MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

9 Months Ended

Sep. 30, 2022

Transfers and Servicing of Financial Assets [Abstract]

MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

EXCESS MORTGAGE SERVICING RIGHTS

Excess mortgage servicing rights assets include Rithm Capital’s direct investments in Excess MSRs and investments in joint ventures jointly controlled by Rithm Capital and Fortress-managed funds investing in Excess MSRs.

The table below summarizes the components of Excess MSRs as presented on the Consolidated Balance Sheets:

	September 30, 2022		December 31, 2021
Direct investments in Excess MSRs	$	248,495	$	259,198
Excess MSR Joint Ventures	73,673		85,749
Excess mortgage servicing rights, at fair value	$	322,168	$	344,947

Direct Investments in Excess MSRs

The following table presents activity related to the carrying value of direct investments in Excess MSRs:

	Total(A)
Balance as of December 31, 2021	$	259,198
Interest income	28,017
Other income	38
Proceeds from repayments	(32,340)
Proceeds from sales	(997)
Change in fair value	(5,421)
Balance as of September 30, 2022	$	248,495

(A)Underlying loans serviced by Mr. Cooper and Specialized Loan Servicing LLC (“SLS”).

Mr. Cooper or SLS, 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.

Rithm Capital entered into a “recapture agreement” with respect to each of the direct Excess MSR investments serviced by Mr. Cooper and SLS. Under such arrangements, Rithm Capital is generally entitled to a pro rata interest in the Excess MSRs on any refinancing by Mr. Cooper of a loan in the original portfolio. These recapture agreements do not apply to Rithm Capital’s Servicer Advance Investments (Note 6).

The following table summarizes direct investments in Excess MSRs:

September 30, 2022										December 31, 2021
UPB of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years(A)	Amortized Cost Basis		Carrying Value(B)		Carrying Value(B)
		Rithm Capital(C, D)	Fortress-managed funds	Mr. Cooper
$	49,993,358	32.5% – 100.0% (56.5%)	0.0% – 50%	0.0% – 35.0%	6.2	$	208,957	$	248,495	$	259,198

(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.

(B)Carrying value represents the fair value of the pools and recapture agreements, as applicable.

(C)Amounts in parentheses represent weighted averages.

(D)Rithm Capital is also invested in related Servicer Advance Investments, including the basic fee component of the related MSR as of September 30, 2022 (Note 6) on $17.5 billion UPB underlying these Excess MSRs.

Changes in fair value of investments consists of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Original and Recaptured Pools	$	(3,857)	$	(4,837)	$	(5,421)	$	(13,666)

As of September 30, 2022, a weighted average discount rate of 7.8% was used to value Rithm Capital’s investments in Excess MSRs (directly and through equity method investees).

Excess MSR Joint Ventures

Rithm Capital entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by Rithm Capital and Fortress-managed funds investing in Excess MSRs.

The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees:

	September 30, 2022			December 31, 2021
Excess MSR	$	134,942		$	152,383
Other assets	13,090			19,802
Other liabilities	(687)			(687)
Equity	$	147,345		$	171,498
Rithm Capital’s investment	$	73,673		$	85,749
Rithm Capital’s percentage ownership	50.0		%	50.0		%

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Interest income	$	4,437	$	261	$	10,514	$	6,500
Other income (loss)	(12,074)		(2,605)		(14,417)		(3,634)
Expenses	(8)		(8)		(24)		(24)
Net income (loss)	$	(7,645)	$	(2,352)	$	(3,927)	$	2,842

The following table summarizes the activity of investments in equity method investees:

Balance at December 31, 2021	$	85,749
Distributions of capital from equity method investees	(10,112)
Change in fair value of investments in equity method investees	(1,964)
Balance at September 30, 2022	$	73,673

The following is a summary of Excess MSR investments made through equity method investees:

	September 30, 2022
	Unpaid Principal Balance		Investee Interest in Excess MSR(A)		Rithm Capital Interest in Investees		Amortized Cost Basis(B)		Carrying Value(C)		Weighted Average Life (Years)(D)
Agency
Original and Recaptured Pools	$	20,073,992	66.7	%	50.0	%	$	108,643	$	134,942	4.9

(A)The remaining interests are held by Mr. Cooper.

(B)Represents the amortized cost basis of the equity method investees in which Rithm Capital holds a 50% interest.

(C)Represents the carrying value of the Excess MSRs held in equity method investees, in which Rithm Capital holds a 50% interest. Carrying value represents the fair value of the pools as applicable.

(D)Represents the weighted average expected timing of the receipt of cash flows of each investment.

MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

The following table summarizes activity related to MSRs and MSR Financing Receivables:

Balance as of December 31, 2021	$	6,858,803
Purchases, net(A)	(250)
Originations(B)	1,059,535
Proceeds from sales	(8,149)
Change in fair value due to:
Realization of cash flows(C)	(522,206)
Change in valuation inputs and assumptions	1,503,167
(Gain) loss realized	4,174
Balance at September 30, 2022	$	8,895,074

(A)Net of purchase price adjustments and purchase price fully reimbursable from MSR sellers as a result of prepayment protection.    

(B)Represents MSRs retained on the sale of originated residential mortgage loans.

(C)Based on the paydown of the underlying residential mortgage loans.

The following table summarizes components of Servicing Revenue, Net:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Servicing fee revenue, net and interest income from MSRs and MSR financing receivables	$	419,793	$	377,201	$	1,276,137	$	996,465
Ancillary and other fees	33,370		13,692		102,904		98,888
Servicing fee revenue, net and fees	453,163		390,893		1,379,041		1,095,353
Change in fair value due to:
Realization of cash flows(A)	(141,616)		(287,318)		(522,206)		(924,766)
Change in valuation inputs and assumptions(B)	143,175		147,233		1,503,167		573,213
Change in fair value of derivative instruments	(18,505)		(41,365)		(11,316)		(41,564)
(Gain) loss realized	1,995		(739)		4,174		(17,088)
Gain (loss) on settlement of derivative instruments	(2,227)		(13,434)		(79,041)		(11,127)
Servicing revenue, net	$	435,985	$	195,270	$	2,273,819	$	674,021

(A)Includes $1.3 million and $3.9 million of fair value adjustment due to realization of cash flows to excess spread financing for the three and nine months ended September 30, 2021, respectively.

(B)Includes $1.3 million and $0.3 million of fair value adjustment to excess spread financing for the three and nine months ended September 30, 2021, respectively.

The following table summarizes MSRs and MSR Financing Receivables by type as of September 30, 2022:

	UPB of Underlying Mortgages		Weighted Average Life (Years)(A)	Carrying Value(B)
Agency	$	369,056,523	7.4	$	6,018,491
Non-Agency	55,380,229		5.0	810,719
Ginnie Mae(C)	119,740,843		7.1	2,065,864
Total/Weighted Average	$	544,177,595	7.1	$	8,895,074

(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.

(B)Carrying value represents fair value. As of September 30, 2022, weighted average discount rates of 8.3% (range 7.6% – 9.8%) were used to value Rithm Capital’s MSRs and MSR Financing Receivables.

(C)As of September 30, 2022, Rithm Capital holds approximately $1.9 billion in residential mortgage loans subject to repurchase and the related residential mortgage loans repurchase liability on its Consolidated Balance Sheets.

Residential Mortgage Loans Subject to Repurchase

Rithm Capital, through its wholly owned subsidiaries as approved issuers of Ginnie Mae MBS, originates and securitizes government-insured residential mortgage loans. As the issuer of the Ginnie Mae-guaranteed securitizations, Rithm Capital has the unilateral right to repurchase loans from the securitizations when they are delinquent for more than 90 days. Loans in forbearance that are three or more consecutive payments delinquent are included as delinquent loans permitted to be repurchased. Under GAAP, Rithm Capital is required to recognize the right to loans on its balance sheet and establish a corresponding liability upon the triggering of the repurchase right regardless of whether the Company intends to repurchase the loans. As of September 30, 2022, Rithm Capital holds approximately $1.9 billion in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its Consolidated Balance Sheets. Rithm Capital may re-pool repurchased loans into new Ginnie Mae securitizations upon re-performance of the loan or otherwise sell to third-party investors. The Company does not change the accounting for MSRs related to previously sold loans upon recognizing loans eligible for repurchase. Rather, upon repurchase of a loan, the MSR is written off. As of September 30, 2022, Rithm Capital holds approximately $0.8 billion of repurchased residential mortgage loans on its Consolidated Balance Sheets.

Ocwen MSR Financing Receivable Transactions

In July 2017, Ocwen Loan Servicing, LLC (collectively with certain affiliates, “Ocwen”) and Rithm Capital entered into an agreement in which both parties agreed to undertake certain actions to facilitate the transfer from Ocwen to Rithm Capital of Ocwen’s remaining interests in the MSRs relating to loans with an aggregate unpaid principal balance of approximately $110.0 billion and with respect to which Rithm Capital already held certain rights (“Rights to MSRs”). Ocwen and Rithm Capital concurrently entered into a subservicing agreement pursuant to which Ocwen agreed to subservice the mortgage loans related to the MSRs that were transferred to Rithm Capital.

In January 2018, Ocwen sold and transferred to Rithm Capital certain “Rights to MSRs” and other assets related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion. PHH (as successor by merger to Ocwen) will continue to service the residential mortgage loans related to the MSRs until any necessary third-party consents to transferring the MSRs are obtained and all other conditions to transferring the MSRs are satisfied.

Of the “Rights to MSRs” sold and transferred to NRM and Newrez, consents and all other conditions to transfer have been received with respect to approximately $66.7 billion UPB of underlying loans. Although legally sold and entitled to the economics of the transfer, as of September 30, 2022, with respect to MSRs representing approximately $12.7 billion UPB of underlying loans, it was determined for accounting purposes that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to Newrez and therefore are not treated as a sale under GAAP and are classified as MSR financing receivables.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the MSRs and MSR Financing Receivables:

	Percentage of Total Outstanding Unpaid Principal Amount
State Concentration	September 30, 2022		December 31, 2021
California	17.5	%	18.1	%
Florida	8.6	%	8.6	%
Texas	6.2	%	6.2	%
New York	6.0	%	6.0	%
Washington	5.8	%	5.6	%
New Jersey	4.4	%	4.5	%
Virginia	3.6	%	3.4	%
Maryland	3.4	%	3.4	%
Illinois	3.4	%	3.4	%
Georgia	2.9	%	3.0	%
Other U.S.	38.2	%	37.8	%
	100.0	%	100.0	%

Geographic concentrations of investments expose Rithm Capital to the risk of economic downturns within the relevant states. Any such downturn in a state where Rithm Capital holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the MSRs.

Residential Mortgage Loan Subservicing

The Mortgage Company performs servicing of residential mortgage loans for third parties under subservicing agreements. The subservicing does not meet the criteria to be recognized as a servicing right asset and, therefore, is not recognized on Rithm Capital’s Consolidated Balance Sheets. The UPB of residential mortgage loans subserviced for others as of September 30, 2022 and 2021 was $91.8 billion and $75.8 billion, respectively. Rithm Capital earned subservicing revenue of $100.4 million and $123.7 million for the nine months ended September 30, 2022 and 2021, respectively, related to subserviced loans which is included within Servicing Revenue, Net in the Consolidated Statements of Income.

NRM engages third party licensed mortgage servicers as subservicers and, in relation to certain MSR purchases, including to perform the operational servicing duties, including recapture activities, in connection with the MSRs it acquires, in exchange for a subservicing fee which is recorded as Subservicing Expense and reflected as part of General and Administrative expenses in Rithm Capital’s Consolidated Statements of Income. As of September 30, 2022, these subservicers include PHH, Mr. Cooper, LoanCare, Valon and Flagstar, which subservice 9.3%, 8.2%, 6.2%, 2.0% and 0.3%, respectively, of the MSRs held by Rithm Capital. The remaining 74.0% of the underlying UPB of the related mortgages is subserviced by the Mortgage Company (Note 1 to the Consolidated Financial Statements).

Servicer Advances Receivable

In connection with Rithm Capital’s ownership of MSRs, the Company assumes the obligation to serve as a liquidity provider to initially fund servicer advances on the underlying pool of mortgages (Note 22) it services. These servicer advances are recorded when advanced and are included in Servicer Advances Receivable on the Consolidated Balance Sheets.

The table below summarizes the type of advances included in the Servicer Advances Receivable:

	September 30, 2022		December 31, 2021
Principal and interest advances	$	643,466	$	562,418
Escrow advances (taxes and insurance advances)	1,131,823		1,523,154
Foreclosure advances	765,265		793,098
Total(A)(B)(C)	$	2,540,554	$	2,878,670

(A)Includes $405.1 million and $593.0 million of servicer advances receivable related to Agency MSRs, respectively, recoverable either from the borrower or the Agencies.

(B)Includes $175.2 million and $212.9 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from either the borrower or Ginnie Mae. Expected losses for advances associated with Ginnie Mae loans in the MSR portfolio are considered in the MSR fair valuation through a nonreimbursable advance loss assumption.

(C)Excludes $18.3 million and $23.5 million, respectively, in unamortized advance discount and reserves, net of accruals for advance recoveries. These reserves relate to inactive loans in the foreclosure or liquidation process.

Rithm Capital’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority pursuant to the underlying servicing agreements (i.e., “top of the waterfall”) and Rithm Capital is generally entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. Furthermore, to the extent that advances are not recoverable by Rithm Capital as a result of the subservicer’s failure to comply with applicable requirements in the relevant servicing agreements, Rithm Capital has a contractual right to be reimbursed by the subservicer. For advances on loans that have been liquidated, sold, paid in full or modified, the Company has reserved $44.3 million and $32.1 million for expected non-recovery of advances as of September 30, 2022 and December 31, 2021, respectively.

The following table summarizes servicer advances reserve:

Balance at December 31, 2021	$	32,122
Provision	26,090
Transfers and Other	—
Write-offs	(13,912)
Balance at September 30, 2022	$	44,300

See Note 18 regarding the financing of MSRs and Servicer Advances Receivable.