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
9 Months Ended
Sep. 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 $43.7 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans (“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 associated with this portfolio 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 $42.3 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans (“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 associated with this portfolio 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, comprised of approximately 25% conforming loans in Fannie Mae (“Pool 3”) and Freddie Mac (“Pool 4”) GSE pools as well as approximately 75% non-conforming loans in private label securitizations (“Pool 5”). Nationstar had 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 associated with this portfolio as the servicer. In September 2013, New Residential invested an additional $26.6 million to acquire an additional 15% interest in the Excess MSRs related to Pool 5 from Nationstar. 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 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 for $2.4 million, 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.
 
Pool 12.  On September 23, 2013, New Residential invested approximately $17.4 million to acquire a 40% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 12”), comprised of loans in private label securitizations. Fortress-managed funds also acquired a 40% interest in the Excess MSRs and the remaining 20% interest in the Excess MSRs is owned by Nationstar. Nationstar performs all servicing and advancing functions, and it retains the ancillary income, servicing obligations and liabilities associated with this portfolio 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, the Fortress-managed funds and Nationstar, subject to certain limitations.
 
As described above, New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments to date. Under the Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio.
 
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:
 
   
September 30, 2013
   
Nine Months
Ended September 30,
2013
 
   
Unpaid Principal
Balance (“UPB”) of Underlying Mortgages
   
Interest in Excess MSR
   
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
  $ 7,171,426       65.0 %   $ 27,255     $ 37,907       12.5 %     4.9     $ 4,914  
MSR Pool 1 - Recapture Agreement
          65.0 %     2,230       4,629       12.5 %     11.3       1,893  
MSR Pool 2
    8,217,751       65.0 %     30,806       35,592       12.5 %     5.2       3,742  
MSR Pool 2 - Recapture Agreement
          65.0 %     1,934       5,882       12.5 %     12.3       3,767  
MSR Pool 3
    8,066,890       65.0 %     25,250       34,063       12.5 %     4.8       5,958  
MSR Pool 3 - Recapture Agreement
          65.0 %     3,608       5,231       12.5 %     11.6       1,699  
MSR Pool 4
    5,222,892       65.0 %     10,032       13,743       12.5 %     5.2       2,693  
MSR Pool 4 - Recapture Agreement
          65.0 %     2,509       3,446       12.5 %     11.6       951  
MSR Pool 5
    38,315,786       80.0 %     121,544       142,387       12.7 %     5.4       18,864  
MSR Pool 5 - Recapture Agreement
          80.0 %     9,277       4,779       12.7 %     12.5       (656 )
MSR Pool 11 - Recapture Agreement
          66.7 %     2,391       2,391       12.5 %     10.2        
MSR Pool 12
    5,321,060       40.0 %     16,963       17,032       16.4 %     4.6       69  
MSR Pool 12 - Recapture Agreement
          40.0 %     479       486       16.4 %     13.6       5  
    $ 72,315,805             $ 254,278     $ 307,568       12.9 %     5.8     $ 43,899  
 
(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 September 30, 2013:
 
State Concentration
 
Percentage of Total Outstanding
 
California
    30.3 %
Florida
    10.1 %
New York
    4.7 %
Texas
    4.2 %
Washington
    4.1 %
Arizona
    3.7 %
Maryland
    3.6 %
Colorado
    3.3 %
New Jersey
    3.3 %
Virginia
    3.1 %
Other U.S.
    29.6 %
      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 Excess MSRs.