| INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES |
INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES
“Agency” residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as Fannie Mae or Freddie Mac. “Non-Agency” RMBS are issued by either public trusts or private label securitization entities.
Activities related to New Residential’s investments in real estate and other securities were as follows: | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | (in millions) | | (in millions) | | Treasury | | Agency | | Non-Agency | | Agency | | Non-Agency | Purchases | | | | | | | | | | Face | $ | 1,552.0 |
| | $ | 7,135.2 |
| | $ | 7,606.5 |
| | $ | 7,163.3 |
| | $ | 5,431.6 |
| Purchase Price | 1,545.3 |
| | 7,367.8 |
| | 3,053.0 |
| | 7,467.6 |
| | 2,746.3 |
| | | | | | | | | | | Sales | | | | | | | | | | Face | $ | 690.0 |
| | $ | 7,310.7 |
| | $ | 235.1 |
| | $ | 6,466.1 |
| | $ | 332.5 |
| Amortized Cost | 687.2 |
| | 7,536.6 |
| | 164.3 |
| | 6,749.4 |
| | 284.7 |
| Sale Price | 686.7 |
| | 7,539.6 |
| | 182.4 |
| | 6,740.0 |
| | 266.6 |
| Gain (Loss) on Sale | (0.5 | ) | | 3.0 |
| | 18.0 |
| | (9.4 | ) | | (18.1 | ) |
As of December 31, 2017, New Residential had sold and purchased $1.0 billion and $1.1 billion face amount of Agency RMBS for $1.0 billion and $1.1 billion, respectively, and purchased $45.0 million face amount of Non-Agency RMBS for $41.1 million, which had not yet been settled. These unsettled sales and purchases were recorded on the balance sheet on trade date as Trades Receivable and Trades Payable.
New Residential has exercised its call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO contained in such trusts prior to their termination. In certain cases, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. Refer to Note 8 for further details on these transactions.
The following is a summary of New Residential’s real estate and other securities, 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, except for securities that are other-than-temporarily impaired and except for securities which New Residential elected to carry at fair value and record changes to valuation through the income statement. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Unrealized | | | | | | Weighted Average | Asset Type | | Outstanding Face Amount | | Amortized Cost Basis | | Gains | | Losses | | Carrying Value(A) | | Number of Securities | | Rating(B) | | Coupon(C) | | Yield | | Life (Years)(D) | | Principal Subordination(E) | December 31, 2017 |
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| Treasury | | $ | 862,000 |
| | $ | 858,028 |
| | $ | — |
| | $ | (5,294 | ) | | $ | 852,734 |
| | 3 |
| | AAA | | 2.21 | % | | 2.27 | % | | 8.1 | | N/A |
| Agency RMBS(F)(G) |
| 1,203,629 |
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| 1,247,093 |
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| 1,176 |
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| (4,652 | ) |
| 1,243,617 |
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| 98 |
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| AAA |
| 3.49 | % |
| 2.83 | % |
| 7.0 |
| N/A |
| Non-Agency RMBS(H) (I) |
| 12,757,357 |
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| 5,599,644 |
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| 423,504 |
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| (48,359 | ) |
| 5,974,789 |
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| 751 |
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| CCC- |
| 2.27 | % |
| 5.66 | % |
| 7.7 |
| 8.5 | % | Total/Weighted Average |
| $ | 14,822,986 |
| | $ | 7,704,765 |
| | $ | 424,680 |
| | $ | (58,305 | ) | | $ | 8,071,140 |
| | 852 |
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| B+ |
| 2.44 | % |
| 4.83 | % |
| 7.6 |
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| December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | Agency RMBS(F)(G) | | $ | 1,486,739 |
| | $ | 1,532,421 |
| | $ | 1,803 |
| | $ | (3,926 | ) | | $ | 1,530,298 |
| | 57 |
| | AAA | | 3.45 | % | | 2.94 | % | | 9.1 | | N/A |
| Non-Agency RMBS(H) (I) | | 7,302,218 |
| | 3,415,906 |
| | 147,206 |
| | (19,552 | ) | | 3,543,560 |
| | 536 |
| | CCC- | | 1.59 | % | | 5.88 | % | | 7.9 | | 8.8 | % | Total/Weighted Average | | $ | 8,788,957 |
| | $ | 4,948,327 |
| | $ | 149,009 |
| | $ | (23,478 | ) | | $ | 5,073,858 |
| | 593 |
| | BB- | | 2.16 | % | | 4.97 | % | | 8.3 | | |
| | (A) | Fair value, which is equal to carrying value for all securities. See Note 12 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. This excludes the ratings of the collateral underlying 204 bonds with a carrying value of $380.5 million which either have never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date and may not be current. |
| | (C) | Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $186.0 million and $0.0 million, respectively, for which no coupon payment is expected. |
| | (D) | The weighted average life is based on the timing of expected principal reduction on the assets. |
| | (E) | Percentage of the amortized cost basis of securities that is subordinate to New Residential’s investments, excluding fair value option securities and servicer advance bonds. |
| | (F) | Includes securities issued or guaranteed by U.S. Government agencies such as Fannie Mae or Freddie Mac. |
| | (G) | The total outstanding face amount was $1.1 billion and $1.3 billion for fixed rate securities and $0.1 billion and $0.2 billion for floating rate securities as of December 31, 2017 and 2016, respectively. |
| | (H) | The total outstanding face amount was $1.3 billion (including $0.7 billion of residual and fair value option notional amount) and $1.2 billion (including $0.8 billion of residual and fair value option notional amount) for fixed rate securities and $11.5 billion (including $4.5 billion of residual and fair value option notional amount) and $6.1 billion (including $2.1 billion of residual and fair value option notional amount) for floating rate securities as of December 31, 2017 and 2016, respectively. |
| | (I) | Includes other asset backed securities (“ABS”) consisting primarily of (i) interest-only securities and servicing strips (fair value option securities) which New Residential elected to carry at fair value and record changes to valuation through the income statement, (ii) bonds backed by servicer advances and (iii) bonds backed by consumer loans. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross Unrealized | | | | | | Weighted Average | Asset Type | | Outstanding Face Amount | | Amortized Cost Basis | | Gains | | Losses | | Carrying Value | | Number of Securities | | Rating | | Coupon | | Yield | | Life (Years) | | Principal Subordination | December 31, 2017 | | | | | | | | | | | | | | | | | | | | | | | Consumer loan bonds | | $ | 29,690 |
| | $ | 29,780 |
| | $ | 971 |
| | $ | (528 | ) | | $ | 30,223 |
| | 3 |
| | N/A | | N/A |
| | 17.17 | % | | 1.5 | | N/A | Fair Value Option Securities | | | | | | | | | | | | | | | | | | | | | | | Interest-only Securities | | 4,475,794 |
| | 205,740 |
| | 10,407 |
| | (9,887 | ) | | 206,260 |
| | 49 |
| | AA- | | 1.51 | % | | 5.33 | % | | 3.2 | | N/A | Servicing Strips | | 450,974 |
| | 4,958 |
| | 1,613 |
| | (225 | ) | | 6,346 |
| | 20 |
| | N/A | | 0.27 | % | | 21.62 | % | | 6.7 | | N/A | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | Servicer Advance Bonds | | $ | 100,000 |
| | $ | 99,838 |
| | $ | 310 |
| | $ | — |
| | $ | 100,148 |
| | 1 |
| | AAA | | 3.21 | % | | 3.10 | % | | 0.7 | | N/A | Fair Value Option Securities | | | | | | | | | | | | | | | | | | | | | | | Interest-only Securities | | 2,062,647 |
| | 113,342 |
| | 5,270 |
| | (6,555 | ) | | 112,057 |
| | 28 |
| | AA+ | | 1.85 | % | | 5.30 | % | | 2.9 | | N/A | Servicing Strips | | 456,629 |
| | 5,613 |
| | 311 |
| | (1 | ) | | 5,923 |
| | 11 |
| | NA | | 0.27 | % | | 21.74 | % | | 6.2 | | N/A |
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the year ended December 31, 2017, New Residential recorded OTTI charges of $10.3 million with respect to real estate securities. During the year ended December 31, 2016, New Residential recorded OTTI of $10.3 million. During the year ended December 31, 2015, New Residential recorded OTTI of $5.8 million. 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 its 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 December 31, 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amortized Cost Basis | | | | | | | | Weighted Average | Securities in an Unrealized Loss Position | | Outstanding Face Amount | | Before Impairment | | Other-Than- Temporary Impairment(A) | | After Impairment | | Gross Unrealized Losses | | Carrying Value | | Number of Securities | | Rating(B) | | Coupon | | Yield | | Life (Years) | Less than 12 Months | | $ | 4,446,684 |
| | $ | 2,234,124 |
| | $ | (1,307 | ) | | $ | 2,232,817 |
| | $ | (44,537 | ) | | $ | 2,188,280 |
| | 155 |
| | CCC+ | | 2.22 | % | | 3.83 | % | | 7.6 | 12 or More Months | | 916,578 |
| | 235,064 |
| | (291 | ) | | 234,773 |
| | (13,768 | ) | | 221,005 |
| | 86 |
| | BBB | | 2.54 | % | | 4.10 | % | | 4.5 | Total/Weighted Average | | $ | 5,363,262 |
| | $ | 2,469,188 |
| | $ | (1,598 | ) | | $ | 2,467,590 |
| | $ | (58,305 | ) | | $ | 2,409,285 |
| | 241 |
| | B | | 2.25 | % | | 3.85 | % | | 7.3 |
| | (A) | This amount represents OTTI recorded on securities that are in an unrealized loss position as of December 31, 2017. |
| | (B) | The weighted average rating of securities in an unrealized loss position for less than 12 months excludes the rating of 29 bonds which either have never been rated or for which rating information is no longer provided. The weighted average rating of securities in an unrealized loss position for 12 or more months excludes the rating of 40 bonds which either have never been rated or for which rating information is no longer provided. |
New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following: | | | | | | | | | | | | | | | | |
| December 31, 2017 |
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| Gross Unrealized Losses |
| Fair Value |
| Amortized Cost Basis After Impairment |
| Credit(A) |
| Non-Credit(B) | Securities New Residential intends to sell(C) | $ | — |
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| $ | — |
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| $ | — |
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| $ | — |
| Securities New Residential is more likely than not to be required to sell(D) | — |
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| — |
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| — |
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| N/A |
| Securities New Residential has no intent to sell and is not more likely than not to be required to sell: |
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| Credit impaired securities | 516,765 |
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| 534,878 |
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| (1,598 | ) |
| (18,113 | ) | Non-credit impaired securities | 1,892,520 |
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| 1,932,712 |
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| — |
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| (40,192 | ) | Total debt securities in an unrealized loss position | $ | 2,409,285 |
| | $ | 2,467,590 |
| | $ | (1,598 | ) | | $ | (58,305 | ) |
| | (A) | This amount is required to be recorded as OTTI through earnings. In measuring the portion of credit losses, New Residential estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include New Residential’s expectations of prepayment rates, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate. |
| | (B) | This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income. |
| | (C) | A portion of securities New Residential intends to sell have a fair value equal to their amortized cost basis after impairment, and, therefore do not have unrealized losses reflected in other comprehensive income as of December 31, 2017. |
| | (D) | New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales. |
The following table summarizes the activity related to credit losses on debt securities: | | | | | | | | | | Year Ended December 31, | | 2017 | | 2016 | Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income | $ | 15,495 |
| | $ | 6,239 |
| Increases to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income | 3,903 |
| | 3,008 |
| Additions for credit losses on securities for which an OTTI was not previously recognized | 6,431 |
| | 7,256 |
| Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis | — |
| | — |
| Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date | — |
| | — |
| Reduction for securities sold during the period | (2,008 | ) | | (1,008 | ) | Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income | $ | 23,821 |
| | $ | 15,495 |
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The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS: | | | | | | | | | | | | | | | | | | December 31, | | | 2017 | | 2016 | Geographic Location(A) | | Outstanding Face Amount |
| Percentage of Total Outstanding | | Outstanding Face Amount | | Percentage of Total Outstanding | Western U.S. | | $ | 4,882,136 |
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| 38.4 | % | | $ | 2,757,424 |
| | 38.3 | % | Southeastern U.S. | | 3,005,519 |
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| 23.6 | % | | 1,635,596 |
| | 22.7 | % | Northeastern U.S. | | 2,555,514 |
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| 20.1 | % | | 1,426,519 |
| | 19.8 | % | Midwestern U.S. | | 1,337,980 |
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| 10.5 | % | | 778,372 |
| | 10.8 | % | Southwestern U.S. | | 927,647 |
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| 7.3 | % | | 557,033 |
| | 7.7 | % | Other(B) | | 18,871 |
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| 0.1 | % | | 47,274 |
| | 0.7 | % | | | $ | 12,727,667 |
| | 100.0 | % | | $ | 7,202,218 |
| | 100.0 | % |
| | (A) | Excludes $29.7 million face amount of bonds backed by consumer loans as of December 31, 2017 and $100.0 million face amount of bonds backed by servicer advances as of December 31, 2016. |
| | (B) | Represents collateral for which New Residential was unable to obtain geographic information. |
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 year ended December 31, 2017, excluding residual and fair value option securities, the face amount of these real estate securities was $3,148.3 million, with total expected cash flows of $2,699.7 million and a fair value of $1,836.1 million on the dates that New Residential purchased the respective securities. For those securities acquired during the year ended December 31, 2016, excluding residual and fair value option securities, the face amount was $2,510.3 million, the total expected cash flows were $2,490.7 million and the fair value was $1,538.5 million on the dates that New Residential purchased the respective securities.
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, excluding residual and fair value option securities: | | | | | | | | | | Outstanding Face Amount | | Carrying Value | December 31, 2017 | $ | 5,364,847 |
| | $ | 3,493,723 |
| December 31, 2016 | 2,951,498 |
| | 1,871,466 |
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The following is a summary of the changes in accretable yield for these securities: | | | | | | | | | | Year Ended December 31, | | 2017 | | 2016 | Beginning Balance | $ | 1,200,125 |
| | $ | 316,521 |
| Additions | 863,681 |
| | 952,271 |
| Accretion | (215,018 | ) | | (130,745 | ) | Reclassifications from (to) non-accretable difference | 218,675 |
| | 63,239 |
| Disposals | (67,197 | ) | | (1,161 | ) | Ending Balance | $ | 2,000,266 |
| | $ | 1,200,125 |
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See Note 11 regarding the financing of real estate securities. |