Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN CONSUMER LOANS

v3.20.1
INVESTMENTS IN CONSUMER LOANS
3 Months Ended
Mar. 31, 2020
Investments In Consumer Loans Equity Method Investees [Abstract]  
INVESTMENTS IN CONSUMER LOANS
INVESTMENTS IN CONSUMER LOANS

New Residential, through limited liability companies (together, the “Consumer Loan Companies”), has a co-investment in a portfolio of consumer loans. The portfolio includes personal unsecured loans and personal homeowner loans. OneMain is the servicer of the loans and provides all servicing and advancing functions for the portfolio. As of March 31, 2020, New Residential owns 53.5% of the limited liability company interests in, and consolidates, the Consumer Loan Companies.

New Residential also purchased certain newly originated consumer loans from a third party (“Consumer Loan Seller”). These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment. In addition, see “Equity Method Investees” below.

The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:
 
Unpaid Principal Balance

Interest in Consumer Loans

Carrying Value

Weighted Average Coupon

Weighted Average Expected Life (Years)(A)
 
Weighted Average Delinquency(B)
March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
606,120

 
53.5
%
 
$
627,001

 
18.8
%
 
4.0
 
4.7
%
Purchased Credit Deteriorated Loans(C)
158,920

 
53.5
%
 
147,606

 
15.3
%
 
3.7
 
9.7
%
Other - Performing Loans
6,958

 
100.0
%
 
6,214

 
15.1
%
 
0.7
 
5.1
%
Total Consumer Loans, held-for-investment
$
771,998

 
 
 
$
780,821

 
18.0
%
 
3.9
 
5.7
%
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Consumer Loan Companies
 
 
 
 
 
 
 
 
 
 
 
Performing Loans
$
644,676

 
53.5
%
 
$
682,310

 
18.8
%
 
4.0
 
4.7
%
Purchased Credit Deteriorated Loans(C)
170,083

 
53.5
%
 
136,633

 
15.5
%
 
3.7
 
10.1
%
Other - Performing Loans
9,158

 
100.0
%
 
8,602

 
15.1
%
 
0.7
 
6.1
%
Total Consumer Loans, held-for-investment
$
823,917

 
 
 
$
827,545

 
18.0
%
 
3.9
 
5.9
%

(A)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
(C)
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, which are accounted for as PCD loans.

See Note 11 regarding the financing of consumer loans.

Upon adoption of ASU 2016-13 on January 1, 2020, New Residential elected to apply the fair value option for all consumer loans. 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. 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 Sheet.

The election of the fair value option resulted in the Company recognizing an adjustment of $19.7 million to reduce retained earnings attributable to the change in the fair value of consumer loans, net of noncontrolling interests. Unrealized gains (losses) from the change in fair value of consumer loans are recognized in Other income (loss), net in the Condensed Consolidated Statements of Income. Realized gains (losses) are recorded in Gain on settlement of investments, net in the Condensed Consolidated Statements of Income. See Note 2.

Consumer 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. Interest income is recognized over the life the loan using the effective interest method and is recorded on the accrual basis.

The following table summarizes the past due status and difference between the aggregate unpaid principal balance and the aggregate fair value of consumer loans as of March 31, 2020:
Days Past Due
 
Unpaid Principal Balance
 
Fair Value
 
Fair Value Over (Under) Unpaid Principal Balance
Under 90 Days
 
755,681

 
764,479

 
8,798

90 days or more past due
 
16,317

 
16,342

 
25

Total
 
771,998

 
780,821

 
8,823



Performing Loans

The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment, which is an important indicator of credit quality and the establishment of the allowance for loan losses:
 
 
December 31, 2019
Days Past Due
 
Delinquency Status(A)
Current
 
95.3
%
30-59
 
1.8
%
60-89
 
1.2
%
90-119(B)
 
0.7
%
120+(B) (C)
 
1.0
%
 
 
100.0
%

(A)
Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency status.
(B)
Includes loans more than 90 days past due and still accruing interest.
(C)
Interest is accrued up to the date of charge-off at 180 days past due.

Activities related to the fair value of consumer loans, held-for-investment were as follows:
Balance at December 31, 2019
 
$
827,545

Fair value adjustment due to fair value option
 
36,472

Purchases
 

Additional fundings(A)
 
11,002

Proceeds from repayments
 
(61,213
)
Accretion of loan discount and premium amortization, net
 
6,932

Fair value adjustment
 
(39,917
)
Balance at March 31, 2020
 
$
780,821


(A)
Represents draws on consumer loans with revolving privileges.

Equity Method Investees

In February 2017, New Residential completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC (“LoanCo”), to purchase up to $5.0 billion worth of newly originated consumer loans from Consumer Loan Seller over a two-year term. New Residential accounted for its investment in LoanCo pursuant to the equity method of accounting because it could exercise significant influence over LoanCo but the requirements for consolidation are not met. As of December 31, 2019, LoanCo had distributed all net assets to New Residential.

Additionally, New Residential and the LoanCo co-investors agreed to purchase warrants to purchase up to 177.7 million shares of Series F convertible preferred stock in the Consumer Loan Seller’s parent company (“ParentCo”). The holder of the warrants has the option to purchase an equivalent number of shares of Series F convertible preferred stock in ParentCo at a price of $0.01 per share. The Series F convertible preferred stock holders have the right to convert such preferred stock to common stock at any time, are entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted, and will have liquidation rights in the event of liquidation. As of March 31, 2020 and December 31, 2019, the warrants are held on New Residential’s balance sheet in Other Assets and carried at $25.5 million and $28.0 million, respectively.

The following table summarizes the income earned from the Company’s investments in LoanCo and WarrantCo during 2019:
 
 
Three Months Ended  
 March 31,
 
 
2019(A)
Interest income
 
$
7,977

Interest expense
 
(2,822
)
Change in fair value of consumer loans and warrants
 
14,536

Gain on sale of consumer loans(B)
 
(446
)
Other expenses
 
(1,456
)
Net income
 
$
17,789

New Residential’s equity in net income
 
$
4,311

New Residential’s ownership
 
24.2
%


(A)
Data for the period ended February 28, 2019 as a result of the one month reporting lag.
(B)
During the three months ended March 31, 2019, LoanCo sold, through securitizations which were treated as sales for accounting purposes, $406.1 million in UPB of consumer loans. LoanCo retained $83.9 million of residual interest in the securitizations and distributed them to the LoanCo co-investors, including New Residential.

The following is a summary of LoanCo’s consumer loan investments at March 31, 2019:
 
Unpaid Principal Balance
 
Interest in Consumer Loans
 
Carrying Value
 
Weighted Average Coupon
 
Weighted Average Expected Life (Years)(A)
 
Weighted Average Delinquency(B)
March 31, 2019(C)
$
259,618

 
25.0
%
 
$
259,618

 
14.0
%
 
1.3
 
1.4
%

(A)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
(C)
Data as of February 28, 2019 as a result of the one month reporting lag.