Quarterly report pursuant to Section 13 or 15(d)

EXCESS MORTGAGE SERVICING RIGHTS ASSETS

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EXCESS MORTGAGE SERVICING RIGHTS ASSETS
9 Months Ended
Sep. 30, 2021
Transfers and Servicing [Abstract]  
EXCESS MORTGAGE SERVICING RIGHTS ASSETS EXCESS MORTGAGE SERVICING RIGHTS ASSETS
Excess mortgage servicing rights assets include New Residential’s direct investments in Excess MSRs and investments in joint ventures jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs.

The table below summarizes the components of excess mortgage servicing rights assets as presented on the Consolidated Balance Sheets:
September 30, 2021 December 31, 2020
Direct investments in Excess MSRs $ 270,180  $ 310,938 
Excess MSR Joint Ventures 89,108  99,917 
Excess mortgage servicing rights assets, at fair value $ 359,288  $ 410,855 

Direct Investments in Excess MSRs

The following table presents activity related to the carrying value of direct investments in Excess MSRs:
Servicer
Mr. Cooper
SLS(A)
Total
Balance as of December 31, 2020 $ 309,009  $ 1,929  $ 310,938 
Purchases —  —  — 
Interest income 16,315  (127) 16,188 
Other income 303  (325) (22)
Proceeds from repayments (42,971) (267) (43,238)
Proceeds from sales (20) —  (20)
Change in fair value (14,092) 426  (13,666)
Balance as of September 30, 2021
$ 268,544  $ 1,636  $ 270,180 
(A)Specialized Loan Servicing LLC (“SLS”).

Mr. Cooper or SLS, as applicable, as servicer performs all of the servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

New Residential has entered into a “recapture agreement” with respect to each of the direct Excess MSR investments serviced by Mr. Cooper and SLS. Under such arrangements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any refinancing by Mr. Cooper of a loan in the original portfolio. These recapture agreements do not apply to New Residential’s Servicer Advance Investments (Note 6).
The following is a summary of direct investments in Excess MSRs:
September 30, 2021 December 31, 2020
UPB of Underlying Mortgages Interest in Excess MSR
Weighted Average Life Years(A)
Amortized Cost Basis(B)
Carrying Value(C)
Carrying Value(C)
New Residential(D)
Fortress-managed funds Mr. Cooper
Agency
Original and Recaptured Pools
$ 28,418,993 
32.5% - 66.7%
(53.3%)
0.0% - 40%
20.0% - 35.0%
6.0 $ 125,402  $ 139,289  $ 162,645 
Non-Agency(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools
32,179,863 
33.3% - 100.0%
(59.4%)
0.0% - 50%
0.0% - 33.3%
6.6 98,407  130,891  148,293 
Total $ 60,598,856  6.3 $ 223,809  $ 270,180  $ 310,938 
(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.
(C)Carrying value represents the fair value of the pools and recapture agreements, as applicable.
(D)Amounts in parentheses represent weighted averages.
(E)New Residential is also invested in related Servicer Advance Investments, including the basic fee component of the related MSR as of September 30, 2021 (Note 6) on $21.6 billion unpaid principal balance (“UPB”) underlying these Excess MSRs.

Changes in fair value of investments consists of the following:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021 2020 2021 2020
Original and Recaptured Pools $ (4,837) $ (664) $ (13,666) $ (11,773)

As of September 30, 2021, a weighted average discount rate of 7.8% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

Excess MSR Joint Ventures
New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.
The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees:
September 30, 2021 December 31,
2020
Excess MSR assets $ 158,916 $ 179,762
Other assets 19,987 20,759
Other liabilities (687) (687)
Equity $ 178,216 $ 199,834
New Residential’s investment $ 89,108 $ 99,917
New Residential’s percentage ownership 50.0  % 50.0  %

Three Months Ended
September 30,
Nine Months Ended
September 30,
2021 2020 2021 2020
Interest income $ 261  $ 12,249  $ 6,500  $ 20,099 
Other income (loss) (2,605) (13,027) (3,634) (25,879)
Expenses (8) (8) (24) (24)
Net income (loss) $ (2,352) $ (786) $ 2,842  $ (5,804)

The following table summarizes the activity of investments in equity method investees:
Balance at December 31, 2020 $ 99,917 
Distributions of capital from equity method investees (12,230)
Change in fair value of investments in equity method investees 1,421 
Balance at September 30, 2021 $ 89,108 

The following is a summary of Excess MSR investments made through equity method investees:
September 30, 2021
Unpaid Principal Balance
Investee Interest in Excess MSR(A)
New Residential Interest in Investees
Amortized Cost Basis(B)
Carrying Value(C)
Weighted Average Life (Years)(D)
Agency
Original and Recaptured Pools $ 24,230,726  66.7  % 50.0  % $ 119,814  $ 158,916  5.7
(A)The remaining interests are held by Mr. Cooper.
(B)Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.
(C)Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools and recapture agreements, as applicable.
(D)Represents the weighted average expected timing of the receipt of cash flows of each investment.
MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES
The following table presents activity related to the carrying value of MSRs and MSR Financing Receivables:
Balance as of December 31, 2020 $ 4,585,841 
Caliber acquisition (Note 1) 1,507,524 
Purchases, net(A)
7,965 
Originations(B)
878,190 
Proceeds from sales (42,075)
Change in fair value due to:
    Realization of cash flows(C)
(928,646)
    Change in valuation inputs and assumptions 573,556 
    (Gain) loss realized (17,088)
Balance at September 30, 2021 $ 6,565,267 
(A)Net of purchase price adjustments and purchase price fully reimbursable from MSR sellers as a result of prepayment protection.    
(B)Represents MSRs retained on the sale of originated mortgage loans.
(C)Based on the paydown of the underlying residential mortgage loans.

Servicing Revenue, Net consists of the following:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2021 2020 2021 2020
Servicing fee revenue, net and interest income from MSRs and MSR financing receivables $ 384,953  $ 404,373  $ 1,069,544  $ 1,249,504 
Ancillary and other fees 13,692  46,486  98,887  140,538 
Servicing fee revenue and fees 398,645  450,859  1,168,431  1,390,042 
Change in fair value due to:
Realization of cash flows(A)
(287,318) (509,624) (924,766) (1,135,515)
Change in valuation inputs and assumptions(B)
147,233  97,832  573,213  (598,226)
Change in fair value of derivative instruments (41,365) —  (41,564) — 
(Gain) loss realized (739) (3,547) (17,088) 2,363 
Gain (loss) on settlement of derivative instruments (13,434) (11,127) — 
Servicing revenue, net $ 203,022  $ 35,520  $ 747,099  $ (341,336)
(A)Includes $1.3 million and $2.4 million of fair value adjustment due to realization of cash flows to Excess spread financing for the three months ended September 30, 2021 and 2020, respectively, and $3.9 million and $6.1 million for the nine months ended September 30, 2021 and 2020, respectively.
(B)Includes $1.3 million and $0.2 million of fair value adjustment to Excess spread financing for the three months ended September 30, 2021 and 2020, respectively, and $0.3 million and $6.2 million for the nine months ended September 30, 2021 and 2020, respectively.
The following is a summary of MSRs and MSR Financing Receivables as of September 30, 2021:
UPB of Underlying Mortgages
Weighted Average Life (Years)(A)
Carrying Value(B)
Agency $ 374,945,577  5.9 $ 4,273,376 
Non-Agency 68,903,562  8.0 966,051 
Ginnie Mae(C)
105,975,422  5.4 1,325,840 
Total $ 549,824,561  6.1 $ 6,565,267 
(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)Carrying value represents fair value. As of September 30, 2021, weighted average discount rates of 7.4% (range 6.9% - 12.5%) were used to value New Residential’s MSRs and MSR Financing Receivables.
(C)As of September 30, 2021, New Residential holds approximately $1.8 billion in residential mortgage loans subject to repurchase and the related residential mortgage loans repurchase liability on its Consolidated Balance Sheets.

Residential Mortgage Loans Subject to Repurchase

New Residential, through its wholly owned subsidiaries as approved issuers of Ginnie Mae MBS, originates and securitizes government-insured residential mortgage loans. As the issuer of the Ginnie Mae-guaranteed securitizations, New Residential has the unilateral right to repurchase loans from the securitizations when they are delinquent for more than 90 days. Loans in forbearance that are three or more consecutive payments delinquent are included as delinquent loans permitted to be repurchased. Under GAAP, New Residential is required to recognize the right to loans on its balance sheet and establish a corresponding liability upon the triggering of the repurchase right regardless of whether the Company intends to repurchase the loans. As of September 30, 2021, New Residential holds approximately $1.8 billion in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its Consolidated Balance Sheets. New Residential may re-pool repurchased loans into new Ginnie Mae securitizations upon re-performance of the loan or otherwise sell to third-party investors. The Company does not change the accounting for MSRs related to previously sold loans upon recognizing loans eligible for repurchase. Rather, upon repurchase of a loan, the MSR is written off. As of September 30, 2021, New Residential holds approximately $1,082.9 million of repurchased residential mortgage loans on its Consolidated Balance Sheets.

Ocwen MSR Financing Receivable Transactions

In July 2017, Ocwen Loan Servicing, LLC (collectively with certain affiliates, “Ocwen”) and New Residential entered into an agreement in which both parties agreed to undertake certain actions to facilitate the transfer from Ocwen to New Residential of Ocwen’s remaining interests in the MSRs relating to loans with an aggregate unpaid principal balance of approximately $110.0 billion and with respect to which New Residential already held certain rights (“Rights to MSRs”). Ocwen and New Residential concurrently entered into a subservicing agreement pursuant to which Ocwen agreed to subservice the mortgage loans related to the MSRs that were transferred to New Residential.

In January 2018, Ocwen sold and transferred to New Residential certain “Rights to MSRs” and other assets related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion. PHH (as successor by merger to Ocwen) will continue to service the mortgage loans related to the MSRs until any necessary third-party consents to transferring the MSRs are obtained and all other conditions to transferring the MSRs are satisfied.

Of the “Rights to MSRs” sold and transferred to NRM and Newrez, consents and all other conditions to transfer have been received with respect to approximately $66.7 billion UPB of underlying loans. Although legally sold and entitled to the economics of the transfer, as of September 30, 2021, with respect to MSRs representing approximately $14.4 billion UPB of underlying loans, it was determined for accounting purposes that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to Newrez and therefore are not treated as a sale under GAAP and are classified as MSR financing receivables.
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the MSRs and MSR Financing Receivables:
Percentage of Total Outstanding Unpaid Principal Amount
State Concentration September 30, 2021 December 31, 2020
California 18.4  % 21.2  %
Florida 8.5  % 7.4  %
Texas 6.1  % 5.6  %
New York 6.1  % 7.0  %
Washington 5.4  % 2.9  %
New Jersey 4.6  % 4.8  %
Illinois 3.4  % 3.6  %
Virginia 3.4  % 2.9  %
Maryland 3.3  % 3.1  %
Colorado 3.0  % 2.8  %
Other U.S. 37.8  % 38.7  %
100.0  % 100.0  %

Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the MSRs.

Mortgage Subservicing

Newrez performs servicing of residential mortgage loans for third parties under subservicing agreements. Mortgage subservicing does not meet the criteria to be recognized as a mortgage servicing right asset and, therefore, is not recognized on New Residential’s Consolidated Balance Sheets. The UPB of residential mortgage loans subserviced for others as of September 30, 2021 and 2020 was $75.8 billion and $77.1 billion, respectively. New Residential earned subservicing revenue of $123.7 million and $138.6 million for the nine months ended September 30, 2021 and 2020, respectively, related to subserviced loans which is included within Servicing Revenue, Net and Interest Income from MSR Financing Receivables in the Consolidated Statements of Income.

NRM engages third party licensed mortgage servicers as subservicers and, in relation to certain MSR purchases, including to perform the operational servicing duties, including recapture activities, in connection with the MSRs it acquires, in exchange for a subservicing fee which is recorded as Subservicing Expense and reflected as part of General and Administrative Expenses in New Residential’s Consolidated Statements of Income. As of September 30, 2021, these subservicers include PHH, Mr. Cooper, LoanCare, and Flagstar, which subservice 10.8%, 9.9%, 8.9% and 0.4% of the MSRs held by New Residential. The remaining 70.0% of the underlying UPB of the related mortgages is subserviced by Newrez and Caliber (Note 1 to our Consolidated Financial Statements).
Servicer Advances Receivable

In connection with New Residential’s ownership of MSRs, the Company assumes the obligation to serve as a liquidity provider to initially fund servicer advances on the underlying pool of mortgages (Note 15) it services. These servicer advances are recorded when advanced and are included in Servicer Advances Receivable on the Consolidated Balance Sheets.

The following types of advances are included in the Servicer Advances Receivable:
September 30, 2021 December 31, 2020
Principal and interest advances $ 592,212  $ 665,538 
Escrow advances (taxes and insurance advances) 1,414,507  1,547,796 
Foreclosure advances 801,466  816,400 
Total(A)(B)(C)
$ 2,808,185  $ 3,029,734 
(A)Includes $555.9 million and $583.9 million of servicer advances receivable related to Agency MSRs, respectively, recoverable either from the borrower or the Agencies.
(B)Includes $183.0 million and $181.2 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from either the borrower or Ginnie Mae. Expected losses for advances associated with Ginnie Mae loans in the MSR portfolio are considered in the MSR fair valuation through a nonreimbursable advance loss assumption.
(C)Excludes $25.6 million and $27.5 million, respectively, in unamortized advance discount and reserves, net of accruals for advance recoveries. These reserves relate to inactive loans in the foreclosure or liquidation process.

New Residential’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority pursuant to the underlying servicing agreements (i.e., “top of the waterfall”) and New Residential is generally entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. Furthermore, to the extent that advances are not recoverable by New Residential as a result of the subservicer’s failure to comply with applicable requirements in the relevant servicing agreements, New Residential has a contractual right to be reimbursed by the subservicer. For advances on loans that have been liquidated, sold, paid in full or modified, the Company has reserved $34.6 million and $22.9 million for expected non-recovery of advances as of September 30, 2021 and December 31, 2020, respectively.

The following table summarizes servicer advances reserve:
Balance at December 31, 2020 $ 22,852 
Caliber acquisition (Note 1) 15,068 
Provision 9,340 
Transfers and Other (10,961)
Write-offs (1,663)
Balance at September 30, 2021 $ 34,636 

See Note 11 regarding the financing of MSRs and Servicer Advances Receivable.