| INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS |
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS The following table presents activity related to the carrying value of New Residential’s direct investments in Excess MSRs: | | | | | | | | | | | | | | | | | | | | Servicer | | | Nationstar | | SLS(A) | | Ocwen(B) | | Total | Balance as of December 31, 2017 | | $ | 532,233 |
| | $ | 2,913 |
| | $ | 638,567 |
| | $ | 1,173,713 |
| Purchases | | — |
| | — |
| | — |
| | — |
| Interest income | | 32,357 |
| | 14 |
| | — |
| | 32,371 |
| Other income | | 4,601 |
| | — |
| | — |
| | 4,601 |
| Proceeds from repayments | | (76,888 | ) | | (495 | ) | | — |
| | (77,383 | ) | Proceeds from sales | | (12,380 | ) | | — |
| | — |
| | (12,380 | ) | Change in fair value | | (15,420 | ) | | 126 |
| | (40,417 | ) | | (55,711 | ) | New Ocwen Agreements (Note 5) | | — |
| | — |
| | (598,150 | ) | | (598,150 | ) | Balance as of September 30, 2018 | | $ | 464,503 |
| | $ | 2,558 |
| | $ | — |
| | $ | 467,061 |
|
| | (A) | Specialized Loan Servicing LLC (“SLS”). |
| | (B) | Ocwen Loan Servicing LLC, a subsidiary of Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), services the loans underlying the Excess MSRs and Servicer Advance Investments acquired from HLSS. |
In January 2018, New Residential entered into the New Ocwen Agreements as described in Note 5. Subsequent to the New Ocwen Agreements, the Excess MSRs serviced by Ocwen became reclassified, as described in Note 5.
Nationstar, SLS, or Ocwen, as applicable, as servicer, performs all of the servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.
New Residential has entered into a “recapture agreement” with respect to each of the Excess MSR investments serviced by Nationstar and SLS. Under such arrangements, 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. These recapture agreements do not apply to New Residential’s Servicer Advance Investments (Note 6).
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, 2018 | | December 31, 2017 | | UPB of Underlying Mortgages | | Interest in Excess MSR | | Weighted Average Life Years(A) | | Amortized Cost Basis(B) | | Carrying Value(C) | | Carrying Value(C) | | | | New Residential(D) | | Fortress-managed funds | | Nationstar | | | | | | | | | Agency | | | | | | | | | | | | | | | | Original and Recaptured Pools | $ | 55,677,339 |
| | 32.5% - 66.7% (53.3%) | | 0.0% - 40.0% | | 20.0% - 35.0% | | 5.6 | | $ | 215,972 |
| | $ | 242,655 |
| | $ | 280,033 |
| Recapture Agreements | — |
| | 32.5% - 66.7% (53.3%) | | 0.0% - 40.0% | | 20.0% - 35.0% | | 12.9 | | 15,930 |
| | 31,198 |
| | 44,603 |
| | 55,677,339 |
| | | | | | | | 6.1 | | 231,902 |
| | 273,853 |
| | 324,636 |
| | | | | | | | | | | | | | | | | Non-Agency(E) | | | | | | | | | | | | | | | | Nationstar and SLS Serviced: | | | | | | | | | | | | | | | | Original and Recaptured Pools | $ | 56,376,994 |
| | 33.3% - 100.0% (59.4%) | | 0.0% - 50.0% | | 0.0% - 33.3% | | 5.8 | | $ | 140,698 |
| | $ | 174,680 |
| | $ | 190,696 |
| Recapture Agreements | — |
| | 33.3% - 100.0% (59.4%) | | 0.0% - 50.0% | | 0.0% - 33.3% | | 12.7 | | 4,983 |
| | 18,528 |
| | 19,814 |
| Ocwen Serviced Pools | — |
| | —% | | —% | | —% | | — | | — |
| | — |
| | 638,567 |
| | 56,376,994 |
| | | | | | | | 6.0 | | 145,681 |
| | 193,208 |
| | 849,077 |
| Total | $ | 112,054,333 |
| | | | | | | | 6.1 | | $ | 377,583 |
| | $ | 467,061 |
| | $ | 1,173,713 |
|
| | (A) | Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment. |
| | (B) | 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. |
| | (C) | Carrying Value represents the fair value of the pools or recapture agreements, as applicable. |
| | (D) | Amounts in parentheses represent weighted averages. |
| | (E) | New Residential also invested in related Servicer Advance Investments, including the basic fee component of the related MSR as of September 30, 2018 (Note 6) on $42.3 billion UPB underlying these Excess MSRs. |
Changes in fair value recorded in other income is comprised of the following: | | | | | | | | | | | | | | | | | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | 2018 | | 2017 | | 2018 | | 2017 | Original and Recaptured Pools |
| $ | (851 | ) | | $ | (12,047 | ) | | $ | (46,540 | ) | | $ | (41,032 | ) | Recapture Agreements |
| (3,893 | ) | | (2,244 | ) | | (9,171 | ) | | 8,382 |
| | | $ | (4,744 | ) | | $ | (14,291 | ) | | $ | (55,711 | ) | | $ | (32,650 | ) |
As of September 30, 2018, a weighted average discount rate of 8.8% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).
New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.
The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential: | | | | | | | | | | | | September 30, 2018 | | December 31, 2017 | Excess MSR assets | | $ | 284,957 |
| | $ | 321,197 |
| Other assets | | 25,607 |
| | 22,333 |
| Other liabilities | | (687 | ) | | — |
| Equity | | $ | 309,877 |
| | $ | 343,530 |
| New Residential’s investment | | $ | 154,939 |
| | $ | 171,765 |
| | | | | | New Residential’s ownership | | 50.0 | % | | 50.0 | % |
| | | | | | | | | | | | | | | | | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | | 2018 | | 2017 | | 2018 | | 2017 | Interest income | | $ | 8,935 |
| | $ | 6,969 |
| | $ | 21,026 |
| | $ | 20,083 |
| Other income (loss) | | (2,143 | ) | | (2,843 | ) | | (9,778 | ) | | (7,908 | ) | Expenses | | — |
| | (18 | ) | | — |
| | (63 | ) | Net income (loss) | | $ | 6,792 |
| | $ | 4,108 |
| | $ | 11,248 |
| | $ | 12,112 |
|
New Residential’s investments in equity method investees changed during the nine months ended September 30, 2018 as follows: | | | | | Balance at December 31, 2017 | $ | 171,765 |
| Contributions to equity method investees | — |
| Distributions of earnings from equity method investees | (7,976 | ) | Distributions of capital from equity method investees | (14,474 | ) | Change in fair value of investments in equity method investees | 5,624 |
| Balance at September 30, 2018 | $ | 154,939 |
|
The following is a summary of New Residential’s Excess MSR investments made through equity method investees: | | | | | | | | | | | | | | | | | | | | | | September 30, 2018 | | Unpaid Principal Balance | | Investee Interest in Excess MSR(A) | | New Residential Interest in Investees | | Amortized Cost Basis(B) | | Carrying Value(C) | | Weighted Average Life (Years)(D) | Agency | | | | | | | | | | | | Original and Recaptured Pools | $ | 44,239,405 |
| | 66.7 | % | | 50.0 | % | | $ | 189,567 |
| | $ | 245,562 |
| | 5.6 | Recapture Agreements | — |
| | 66.7 | % | | 50.0 | % | | 20,566 |
| | 39,395 |
| | 12.8 | Total | $ | 44,239,405 |
| | | | | | $ | 210,133 |
| | $ | 284,957 |
| | 6.3 |
| | (A) | The remaining interests are held by Nationstar. |
| | (B) | Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. 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. |
| | (C) | Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools or recapture agreements, as applicable. |
| | (D) | The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment. |
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments: | | | | | | | | | | Aggregate Direct and Equity Method Investees | | | Percentage of Total Outstanding Unpaid Principal Amount | State Concentration | | September 30, 2018 | | December 31, 2017 | California | | 24.8 | % | | 24.0 | % | Florida | | 8.0 | % | | 8.7 | % | New York | | 6.6 | % | | 8.5 | % | Texas | | 4.5 | % | | 4.6 | % | New Jersey | | 3.9 | % | | 4.1 | % | Maryland | | 3.8 | % | | 3.7 | % | Illinois | | 3.6 | % | | 3.5 | % | Georgia | | 3.5 | % | | 3.1 | % | Virginia | | 3.3 | % | | 3.0 | % | Arizona | | 2.6 | % | | 2.5 | % | Washington | | 2.6 | % | | 2.4 | % | Pennsylvania | | 2.5 | % | | 2.6 | % | Other U.S. | | 30.3 | % | | 29.3 | % | | | 100.0 | % | | 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.
See Note 11 regarding the financing of Excess MSRs. |