FAIR VALUE OF FINANCIAL INSTRUMENTS

U.S. GAAP requires the categorization of the fair value of financial instruments into three broad levels which form a hierarchy based on the transparency of inputs to the valuation.

Level 1 - Quoted prices in active markets for identical instruments.

Level 2 - Valuations based principally on other observable market parameters, including


•	Quoted prices in active markets for similar instruments,


•	Quoted prices in less active or inactive markets for identical or similar instruments,


•	Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates), and


•	Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3 - Valuations based significantly on unobservable inputs.

New Residential follows this hierarchy for its financial instruments. The classifications are based on the lowest level of input that is significant to the fair value measurement.

The carrying values and fair values of New Residential’s financial 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 December 31, 2014 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)	$	102,481,758	$	417,733	$	—	$	—	$	417,733	$	417,733
Excess mortgage servicing rights, equity method investees, at fair value^(A)	146,257,821		330,876		—		—		330,876		330,876
Servicer advances	3,102,492		3,270,839		—		—		3,270,839		3,270,839
Real estate securities, available-for-sale	3,542,511		2,463,163		—		1,740,163		723,000		2,463,163
Residential mortgage loans, held for investment	69,581		47,838		—		—		47,913		47,913
Residential mortgage loans, held for sale	1,364,216		1,126,439		—		—		1,140,070		1,140,070
Non-hedge derivatives⁽^B⁾	399,625		32,597		—		195		32,402		32,597
Cash and cash equivalents	212,985		212,985		212,985		—		—		212,985
Restricted cash	29,418		29,418		29,418		—		—		29,418
			$	7,931,888	$	242,403	$	1,740,358	$	5,962,833	$	7,945,594
Liabilities:
Repurchase agreements	$	3,149,090	$	3,149,090	$	—	$	2,246,651	$	902,439	$	3,149,090
Notes payable	2,913,209		2,913,209		—		822,587		2,092,814		2,915,401
Derivative liabilities	2,341,000		14,220		—		14,220		—		14,220
			$	6,076,519	$	—	$	3,083,458	$	2,995,253	$	6,078,711


(A)	The notional amount represents the total unpaid principal balance of the mortgage loans underlying the Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.


(B)	The notional amount for linked transactions consists of the aggregate UPB amounts of the loans and securities that comprise the asset portion of the linked transaction.

New Residential has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, New Residential’s quarterly procedures include a comparison to quotations from different sources, outputs generated from its internal pricing models and transactions New Residential has completed with respect to these or similar securities, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on New Residential’s internal pricing models, New Residential’s management corroborates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters, where available, and models for reasonableness. New Residential believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value.

New Residential’s financial 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)
	Agency			Non-Agency			Agency			Non-Agency			Servicer Advances			Non-Agency RMBS			Linked Transactions			Total
Balance at December 31, 2012	$	130,702		$	114,334		$	—		$	—		$	—		$	289,756		$	—		$	534,792
Transfers^(C)
Transfers from Level 3	—			—			—			—			—			—			—			—
Transfers to Level 3	—			—			—			—			—			—			—			—
Gains (losses) included in net income
Included in other-than-temporary impairment (“OTTI”) on securities^(D)	—			—			—			—			—			(978		)	—			(978		)
Included in change in fair value of investments in excess mortgage servicing rights^(D)	32,660			20,672			—			—			—			—			—			53,332
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(D)	—			—			47,493			2,850			—			—			—			50,343
Included in change in fair value of investments in servicer advances	—			—			—			—			—			—			—			—
Included in gain on settlement of investments, net	—			—			—			—			—			52,657			—			52,657
Included in other income^(D)	—			—			—			—			—			—			1,820			1,820
Gains (losses) included in other comprehensive income, net of tax^(E)	—			—			—			—			—			(11,604		)	—			(11,604		)
Interest income	19,416			21,505			—			—			4,421			20,556			—			65,898
Purchases, sales and repayments
Purchases/contributions from Newcastle	2,391			61,043			244,150			114,715			2,764,524			825,871			34,106			4,046,800
Purchase adjustments	—			—			—			—			—			—			—			—
Proceeds from sales	—			—			—			—			—			(521,865		)	—			(521,865		)
Proceeds from repayments	(40,509		)	(38,063		)	(46,244		)	(10,198		)	(103,394		)	(83,968		)	—			(322,376		)
Settlements^(F)	—			—			—			—			—			—			—			—
Balance at December 31, 2013	$	144,660		$	179,491		$	245,399		$	107,367		$	2,665,551		$	570,425		$	35,926		$	3,948,819
Transfers^(C)
Transfers from Level 3	—			—			—			—			—			—			—			—
Transfers to Level 3	—			—			—			—			—			—			—			—
Gains (losses) included in net income
Included in other-than-temporary impairment (“OTTI”) on securities^(D)	—			—			—			—			—			(927		)	—			(927		)
Included in change in fair value of investments in excess mortgage servicing rights^(D)	24,265			17,350			—			—			—			—			—			41,615
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(D)	—			—			40,120			17,160			—			—			—			57,280
Included in change in fair value of investments in servicer advances	—			—			—			—			84,217			—			—			84,217
Included in gain on settlement of investments, net	—			—			—			—			—			60,553			5,652			66,205
Included in other income^(D)	1,157			—			—			—			—			—			1,187			2,344
Gains (losses) included in other comprehensive income, net of tax^(E)	—			—			—			—			—			8,819			—			8,819
Interest income	22,451			26,729			—			—			190,206			17,713			—			257,099
Purchases, sales and repayments
Purchases	66,197			27,916			—			—			6,830,266			1,455,996			39,538			8,419,913
Proceeds from sales	—			—			—			—			—			(1,288,980		)	(25,240		)	(1,314,220		)
Proceeds from repayments	(41,211		)	(51,272		)	(52,901		)	(26,269		)	(6,499,401		)	(100,599		)	(9,069		)	(6,780,722		)
Settlements^(F)	—			—			—			—			—			—			(15,592		)	(15,592		)
Balance at December 31, 2014	$	217,519		$	200,214		$	232,618		$	98,258		$	3,270,839		$	723,000		$	32,402		$	4,774,849


(A)	Includes the Recapture Agreement for each respective pool.


(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)	Transfers are assumed to occur at the beginning of the respective period.


(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.


(E)	These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of Comprehensive Income.


(F)	Includes value of 1) residential mortgage loans transferred to REO net of associated repurchase financing agreements, and 2) residential mortgage loans no longer treated as linked transactions due to repayment of associated repurchase financing.

Investments in Excess MSRs Valuation and Excess MSRs Equity Method Investees Valuation

Fair value estimates of New Residential’s Excess MSRs were based on internal pricing models. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included expectations of prepayment rates, delinquency rates, recapture rates, the excess mortgage servicing amount of the underlying mortgage loans and discount rates that market participants would use in determining the fair values of mortgage servicing rights on similar pools of residential mortgage loans.

In order to evaluate the reasonableness of its fair value determinations, management engages an independent valuation firm to separately measure the fair value of its Excess MSRs. The independent valuation firm determines an estimated fair value range of each pool based on its own models and issues a “fairness opinion” with this range. Management compares the range included in the opinion to the value generated by its internal models. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

In addition, in valuing the Excess MSRs, management considered the likelihood of Nationstar or SLS being removed as the servicer, which likelihood is considered to be remote.

Significant increases (decreases) in the discount rates, prepayment or delinquency rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recapture rates or excess mortgage servicing amount in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the prepayment speed.

The following table summarizes certain information regarding the inputs used in valuing the Excess MSRs owned directly and through equity method investees as of December 31, 2014:



	Significant Inputs^(A)
Directly Held (Note 4)	Prepayment Speed^(B)		Delinquency^(C)		Recapture Rate^(D)		Excess Mortgage Servicing Amount (bps)^(E)
Agency
Original and Recaptured Pools	10.9	%	5.5	%	31.1	%	22
Recapture Agreement	8.0	%	5.0	%	19.8	%	21
	10.7	%	5.5	%	30.4	%	22
Non-Agency^(F)
Original and Recaptured Pools	12.5	%	N/A		10.0	%	15
Recapture Agreement	8.0	%	N/A		20.0	%	20
	12.2	%	N/A		10.7	%	15
Total/Weighted Average--Directly Held	11.5	%	5.5	%	20.0	%	18

Held through Equity Method Investees (Note 5)
Agency
Original and Recaptured Pools	13.2	%	6.7	%	33.3	%	19
Recapture Agreement	8.0	%	5.0	%	20.0	%	23
	12.3	%	6.4	%	30.9	%	19
Non-Agency^(F)
Original and Recaptured Pools	13.4	%	N/A		10.0	%	12
Recapture Agreement	8.0	%	N/A		20.0	%	20
	13.1	%	N/A		10.7	%	12
Total/Weighted Average--Held through Investees	12.5	%	6.4	%	24.1	%	17

Total/Weighted Average--All Pools	12.2	%	6.3	%	22.6	%	17


(A)	Weighted by amortized cost basis of the mortgage loan portfolio.


(B)	Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.


(C)	Projected percentage of mortgage loans in the pool that will miss their mortgage payments.


(D)	Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar.


(E)	Weighted average total mortgage servicing amount in excess of the basic fee.


(F)	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.

As of December 31, 2014, a weighted average discount rate of 9.6% was used to value New Residential's investments in Excess MSRs (directly and through equity method investees).

All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. Prepayment speed and delinquency rate projections are in the form of “curves” or “vectors” that vary over the expected life of the pool. New Residential uses assumptions that generate its best estimate of future cash flows for each investment in Excess MSRs.

When valuing Excess MSRs, New Residential uses the following criteria to determine the significant inputs:

•

Prepayment Speed: Prepayment speed projections are in the form of a “vector” that varies over the expected life of the pool. The prepayment vector specifies the percentage of the collateral balance that is expected to prepay voluntarily (i.e., pay off) and involuntarily (i.e., default) at each point in the future. The prepayment vector is based on assumptions that reflect macroeconomic conditions and factors such as the borrower’s FICO score, loan-to-value ratio, debt-to-income ratio, vintage on a loan level basis, as well as the projected effect on loans eligible for the Home Affordable Refinance Program 2.0 (“HARP 2.0”). Management considers collateral-specific prepayment experience when determining this vector. For the Recapture Agreements and recaptured loans, New Residential also considers industry research on the prepayment experience of similar loan pools (i.e., loan pools composed of refinanced loans). This data is obtained from remittance reports, market data services and other market sources.

•

Delinquency Rates: For existing mortgage pools, delinquency rates are based on the recent pool-specific experience of loans that missed their latest mortgage payments. For the Recapture Agreements and recaptured loans, delinquency rates are based on the experience of similar loan pools originated by Nationstar and delinquency experience over the past year. Management believes this time period provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions. Additional consideration is given to loans that are expected to become 30 or more days delinquent.


•	Recapture Rates: Recapture rates are based on actual average recapture rates experienced by Nationstar on similar mortgage loan pools. Generally, New Residential looks to one year worth of actual recapture rates, which management believes provides a reasonable sample for projecting future recapture rates while taking into account current market conditions.

•

Excess Mortgage Servicing Amount: For existing mortgage pools, excess mortgage servicing amount projections are based on the actual total mortgage servicing amount in excess of a basic fee. For loans expected to be refinanced by Nationstar and subject to a Recapture Agreement, New Residential considers the excess mortgage servicing amount on loans recently originated by Nationstar over the past year and other general market considerations. Management believes this time period provides a reasonable sample for projecting future excess mortgage servicing amounts while taking into account current market conditions.


•	Discount Rate: The discount rates used by New Residential are derived from market data on pricing of mortgage servicing rights backed by similar collateral.

New Residential uses different prepayment and delinquency assumptions in valuing the Excess MSRs relating to the original loan pools, the Recapture Agreements and the Excess MSRs relating to recaptured loans. The prepayment speed and delinquency rate assumptions differ because of differences in the collateral characteristics, eligibility for HARP 2.0 and expected borrower behavior for original loans and loans which have been refinanced. The assumptions for recapture and discount rates when valuing Excess MSRs and Recapture Agreements are based on historical recapture experience and market pricing.

Investments in Servicer Advances Valuation

On December 17, 2013, New Residential initially recorded its investment in servicer advances, including the basic fee component of the related MSR, at the purchase price paid, which New Residential’s management believes reflects the value a market participant would attribute to the investment at the time of purchase and approximated the fair value of the investment as of December 31, 2013.

Management uses internal pricing models to estimate the future cash flows related to the servicer advance investments that incorporate significant unobservable inputs and include assumptions that are inherently subjective and imprecise. Management’s estimations of future cash flows include the combined cash flows of all of the components that comprise the servicer advance investments: existing advances, the requirement to purchase future advances, the recovery of advances and the right to the basic fee component of the related MSR. The factors that most significantly impact the fair value include (i) the rate at which the servicer advance balance changes over the term of the investment, (ii) the UPB of the underlying loans with respect to which New Residential has the obligation to make advances and owns the basic fee component of the related MSR which, in turn, is driven by prepayment speeds and (iii) the percentage of delinquent loans with respect to which New Residential owns the basic fee component of the related MSR. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included the assumptions used to establish the aforementioned cash flows and discount rates that market participants would use in determining the fair values of servicer advances.

In order to evaluate the reasonableness of its fair value determinations, management engages an independent valuation firm to separately measure the fair value of its investment in servicer advances. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range. Management compares the range included in the opinion to the value generated by its internal models. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

In valuing the servicer advances, management considered the likelihood of Nationstar or SLS being removed as the servicer, which likelihood is considered to be remote.

Significant increases (decreases) in the advance balance-to-UPB ratio, prepayment speed, delinquency rate, or discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the advance balance-to-UPB ratio, but also a directionally opposite change in the prepayment rate.

The following table summarizes certain information regarding the inputs used in valuing the servicer advances as of December 31, 2014:



	Significant Inputs
	Weighted Average
	Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans	Prepayment Speed	Delinquency	Mortgage Servicing Amount^(A)	Discount Rate
December 31, 2014	2.1%	12.6%	15.6%	19.4 bps	5.4%


(A)	Mortgage servicing amount excludes the amounts New Residential pays Nationstar and SLS as a monthly servicing fee.

The valuation of the servicer advances also takes into account the performance fee paid to the servicer, which in the case of the Buyer is based on its equity returns and therefore is impacted by relevant financing assumptions such as loan-to-value ratio and interest rate (Note 6). All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. The prepayment speed, the delinquency rate and the advance-to-UPB ratio projections are in the form of “curves” or “vectors” that vary over the expected life of the underlying mortgages and related servicer advances. New Residential uses assumptions that generate its best estimate of future cash flows for each investment in servicer advances, including the basic fee component of the related MSR.

When valuing servicer advances, New Residential uses the following criteria to determine the significant inputs:

•

Servicer advance balance: Servicer advance balance projections are in the form of a “vector” that varies over the expected life of the residential mortgage loan pool. The servicer advance balance projection is based on assumptions that reflect factors such as the borrower’s expected delinquency status, the rate at which delinquent borrowers re-perform or become current again, servicer modification offer and acceptance rates, liquidation timelines and the servicers’ stop advance and clawback policies.

•

Delinquency Rates: For existing mortgage pools, delinquency rates are based on the recent pool-specific experience of loans that missed recent mortgage payment(s) as well as loan- and borrower-specific characteristics such as the borrower’s FICO score, the loan-to-value ratio, debt-to-income ratio, occupancy status, loan documentation, payment history and previous loan modifications. Management believes the time period utilized provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions.


•	Mortgage Servicing Amount: Mortgage servicing amounts are contractually determined on a pool-by-pool basis. Management projects the weighted average mortgage servicing amount based on its projections for prepayment speeds.


•	Discount Rate: The discount rates used by New Residential are derived from market data on pricing of mortgage servicing rights backed by similar collateral and the advances made thereon.

Real Estate Securities Valuation

As of December 31, 2014, 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	$	1,646,361	$	1,724,329	$	1,740,163	$	—	$	1,740,163	2
Non-Agency RMBS^(C)	1,896,150		710,515		709,346		13,654		723,000		3
Total	$	3,542,511	$	2,434,844	$	2,449,509	$	13,654	$	2,463,163

(A)

Management 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. Management selected one of the quotes received as being most representative of the fair value and did 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 management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes New Residential receives. Management 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, management selects one of the quotes which is believed to more accurately reflect fair value. New Residential never adjusts quotes received. 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.


(B)	Management was unable to obtain quotations from more than one source on these securities. The one source was the seller (the party that sold New Residential the security).


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

For New Residential’s investments in real estate securities categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions related to prepayments, default rates and loss severities. Significant increases (decreases) in any of the discount rates, default rates or loss severities in isolation would result in a significantly lower (higher) fair value measurement. The impact of changes in prepayment speeds would have differing impacts on fair value, depending on the seniority of the investment. Generally, a change in the default assumption is accompanied by directionally similar changes in the assumptions used for the loss severity and the prepayment speed.

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 December 31, 2014 and 2013, assets measured at fair value on a nonrecurring basis were $666.6 million and $0.0 million, respectively. The $666.6 million of assets include approximately $610.1 million of residential mortgage loans and $56.5 million of REO. The fair value of New Residential’s residential mortgage loans held-for-sale are estimated based on a discounted cash flow model analysis using internal pricing models and are categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these residential mortgage loans as of December 31, 2014:



December 31, 2014	Fair Value		Discount Rate		Weighted Average Life (Years)^(A)	Prepayment Rate		CDR^(B)		Loss Severity^(C)
Performing Loans	$	36,613	4.6	%	7.5	4.2	%	4.2	%	40.2	%
PCI Loans	573,510		5.7	%	2.6	2.9	%	N/A		30.9	%
Total/Weighted Average	$	610,123	5.6	%	2.9	3.0	%			31.5	%


(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. Not applicable for PCI Loans that are not 100% in default.


(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 are generally 10%.

The total change in the recorded value of assets for which a fair value adjustment has been included in the Consolidated Statements of Income for the year ended December 31, 2014, was a reduction of approximately $4.9 million and $2.4 million for loans held-for-sale and REO, respectively.

Residential Mortgage Loans for Which Fair Value is Only Disclosed

The fair value of New Residential’s residential mortgage loans held-for-investment are estimated based on a discounted cash flow model analysis using internal pricing models and are categorized within Level 3 of the fair value hierarchy.

For reverse mortgage loans, the significant inputs to these models include discount rates and the timing and amount of expected cash flows that management believes market participants would use in determining the fair values on similar pools of reverse mortgage loans.

The following table summarizes the inputs used in valuing residential mortgage loans as of December 31, 2014:



December 31, 2014	Carrying Value^(A)		Fair Value		Valuation Provision/ (Reversal) In Current Year		Discount Rate		Weighted Average Life (Years)^(A)	Prepayment Rate		CDR^(B)		Loss Severity^(C)
Reverse Mortgage Loans^(D)	$	24,965	$	24,965	$	1,057	10.2	%	3.9	N/A		N/A		5.9	%
Performing Loans	374,745		383,689		N/A		4.6	%	7.0	5.7	%	2.2	%	44.9	%
PCI Loans	164,444		169,206		N/A		5.5	%	2.8	2.3	%	N/A		25.8	%
Total/Weighted Average	$	564,154	$	577,860	$	1,057	5.1	%	5.6					37.6	%


(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.


(D)	Carrying value and fair value represent a 70% interest New Residential holds in the reverse mortgage loans.

Derivative Valuation

New Residential financed certain investments with the same counterparty from which it purchased those investments, and accounts for the contemporaneous purchase of the investments and the associated financings as linked transactions (Note 10). The linked transactions are valued on a net basis considering their underlying components, the investment value and the related repurchase financing agreement value, generally determined consistently with the relevant instruments as described in this note. Values of investments in non-performing loans are estimated based on a discounted cash flow analysis using internal pricing models that employ market-based assumptions regarding the timing and amount of expected cash flows primarily based upon the performance of the loan pool and liquidation attributes. The linked transactions, which are categorized as Level 3, are recorded as a non-hedge derivative instrument on a net basis.

New Residential also enters into economic hedges including interest rate swaps and TBAs, which are categorized as Level 2 in the valuation hierarchy. Management generally values such derivatives using quotations, similarly to the method of valuation used for New Residential’s other assets that are categorized as Level 2.

Liabilities for Which Fair Value is Only Disclosed

Repurchase agreements and notes payable are not measured at fair value. They are generally considered to be Level 2 and Level 3 in the valuation hierarchy, respectively, with significant valuation variables including the amount and timing of expected cash flows, interest rates and collateral funding spreads.

Short-term repurchase agreements and short-term notes payable have an estimated fair value equal to their carrying value due to their short duration and generally floating interest rates. Longer-term notes payable, representing the securitized portion of the servicer advance financing, are valued based on internal models utilizing both observable and unobservable inputs. As of December 31, 2014, these longer-term notes have an estimated fair value of $1,995.6 million and a carrying value of $1,995.9 million.