Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

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INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE
6 Months Ended
Jun. 30, 2013
Investments In Excess Mortgage Servicing Rights At Fair Value  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE
3.      INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans with an outstanding principal balance of approximately $9.9 billion (“Pool 1”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $42 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $10.4 billion (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $63.7 billion, comprised of approximately 75% non-conforming loans in private label securitizations and approximately 25% conforming loans in GSE pools. The portfolio is comprised of three pools: two GSE loan pools with outstanding principal balances of approximately $9.8 billion (“Pool 3”) and $6.3 billion (“Pool 4”), respectively, and a pool of non-conforming loans in private label securitizations with an outstanding principal balance of approximately $47.6 billion (“Pool 5”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 11. On May 20, 2013, New Residential entered into an excess spread agreement with Nationstar to purchase for $2.4 million a two-thirds interest in the Excess MSRs on a portion of the loans in the pool which are eligible to be refinanced by a specific third party for a period of time, with Nationstar retaining the remaining one-third interest in the Excess MSRs and all servicing rights. After this period expires, Nationstar will have the ability to refinance all of the loans in the pool. See Note 6 for information on our other agreements with Nationstar with respect to Pool 11.
 
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.
 
The following is a summary of New Residential’s direct investments in Excess MSRs:
 
   
June 30, 2013
   
Six
Months
Ended June
30, 2013
 
   
Unpaid Principal
Balance (“UPB”) of Underlying Mortgages
   
Amortized
Cost Basis
 (A)
   
Carrying Value (B)
   
Weighted Average Yield
   
Weighted Average Life
(Years) (C)
   
Changes in Fair Value Recorded in Other
 Income (D)
 
MSR Pool 1
  $ 7,593,438     $ 28,120     $ 39,147       12.5 %     4.9     $ 5,290  
MSR Pool 1 - Recapture Agreement
          2,980       5,383       12.5 %     11.0       1,897  
MSR Pool 2
    8,570,405       31,629       37,339       12.5 %     5.1       4,666  
MSR Pool 2 - Recapture Agreement
          2,934       6,557       12.5 %     12.1       3,441  
MSR Pool 3
    8,380,524       25,351       33,183       12.5 %     4.8       4,976  
MSR Pool 3 - Recapture Agreement
          4,088       5,755       12.5 %     11.5       1,742  
MSR Pool 4
    5,381,133       10,205       13,176       12.5 %     4.6       1,952  
MSR Pool 4 - Recapture Agreement
          2,657       3,533       12.5 %     11.1       891  
MSR Pool 5
    39,989,031       99,530       121,102       12.5 %     5.5       19,594  
MSR Pool 5 - Recapture Agreement
          8,454       3,854       12.5 %     12.8       (758 )
MSR Pool 11 - Recapture Agreement
          2,391       2,391       12.5 %            
    $ 69,914,531     $ 218,339     $ 271,420       12.5 %     5.8     $ 43,691  
 
(A)
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.
   
(B)
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
   
(C)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.
   
(D)
The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.
  
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs at June 30, 2013:

State Concentration
 
Percentage of Total Outstanding (A)
 
California
    31.5 %
Florida
    10.1 %
New York
   
4.5
%
Washington
    4.3 %
Arizona
    3.8 %
Texas
    3.6 %
Maryland
    3.5 %
Colorado
    3.5 %
New Jersey
    3.2 %
Virginia
    3.1 %
Other U.S.
    28.9 %
      100.0 %
 
 
(A)
Based on the information provided by the loan servicer as of June 30, 2013.

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 Excess MSRs.