Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE MEASUREMENT

v3.20.1
FAIR VALUE MEASUREMENT
3 Months Ended
Mar. 31, 2020
Fair Value Disclosures [Abstract]  
FAIR VALUE MEASUREMENT
FAIR VALUE MEASUREMENT

The carrying values and fair values of New Residential’s 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 March 31, 2020 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)
$
85,009,386

 
$
363,932

 
$

 
$

 
$
363,932

 
$
363,932

Excess mortgage servicing rights, equity method investees, at fair value(A)
33,251,300

 
119,609

 

 

 
119,609

 
119,609

Mortgage servicing rights, at fair value(A)
403,706,059

 
3,934,384

 

 

 
3,934,384

 
3,934,384

Mortgage servicing rights financing receivables, at fair value
123,066,762

 
1,604,431

 



 
1,604,431

 
1,604,431

Servicer advance investments, at fair
    value
461,723

 
515,574

 

 

 
515,574

 
515,574

Real estate and other securities, available-for-sale
20,834,705

 
2,479,603

 

 
318,568

 
2,161,035

 
2,479,603

Residential mortgage loans, held-for-sale
1,470,604

 
1,264,533

 

 

 
1,264,533

 
1,264,533

Residential mortgage loans, held-for-sale, at fair value
3,476,667

 
3,283,973

 

 
1,633,481

 
1,650,492

 
3,283,973

Residential mortgage loans, held-for-investment, at fair value
919,461

 
824,183

 

 

 
824,183

 
824,183

Residential mortgage loans subject to repurchase
197,715

 
197,715

 

 
197,715

 

 
197,715

Consumer loans, held-for-investment, at fair value
771,998

 
780,821

 

 

 
780,821

 
780,821

Derivative assets
14,724,133

 
132,616

 

 
48

 
132,568

 
132,616

Note receivable
46,724

 
42,787

 

 

 
42,787

 
42,787

Cash and cash equivalents
360,453

 
360,453

 
360,453

 

 

 
360,453

Restricted cash
147,435

 
147,435

 
147,435

 

 

 
147,435

Other assets(B)
N/A

 
45,118

 
2,902

 

 
42,216

 
45,118

 
 
 
$
16,097,167

 
$
510,790

 
$
2,149,812

 
$
13,436,565

 
$
16,097,167

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Repurchase agreements
$
10,815,570

 
$
10,814,130

 
$

 
$
10,815,570

 
$

 
$
10,815,570

Notes and bonds payable(C)
7,028,099

 
7,014,579

 

 

 
6,238,923

 
6,238,923

Residential mortgage loan repurchase liability
197,715

 
197,715

 

 
197,715

 

 
197,715

Derivative liabilities
18,169,875

 
160,353

 

 
158,925

 
1,428

 
160,353

Excess spread financing
2,839,463

 
25,614

 

 

 
25,614

 
25,614

Contingent consideration
N/A

 
56,836

 

 

 
56,836

 
56,836

 
 
 
$
18,269,227

 
$

 
$
11,172,210

 
$
6,322,801

 
$
17,495,011

 
(A)
The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs, MSR financing receivables and Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.
(B)
Excludes the indirect equity investment in a commercial redevelopment project that is accounted for at fair value on a recurring basis based on the NAV of New Residential’s investment. The investment had a fair value of $31.9 million as of March 31, 2020.
(C)
Includes the SAFT 2013-1 and MDST Trusts mortgage backed securities issued for which the fair value option for financial instruments was elected and resulted in a fair value of $272.3 million as of March 31, 2020.

New Residential’s 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)
 
MSRs(A)
 
MSR Financing Receivables(A)
 
Servicer Advance Investments
 
Non-Agency RMBS
 
Derivatives(C)
 
Residential Mortgage Loans
 
Consumer Loans
 
 
 
Agency
 
Non-Agency
 
 
 
 
 
 
Total
Balance at December 31, 2019
$
209,633

 
$
170,114

 
$
125,596

 
$
3,967,960

 
$
1,718,273

 
$
581,777

 
$
7,957,785

 
$
39,891

 
$
3,998,825

 
$

 
$
18,769,854

Transfers
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transfers from Level 3

 

 

 

 

 

 

 

 
(467,263
)
 


 
(467,263
)
Transfers to Level 3

 

 

 

 

 

 

 

 
440,168

 
827,545

 
1,267,713

Shellpoint Acquisition

 

 

 

 

 

 

 

 

 

 

Transfers from investments in mortgage servicing rights financing receivables to investments in mortgage servicing rights

 

 

 

 

 

 

 

 

 

 

Gains (losses) included in net income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Included in provision (reversal) for credit losses on securities(D)

 

 

 

 

 

 
(44,149
)
 

 

 

 
(44,149
)
Included in change in fair value of investments in excess mortgage servicing rights(D)
(5,557
)
 
(5,467
)
 

 

 

 

 

 

 

 

 
(11,024
)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees(D)

 

 
(457
)
 

 

 

 

 

 

 

 
(457
)
Included in servicing revenue, net(E)

 

 

 
(655,800
)
 

 

 

 

 

 

 
(655,800
)
Included in change in fair value of investments in mortgage servicing rights financing receivables(D)

 

 

 

 
(104,111
)
 

 

 

 

 

 
(104,111
)
Included in change in fair value of servicer advance investments

 

 

 

 

 
(18,749
)
 

 

 

 

 
(18,749
)
Included in change in fair value of investments in residential mortgage loans

 

 

 

 

 

 

 

 
(265,244
)
 

 
(265,244
)
Included in gain (loss) on settlement of investments, net
8

 
1

 

 

 

 

 
(924,897
)
 

 

 

 
(924,888
)
Included in other income (loss), net(D)
557

 
70

 

 

 

 

 
(87,650
)
 
91,249

 
730

 
(39,916
)
 
(34,960
)
Gains (losses) included in other comprehensive income(F)

 

 

 

 

 

 
(640,403
)
 

 
(6,020
)
 
36,472

 
(609,951
)
Interest income
6,146

 
7,080

 

 

 

 
(18,089
)
 
67,123

 

 

 
6,932

 
69,192

Purchases, sales and repayments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Purchases

 

 

 
436,395

 

 
330,140

 
538,964

 

 
1,250,157

 
11,002

 
2,566,658

Proceeds from sales
(31
)
 
(3
)
 

 
(8,504
)
 
(3,708
)
 

 
(4,358,894
)
 

 
(2,393,309
)
 

 
(6,764,449
)
Proceeds from repayments
(10,589
)
 
(8,030
)
 
(5,530
)
 
(1,563
)
 
(6,023
)
 
(359,505
)
 
(346,844
)
 

 
(83,369
)
 
(61,214
)
 
(882,667
)
Originations and other

 

 

 
195,896

 

 

 

 

 

 

 
195,896

Balance at March 31, 2020
$
200,167

 
$
163,765

 
$
119,609

 
$
3,934,384

 
$
1,604,431

 
$
515,574

 
$
2,161,035

 
$
131,140

 
$
2,474,675

 
$
780,821

 
$
12,085,601

 
(A)
Includes the recapture agreement for each respective pool, as applicable.
(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)
For the purpose of this table, the IRLC asset and liability positions are shown net.
(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)
The components of Servicing revenue, net are disclosed in Note 5.
(F)
These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.

New Residential’s liabilities measured at fair value on a recurring basis using Level 3 inputs changed as follows:
 
 
Level 3
 
 
 
 
Excess Spread Financing
 
Mortgage-Backed Securities Issued
 
Contingent Consideration
 
 
 
 
 
Total
Balance at December 31, 2019
 
$
31,777

 
$
659,738

 
$
55,222

 
$
746,737

Transfers
 
 
 
 
 
 
 
 
Transfers from Level 3
 

 

 

 

Transfers to Level 3
 

 

 

 

Acquisition
 

 

 

 

Gains (losses) included in net income
 
 
 
 
 
 
 
 
Included in provision (reversal) for credit losses on securities(A)
 

 

 

 

Included in change in fair value of investments in excess mortgage servicing rights
 

 

 

 

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

 

 

 

Included in servicing revenue, net(B)
 
(6,425
)
 

 

 
(6,425
)
Included in change in fair value of investments in notes receivable - rights to MSRs
 

 

 

 

Included in change in fair value of servicer advance investments
 

 

 

 

Included in change in fair value of investments in residential mortgage loans
 

 
(17,002
)
 

 
(17,002
)
Included in gain (loss) on settlement of investments, net
 

 

 

 

Included in other income(A)
 

 

 
1,614

 
1,614

Gains (losses) included in other comprehensive income, net of tax(C)
 

 

 

 

Interest income
 

 

 

 

Purchases, sales and repayments
 
 
 
 
 
 
 
 
Purchases
 

 

 

 

Proceeds from sales
 

 

 

 

Payments
 

 
(368,979
)
 

 
(368,979
)
Other
 
262

 
(1,465
)
 

 
(1,203
)
Balance at March 31, 2020
 
$
25,614

 
$
272,292

 
$
56,836

 
$
354,742


(A)
The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 liabilities still held at the reporting dates and realized gains (losses) recorded during the period.
(B)
The components of Servicing revenue, net are disclosed in Note 5.
(C)
These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.

Investments in Excess MSRs, Excess MSRs Equity Method Investees, MSRs and MSR Financing Receivables Valuation

The following table summarizes certain information regarding the ranges and weighted averages of inputs used as of March 31, 2020:
 
 
Significant Inputs(A)
 
 
Prepayment
Rate
(B)
 
Delinquency(C)
 
Recapture
Rate
(D)
 
Mortgage Servicing Amount or Excess Mortgage Servicing Amount (bps)(E)
 
Collateral Weighted Average Maturity (Years)(F)
Excess MSRs Directly Held (Note 4)
 
 
 
 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
 
 
Original Pools

5.7% - 10.2% (8.1%)
 
0.0% - 4.8% (1.7%)
 
4.4% - 28.7% (18.5%)
 
15 - 31 (21)
 
15 - 22 (20)
Recaptured Pools
 
6.4% - 11.2% (10.1%)
 
0.1% - 4.0% (0.8%)
 
0.0% - 35.7% (26.3%)
 
20 - 29 (23)
 
20 - 24 (23)


5.7% - 11.2% (8.7%)
 
0.0% - 4.8% (1.4%)
 
0.0% - 35.7% (21.0%)
 
15 - 31 (22)
 
15 - 24 (21)
Non-Agency(G)

 
 
 
 
 
 
 
 
 
Mr. Cooper and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
Original Pools

7.8% - 11.9% (8.9%)
 
N/A
 
0.0% - 14.2% (12.5%)
 
5 - 25 (15)
 
19 - 31 (23)
Recaptured Pools
 
6.2% - 7.5% (7.1%)
 
N/A
 
12.3% - 16.5% (14.9%)
 
22 - 27 (25)
 
21 - 24 (23)


6.2% - 11.9% (8.6%)
 
N/A
 
0.0% - 16.5% (12.9%)
 
5 - 27 (16)
 
19 - 31 (23)
Total/Weighted AverageExcess MSRs Directly Held

5.7% - 11.9% (8.7%)
 
N/A
 
0.0% - 35.7% (17.2%)
 
5 - 31 (19)
 
15 - 31 (22)


 
 
 
 
 
 
 
 
 
Excess MSRs Held through Equity Method Investees (Note 4)
 
 
 
 
 
 
 
 
Agency

 
 
 
 
 
 
 
 
 
Original Pools

8.4% - 9.2% (8.6%)
 
1.2% - 4.0% (2.1%)
 
13.7% - 28.6% (19.8%)
 
15 - 25 (19)
 
18 - 20 (19)
Recaptured Pools
 
9.4% - 10.2% (9.9%)
 
0.7% - 1.7% (1.2%)
 
20.8% - 29.3% (24.6%)
 
22 - 28 (24)
 
21 - 24 (22)
Total/Weighted AverageExcess MSRs Held through Investees

8.4% - 10.2% (9.2%)
 
0.7% - 4.0% (1.7%)
 
13.7% - 29.3% (22.1%)
 
15 - 28 (21)
 
18 - 24 (20)
 
 
 
 
 
 
 
 
 
 
 
Total/Weighted AverageExcess MSRs All Pools
 
5.7% - 11.9% (8.9%)
 
N/A
 
0.0% - 35.7% (18.9%)
 
5 - 31 (20)
 
15 - 31 (21)
 
 
 
 
 
 
 
 
 
 
 
MSRs
 
 
 
 
 
 
 
 
 
 
Agency(H)
 
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(I) (J)
 
10.7% - 16.5% (12.0%)
 
0.1% - 3.4% (1.2%)
 
5.1% - 25.1% (20.5%)
 
25 - 33 (28)
 
0 - 30 (22)
MSR Financing Receivables(I)
 
11.8% - 14.9% (13.1%)
 
0.5% - 0.8% (0.6%)
 
12.4% - 18.6% (15.1%)
 
25 - 29 (27)
 
0 - 30 (25)
 
 
10.7% - 16.5% (12.1%)
 
0.1% - 3.4% (1.2%)
 
5.1% - 25.1% (19.8%)
 
25 - 33 (28)
 
0 - 30 (22)
Non-Agency
 
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(I)
 
8.7% - 11.9% (11.7%)
 
0.3% - 13.2% (0.9%)
 
1.9% - 24.5% (23.5%)
 
26 - 87 (28)
 
0 - 30 (16)
MSR Financing Receivables(I)
 
8.1%
 
15.1%
 
9.4%
 
48
 
0 - 30 (25)
 
 
8.1% - 11.9% (8.2%)
 
0.3% - 15.1% (14.8%)
 
1.9% - 24.5% (9.6%)
 
26 - 87 (47)
 
0 - 30 (25)
Ginnie Mae
 
 
 
 
 
 
 
 
 
 
Mortgage Servicing Rights(I) (J)
 
14.3% - 17.0% (15.8%)
 
2.0% - 6.1% (5.6%)
 
15.3% - 35.0% (23.9%)
 
32 - 52 (45)
 
0 - 30 (27)
 
 
 
 
 
 
 
 
 
 
 
Total/Weighted AverageMSRs
 
8.1% - 17.0% (11.8%)
 
0.1% - 15.1% (4.5%)
 
1.9% - 35.0% (20.0%)
 
25 - 87 (34)
 
0 - 30 (23)

(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 residential 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 or subservicer, as applicable.
(E)
Weighted average total mortgage servicing amount, in excess of the basic fee as applicable, measured in basis points (bps). A weighted average cost of subservicing of $6.2 - $8.8 ($7.6) per loan per month was used to value the agency MSRs, including MSR Financing Receivables. A weighted average cost of subservicing of $11.20 per loan per month was used to value the Non-Agency MSRs, including MSR Financing Receivables. A weighted average cost of subservicing of $9.70 per loan per month was used to value the Ginnie Mae MSRs.
(F)
Weighted average maturity of the underlying residential 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.
(H)
Represents Fannie Mae and Freddie Mac MSRs.
(I)
For certain pools, recapture rate represents the expected recapture rate with the successor subservicer appointed by NRM.
(J)
Includes valuation of the related Excess spread financing (Note 5).

With respect to valuing the Ocwen-serviced MSR financing receivables, which include a significant servicer advances receivable component, the cost of financing servicer advances receivable is assumed to be LIBOR plus 1.8%.

As of March 31, 2020, a weighted average discount rate of 8.3% (range 8.0% - 8.5%) was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees). As of March 31, 2020, a weighted average discount rate of 8.2% (range 7.9% - 13.5%) was used to value New Residential’s investments in MSRs and a weighted average discount rate of 9.4% (range 8.0% - 10.0%) was used to value New Residential’s investments in MSR financing receivables.

Servicer Advance Investments Valuation

The following table summarizes certain information regarding the ranges and weighted averages of inputs used in valuing the Servicer Advance Investments, including the basic fee component of the related MSRs:
 
Significant Inputs
 
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)
March 31, 2020
0.8% - 1.6% (1.6%)
 
8.2% - 8.7% (8.7%)
 
5.4% - 17.7% (17.3%)
 
15.6 - 19.8 (19.6)
bps
5.8% - 6.3% (5.8%)
 
22.5 - 22.7 (22.7)


(A)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
(B)
Mortgage servicing amount is net of 11.0 bps which represents the amount New Residential paid its servicers as a monthly servicing fee.
(C)
Weighted average maturity of the underlying residential mortgage loans in the pool.
 
Real Estate and Other Securities Valuation
 
As of March 31, 2020, 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
 
$
306,566

 
$
308,486

 
$
318,568

 
$

 
$
318,568

 
2

Non-Agency RMBS(C)
 
20,528,139

 
2,239,021

 
2,139,579

 
21,456

 
2,161,035

 
3

Total
 
$
20,834,705

 
$
2,547,507

 
$
2,458,147

 
$
21,456

 
$
2,479,603

 
 
 
(A)
New Residential generally obtained pricing service quotations or broker quotations from two sources, one of which was 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, for Non-Agency RMBS, 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 75.8% of New Residential’s Non-Agency RMBS, the ranges and weighted averages 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
 
$
1,637,017

 
1.6% - 11.8% (5.1%)
 
2.3% - 27.1% (10.5%)
 
0% - 3.0% (1.0%)
 
12.9% - 85.6% (43.8%)

(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.
(C)
Includes New Residential’s investments in interest-only notes for which the fair value option for financial instruments was elected.

Residential Mortgage Loans Valuation

New Residential, through its wholly owned subsidiary, NewRez, originates mortgage loans that it intends to sell into Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securitizations. Residential mortgage loans held-for-sale, at fair value are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. Residential mortgage loans held-for-sale, at fair value are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, New Residential classifies these valuations as Level 2 in the fair value hierarchy.

Residential mortgage loans held-for-sale, at fair value also includes certain nonconforming mortgage loans originated for sale to private investors, which are valued using internal pricing models to forecast loan level cash flows using inputs such as default rates, prepayments speeds and discount rates. As the internal pricing model is based on certain unobservable inputs, New Residential classifies these valuations as Level 3 in the fair value hierarchy.

The following table summarizes certain information regarding the ranges and weighted averages of inputs used in valuing residential mortgage loans held-for-sale, at fair value classified as Level 3:
 
 
Fair Value
 
Discount Rate
 
Prepayment Rate
 
CDR
 
Loss Severity
Acquired Loans
 
$
1,527,770

 
4.1% - 11.0%
(6.5%)
 
0.0% - 14.1%
(5.0%)
 
0.0% - 34.7%
(4.0%)
 
0.0% - 60.0%
(27.0%)
Originated Loans
 
122,722

 
7.0%
 
14.1%
 
1.2%
 
50.0%
Residential Mortgage Loans Held-for-Sale, at Fair Value
 
$
1,650,492

 

 

 

 



Residential mortgage loans held-for-investment, at fair value includes mortgage loans underlying the SAFT 2013-1 securitization, which are valued using internal pricing models using inputs such as default rates, prepayment speeds and discount rates. As the internal pricing model is based on certain unobservable inputs, New Residential classifies these valuations as Level 3 in the fair value hierarchy.

The following table summarizes certain information regarding the ranges and weighted averages of inputs used in valuing residential mortgage loans held-for-investment, at fair value classified as Level 3:
 
 
Fair Value
 
Discount Rate
 
Prepayment Rate
 
CDR
 
Loss Severity
Residential Mortgage Loans Held-for-Investment, at Fair Value
 
$
824,183

 
4.0% - 10.5%
(8.2%)
 
3.0% - 15.0%
(6.6%)
 
2.0% - 2.9%
(2.4%)
 
20.0% - 47.9%
(36.6%)


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 classified as Level 2 in the fair value hierarchy.

As a part of the mortgage loan origination business, New Residential enters into forward loan sale and securities delivery commitments, which are valued based on observed market pricing for similar instruments and therefore, are classified as Level 2. In addition, New Residential enters into IRLCs, which are valued using internal pricing models (i) incorporating market pricing for instruments with similar characteristics, (ii) estimating the fair value of the servicing rights expected to be recorded at sale of the loan and (iii) adjusting for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded
at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and therefore, IRLCs are classified as Level 3 in the fair value hierarchy.

The following table summarizes certain information regarding the ranges and weighted averages of inputs used in valuing IRLCs:
 
 
Fair Value
 
Loan Funding Probability
 
Fair Value of initial servicing rights (bps)
IRLCs (net)
 
$
131,140

 
43% - 100% (76.5%)
 
2.33 - 306 (139.8)


Mortgage-Backed Securities Issued

New Residential and NewRez, a wholly owned subsidiary of New Residential, were deemed to be the primary beneficiaries of the MDST Trusts and SAFT 2013-1 securitization entity and therefore, New Residential’s condensed consolidated balance sheets include the mortgage-backed securities issued by the MDST Trusts and SAFT 2013-1, respectively. New Residential elected the fair value option for these financial instruments and the mortgage-backed securities issued were valued consistently with New Residential’s Non-Agency RMBS described above.

The following table summarizes certain information regards the ranges and weighted averages of inputs used in valuing Mortgage-Backed Securities Issued:
 
 
Fair Value
 
Discount Rate
 
Prepayment Rate
 
CDR
 
Loss Severity
Mortgage-Backed Securities Issued
 
$
272,292

 
4.0% - 7.3%
(6.2%)
 
3.3% - 15.0%
(7.5%)
 
2.0% - 2.8%
(2.5%)
 
20.0% - 30.0%
(26.5%)


Contingent Consideration Valuation

New Residential, as additional consideration for the Shellpoint Acquisition, may make up to three cash earnout payments, which will be calculated following each of the first three anniversaries of the Shellpoint Closing as a percentage of the amount by which the pre-tax income of certain of Shellpoint’s businesses exceeds certain specified thresholds, up to an aggregate maximum amount of $60.0 million (the “Shellpoint Earnout Payments”). On September 5, 2019, New Residential paid $10.0 million as the first of three potential earnout payments. In accordance with ASC 805, New Residential measures its contingent consideration at fair value on a recurring basis using a scenario-based method to weigh the probability of multiple outcomes to arrive at an expected payment cash flow and then discounts the expected cash flow. The inputs utilized in valuing the contingent consideration include a discount rate of 11% and the application of probability weighting of income scenarios, which are significant unobservable inputs and therefore, contingent consideration is classified as Level 3 in the fair value hierarchy.

In addition, as additional consideration for the Guardian Acquisition, New Residential may make up to four cash earnout payments, calculated as the amount of cumulative Guardian earnings on specified contracts in excess of certain thresholds up to an aggregate maximum amount of $17.5 million (the “Guardian Earnout Payments”), which will be calculated following the end of each calendar year with the final payment being calculated as of the fourth anniversary date of the Guardian closing. As described above, in accordance with ASC 805, New Residential measures its contingent consideration at fair value on a recurring basis using a scenario-based method to weigh the probability of multiple outcomes to arrive at an expected payment cash flow and then discounts the expected cash flow. The inputs utilized in valuing the contingent consideration include a discount rate of 11% and the application of probability weighting of income scenarios, which are significant unobservable inputs and therefore, contingent consideration is classified as Level 3 in the fair value hierarchy.

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 March 31, 2020, assets measured at fair value on a nonrecurring basis were $1,312.2 million. The $1,312.2 million of assets include approximately $1,264.5 million of residential mortgage loans held-for-sale and $47.7 million of REO. The fair value of New Residential’s residential mortgage loans, held-for-sale is estimated based on a discounted cash flow model analysis using internal pricing models and is categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these residential mortgage loans as of March 31, 2020:
 
 
Fair Value and Carrying Value
 
Discount Rate
 
Weighted Average Life (Years)(A)
 
Prepayment Rate
 
CDR(B)
 
Loss Severity(C)
Performing Loans
 
$
753,288

 
5.0% - 11.0%
(6.1%)
 
2.4 - 4.8
(4.2)
 
4.3% - 20.0%
(8.5%)
 
1.3% - 34.7%
(6.9%)
 
0.0% - 100.0%
(38.5%)
Non-Performing Loans
 
511,245

 
5.8% - 8.5%
(8.3%)
 
2.3 - 5.1
(3.2)
 
2.0% - 6.3%
(3.1%)
 
2.7% - 2.9%
(2.9%)
 
18.9% - 30.0%
(29.6%)
Total/Weighted Average
 
$
1,264,533

 
7.0%
 
3.8
 
6.3%
 
5.3%
 
34.9%

(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% - 25% (weighted average of 16%), depending on the information available to the broker.

The total change in the recorded value of assets for which a fair value adjustment has been included in the Condensed Consolidated Statements of Income for the three months ended March 31, 2020 consisted of a valuation allowance of $98.7 million for residential mortgage loans and $1.8 million increased allowance for REO