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.