Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN REAL ESTATE SECURITIES

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INVESTMENTS IN REAL ESTATE SECURITIES
6 Months Ended
Jun. 30, 2013
Investments In Real Estate Securities  
INVESTMENTS IN REAL ESTATE SECURITIES
4.      INVESTMENTS IN REAL ESTATE SECURITIES

During 2013, New Residential acquired $547.5 million face amount of Non-Agency RMBS for approximately $362.4 million and $156.3 million face amount of Agency ARM RMBS for approximately $165.2 million net of sales.  In addition, Newcastle contributed $1.0 billion face amount of Agency ARM RMBS to New Residential during this period.
 
The following is a summary of New Residential’s real estate securities at June 30, 2013, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income.
  
               
Gross Unrealized
             
Weighted Average
 
Asset Type
 
Outstanding
Face Amount
   
Amortized
Cost Basis
   
Gains
   
Losses
   
Carrying
Value (A)
   
Number of
Securities
 
Rating (B)
 
Coupon
   
Yield
   
Life (Years)
(C)
   
Principal
Subordination
(D)
 
                                                               
Agency ARM RMBS (E) (F)
  $ 1,059,950     $ 1,134,190     $ 1,430     $ (5,834 )   $ 1,129,786       66  
 AAA
    3.30 %     1.47 %     3.2       N/A  
Non-Agency RMBS
    927,903       605,835       33,286       (9,668 )     629,453       98  
 CC
    0.77 %     4.87 %     3.8       6.7 %
Total/Weighted Average (G)
  $ 1,987,853     $ 1,740,025     $ 34,716     $ (15,502 )   $ 1,759,239       164  
 BBB
    2.12 %     2.65 %     3.4          
 
(A)
Fair value, which is equal to carrying value for all securities. See Note 9 regarding the estimation of fair value.
   
(B)
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Ratings provided were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
   
(C)
The weighted average life is based on the timing of expected principal reduction on the assets.
   
(D)
Percentage of the outstanding face amount of securities and residual interests that is subordinate to New Residential’s investments.
   
(E)
Includes securities issued or guaranteed by U.S. Government agencies such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
   
(F)
Amortized cost basis and carrying value include principal receivable of $13.8 million.
   
(G) The total outstanding face amount was $ 18.4 million for fixed rate securities and $ 1.97 billion for floating rate securities.
 
Unrealized losses that are considered other than temporary are recognized currently in earnings.  During the six months ended June 30, 2013, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $3.8 million with respect to real estate securities held prior to the spin-off on May 15, 2013.  Based on Newcastle management’s analysis of these securities, Newcastle determined it did not have the intent to hold the securities past May 15, 2013.  Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment.  New Residential performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period.  New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.
 
The following table summarizes New Residential’s securities in an unrealized loss position as of June 30, 2013.
 
         
Amortized Cost Basis
   
Gross Unrealized
             
Weighted Average
       
Securities in an Unrealized Loss Position
 
Outstanding
Face Amount
   
Before
Impairment
   
Other-Than-
Temporary
 Impairment (A)
   
After
Impairment
   
Gains
   
Losses
   
Carrying Value
   
Number of
Securities
 
Rating
 
Coupon
   
Yield
   
Life
(Years)
 
                                                                     
Less than Twelve Months
  $ 1,183,118     $ 1,104,946     $ (3,429 )   $ 1,101,517     $     $ (15,485 )   $ 1,086,032       79  
BBB
    2.51 %     1.83 %     3.5  
                                                                                           
Twelve or More Months
    6,798       7,447       (40 )     7,407             (17 )     7,390       1  
 AAA
    2.76 %     0.93 %     4.2  
                                                                                           
Total/WA
  $ 1,189,916     $ 1,112,393     $ (3,469 )   $ 1,108,924     $     $ (15,502 )   $ 1,093,422       80  
BBB
    2.51 %     1.82 %     3.5  
 
 
(A)
Other than temporary impairment was recorded in connection with unrealized losses at the time of spin-off as Newcastle did not have the intent and ability to hold the securities past May 15, 2013.  The losses were not recorded as the result of New Residential’s intent to sell the securities and are not the result of credit impairment.
 
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS at June 30, 2013:
 
Geographic Location
 
Outstanding Face
Amount
   
Percentage of Total
Outstanding
 
Western U.S.
  $ 346,056       37.3 %
Northeastern U.S.
    219,197       23.6 %
Southeastern U.S.
    190,998       20.6 %
Midwestern U.S.
    98,933       10.7 %
Southwestern U.S.
    72,719       7.8 %
    $ 927,903       100.0 %
 
New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the six months ended June 30, 2013, the face amount of these real estate securities was $472.7 million, with total expected cash flows of $375.2 million and a fair value of $298.9 million.
 
The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, at December 31, 2012 and June 30, 2013:
 
   
Outstanding Face Amount
   
Carrying Value
 
December 31, 2012
  $ 342,013     $ 212,129  
June 30, 2013
  $ 771,682     $ 495,872  
 
The following is a summary of the changes in accretable yield for these securities:
 
   
For the Six Months
Ended June 30, 2013
 
Balance at December 31, 2012
  $ 90,077  
         
Additions
    76,263  
         
Accretion
    (9,706 )
         
Reclassifications from nonaccretable difference
    23,679  
         
Disposals
    153  
         
Balance at June 30, 2013
  $ 180,466