
 
16,627

 
7,280

Realized gain on sale of originated mortgage loans, net
 
$
205,498

 
$
59,828

Change in fair value of loans
 
22,275

 
5,349

Change in fair value of interest rate lock commitments (Note 10)
 
91,249

 
3,208

Change in fair value of derivative instruments (Note 10)
 
(139,324
)
 
(1,215
)
Gain on originated mortgage loans, held-for-sale, net
 
$
179,698

 
$
67,170


(A)
Includes loan origination fees of $277.0 million and $25.0 million in the three months ended March 31, 2020 and 2019, respectively.
(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, 2019
 
$
93,672

Purchases
 
3,910

Transfer of loans to real estate owned
 
20,240

Sales(A)
 
(34,741
)
Valuation (provision) reversal on REO
 
(1,792
)
Balance at March 31, 2020
 
$
81,289



(A)
Recognized when control of the property has transferred to the buyer.

As of March 31, 2020, New Residential had residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $418.9 million.

In addition, New Residential has recognized $16.6 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.

During the first quarter of 2018, New Residential formed entities (the “RPL Borrowers”) that issued securitized debt collateralized by reperforming residential mortgage loans. New Residential evaluated these entities under the VIE model and concluded them to be VIEs. See Note 13 for information on the analysis and assets and liabilities related to these consolidated VIEs.