NEW RESIDENTIAL
INVESTMENT CORP.
NEW RESIDENTIAL
INVESTMENT CORP.
2014 Annual Report
NEW RESIDENTIAL INVESTMENT CORP. (NYSE: NRZ)*
26%
ANNUALIZED RETURN
ON EQUITY (1)
NEW RESIDENTIAL
INVESTMENT CORP.
46%
YOY GROWTH IN 4Q
CORE EARNINGS (2)
$95B
UPB
CALL RIGHTS
$343M
TOTAL LIFETIME
DIVIDENDS
$1.8B
MARKET CAP.
(NYSE)
$249B
EXCESS MSR
PORTFOLIO(3)
(1) Inception date of May 15, 2013, when New Residential spun off from Newcastle Investment Corp. (NYSE: NCT). Return On Equity (“ROE”) is calculated by
dividing annualized net income (loss) attributable to common stockholders since inception (of $358 million, which is inception-to-date income of $581
million annualized) by average quarter-end total New Residential stockholders’ equity since inception (of $1.4 billion).
(2) Fourth quarter 2014 core earnings year-over-year growth is calculated based on per share amount.
(3) Represents unpaid principal balance (“UPB”).
NET INVESTMENT BY SEGMENT*
EXCESS MSRs
$749M
SERVICER ADVANCES
$203M
$1,638M
RESIDENTIAL SECURITIES & CALL RIGHTS
$1,638M
OPPORTUNISTIC INVESTMENTS
EXCESS MSRs
SERVICER ADVANCES
RESIDENTIAL SECURITIES & CALL RIGHTS
CASH
OPPORTUNISTIC INVESTMENTS
CASH
CUMULATIVE COMMON DIVIDENDS SINCE SPIN-OFF*
$276M
$749M
$311M
$203M
$99M
$276M
$311M
$99M
$2.57
$2.57
$2.19
$2.19
$1.84
$1.84
$1.34
$0.99
$1.34
$0.99
$0.49
$0.49
$0.14
$0.14
Q2-13
Q2-13
Q3-13
Q4-13
Q1-14
Q2-14
Q3-14
Q4-14
Q3-13
Q4-13
*All data as of December 31, 2014.
Q1-14
Q2-14
Q3-14
Q4-14
NEW RESIDENTIAL
INVESTMENT CORP.
DEAR FELLOW SHAREHOLDERS,
By all measures, 2014 was truly an outstanding and transforma-
tional year for New Residential Investment Corp. (NYSE: NRZ;
“we,” “New Residential” or the “Company”). Since the Company’s
inception in May 2013, we have worked continuously to identify
and execute on attractive investments across the mortgage
markets. In the past year, we were particularly focused on the
simplification around our core business and investment strat-
egy. Today, our core business consists of three primary seg-
ments: Excess mortgage servicing rights (“Excess MSRs”),
servicer advances and non-agency securities with associated
call rights. We believe these key assets provide New Residential
with strong risk-adjusted returns and help position our portfolio
for various interest rate environments.
Throughout 2014, New Residential achieved significant growth
and it is with great pleasure that I share with you some of our
key accomplishments. Since becoming a publicly traded com-
pany, we have created meaningful shareholder value, generated
an annualized return on equity of 26% and paid out a total of
$343 million in common dividends. Furthermore, we have deliv-
ered exceptional year-over-year financial results.
For full year 2014, New Residential earned $353 million in GAAP
Income, or $2.53 per diluted share, representing a 22% year-
over-year increase per diluted share. Core Earnings totaled $219
million, or $1.57 per diluted share, representing a 55% year-
over-year increase per diluted share. In addition, New Residential
paid out $218 million in total Common Dividends, or $1.58 per
diluted share. Furthermore, in the fourth quarter, as our portfo-
lio of assets continued to generate growing and stable cash
flows, we increased our quarterly dividend by 9%, from $0.35 to
$0.38 per common share.
INVESTMENT HIGHLIGHTS
Over the course of 2014, we achieved impressive results across
our core segments by leveraging our expertise and insight into
the mortgage servicing market. In total, we invested over $989
million throughout the year across investments in Excess MSRs,
servicer advances and non-agency securities with associated
call rights.
EXCESS MORTGAGE SERVICING RIGHTS (“EXCESS MSRS”)
Since inception, Excess MSRs have been the foundation of our
investment thesis and will continue to be a core part of our
investment strategy going forward. From 2011 to 2014, we
invested a total of $777 million in 24 loan pools with $249 billion
of initial unpaid principal balance (“UPB”) as of December 31,
2014. In 2014 alone, we acquired a total of $36 billion UPB of
Excess MSRs. Through the end of December 2014, we received
life-to-date cash flows totaling $360 million, representing
46% of our initial investment and a life-to-date internal rate of
return (“IRR”) of 29%. Going forward, we expect future cash
flows to total approximately $1.2 billion, generating a lifetime
expected return of 15% to 20%.
Particularly of note, our Excess MSR portfolio consists mainly
of well-seasoned mortgage loans with an average tenor of
approximately 7 years. Over 80% of our borrowers are “credit
impaired,” meaning that they have high loan-to-value ratios
or below average FICO scores. We believe the well-seasoned
and credit impaired nature of our MSR portfolio provides us
with a unique competitive advantage that helps protect our
investments against various interest rate environments.
Looking ahead in 2015, we are encouraged by the revived
activities in the MSR market and remain optimistic about our
ability to maintain momentum in growing our portfolio of ser-
vicing assets. In the first quarter of 2015 alone, we acquired or
committed to acquire $38 billion UPB of legacy agency Excess
MSRs. We expect MSR sales from both bank and non-bank
servicers to continue given operational pressure and regula-
tory capital requirements. As market activity becomes
increasingly robust, we estimate an actionable MSR pipeline
totaling approximately $150 billion UPB or more over the
course of 2015.
SERVICER ADVANCES
Since making our first investment in servicer advances in
December 2013, where we acquired from Nationstar Mortgage
Holdings Inc. (NYSE: NSM, “Nationstar”) approximately $3.2
billion of non-agency servicer advances related to $54 billion
of initial UPB, we have achieved terrific results. On our initial
invested capital of $313 million, we have received $178 million
of cash flow, resulting in a life-to-date IRR of 42%. Our current
net investment is $203 million, and we expected the lifetime
return to be in the range of 20% to 25%.
Subsequent to 2014, we further improved our investment
returns by refinancing $4.3 billion of facilities in March. This
resulted in a lower cost of funds, higher advance rates and
longer maturities. As 2015 progresses, we look forward to
integrating our purchase of servicer advances and other
assets of Home Loan Servicing Solutions, Ltd. (which is
described in more detail below), and realizing efficiencies
there given our expertise and lender relationships.
NON-AGENCY SECURITIES & ASSOCIATED CALL RIGHTS
Our strategy around non-agency securities is simple, and it
continues to be an important part of our core business. We aim
to buy non-agency securities where we can own the associated
call rights, since they permit us to pay off outstanding RMBS at
face value (or “par”) in exchange for ownership of the underly-
ing collateral. We believe there can be a meaningful discrep-
ancy between the value of the non-agency RMBS and the
recovery value of the underlying mortgage loans. We believe
that the acquisition and execution of call rights will allow us to
realize this difference by selectively retaining loans that meet
our return thresholds or re-securitizing or selling performing
loans for a gain. Furthermore, we aim to purchase underlying
bonds at a discount and realize the accretion to par upon
execution.
As of year-end, our portfolio consisted of $779 million fair
market value of non-agency RMBS. In 2014, we purchased $1.9
billion face value of non-agency RMBS for $1.5 billion, at 79%
of par, with a net equity investment of $375 million. In addition,
we sold $1.6 billion face value for $1.3 billion, at 81% of par,
recognizing gains of approximately $60 million. Furthermore,
we collapsed approximately $1.4 billion of UPB across 60 non-
agency deals in 2014, resulting in $12 million of income from
discount bonds paid off at par.
As of December 31, 2014, we owned call rights on $95 billion
UPB of non-agency residential mortgage securitizations. While
only $9.3 billion is callable as of year-end, the remainder of the
call rights will become exercisable over time once the current
collateral balances are reduced below the applicable thresh-
olds (generally expressed as a percentage of the original bal-
ances). In 2015 and onwards, we will look to continually monetize
the call rights as they become exercisable.
OTHER INVESTMENTS—CONSUMER LOAN PORTFOLIO
In addition to focusing on our three core segments, from time
to time, we also embark on opportunistic investments that we
believe have the potential to generate outsized returns.
Especially of note, in April 2013, New Residential invested
$241 million to purchase an interest in a $3.9 billion UPB con-
sumer loan portfolio. In October 2014, to further enhance the
returns on our investment, we, along with our co-investors,
completed a $2.6 billion asset-backed secured refinancing of
the consumer loan portfolio, which had a UPB of approximately
$2.7 billion at that time. As a result of distributions and refi-
nancing proceeds, we received total life-to-date cash flows of
$473 million and achieved superior returns. On our initial equity
investment of $241 million, the investment has generated an
impressive IRR of 73% to date. In the next four years, we
expect the investment to generate an additional $155 million
in total cash flows while being carried at a zero cost basis on
our balance sheet.
NEW RESIDENTIAL
INVESTMENT CORP.
RECENT KEY MILESTONES
Subsequent to year end, we completed an important milestone
transaction in our effort to further grow our business and
strengthen our platform. In April 2015, we announced the entry
into a $1.4 billion purchase agreement with Home Loan Servicing
Solutions, Ltd. (NASDAQ: HLSS, “HLSS”). As a result of the
transaction, we acquired substantially all of the assets of HLSS,
including approximately $6.7 billion of servicing-related assets.
We are extremely pleased with the completion of this milestone
transaction, which increased our servicing assets portfolio to
approximately $400 billion UPB. Furthermore, we are excited for
the opportunity to expand and strengthen our partnership with
Ocwen Financial Corporation (NYSE: OCN, “Ocwen”) through a
multi-year extension of the servicing contracts and acquisition
of non-agency call rights. We believe establishing a strong part-
nership with both Nationstar and Ocwen, the two largest non-
bank servicers in the United States, will provide us with
additional bandwidth to acquire additional servicing assets
going forward. All in all, this was an important and transforma-
tional transaction for us, and we believe it will be highly benefi-
cial for our core investment strategy and accretive to our
long-term earnings.
LOOKING FORWARD
In summary, 2014 was notable for its record results, strategic
growth and diversification. By leveraging our experience, strong
relationships and deep knowledge of the mortgage markets, we
were successful in driving impressive year-over-year financial
results. Furthermore, we made significant strides in building a
balanced and diversified investment portfolio through meaning-
ful investments and accretive acquisitions.
During 2015, we continue to expect significant opportunities for
growth in the mortgage servicing industry, as we expect both
bank and non-bank servicers to continue to sell servicing-related
assets. Furthermore, we are extremely encouraged by our
recent purchases of Excess MSRs and other servicing assets,
and we expect additional opportunities to come from our non-
agency deal collapses. We look forward to continuing to work
closely with our servicing partners, and we remain optimistic
about our ability to acquire additional attractively priced servic-
ing assets in the coming quarters.
Looking ahead, we remain confident in our ability to optimize
returns for our shareholders and to excel as one of the leading
capital providers in the mortgage servicing business. We thank
you for your support, and in return, we will remain focused on
driving results and maximizing shareholder value.
Sincerely,
Michael Nierenberg
Chief Executive Officer & President
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2014 FORM 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35777
New Residential Investment Corp.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1345 Avenue of the Americas, New York, NY
(Address of principal executive offices)
45-3449660
(I.R.S. Employer
Identification No.)
10105
(Zip Code)
(212) 798-3150
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class:
Common Stock, $0.01 par value per share
Name of each exchange on which registered:
New York Stock Exchange (NYSE)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this form 10-K
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
The aggregate market value of the common stock held by non-affiliates as of June 30, 2014 (computed based on the closing price on such date as reported
on the NYSE) was: $1.7 billion.
Common stock, $0.01 par value per share: 141,434,905 shares outstanding as of February 20, 2015.
The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the registrant’s Definitive Proxy Statement for
its 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.A
DOCUMENTS INCORPORATED BY REFERENCE
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of
1995, which statements involve substantial risks and uncertainties. Such forward-looking statements relate to, among other things,
the operating performance of our investments, the stability of our earnings, our financing needs and the size and attractiveness of
market opportunities. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,”
“will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,”
“believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based
on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations,
cash flows or financial condition or state other forward-looking information. Our ability to predict results or the actual outcome
of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking
statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth
in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause
our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect
on our operations and future prospects include, but are not limited to:
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•
•
•
•
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reductions in cash flows received from our investments;
the quality and size of the investment pipeline and our ability to take advantage of investment
opportunities at attractive risk-adjusted prices;
servicer advances may not be recoverable or may take longer to recover than we expect, which could
cause us to fail to achieve our targeted return on our investment in servicer advances;
our ability to deploy capital accretively and the timing of such deployment;
our counterparty concentration and default risks in Nationstar, Springleaf and other third-parties;
a lack of liquidity surrounding our investments, which could impede our ability to vary our portfolio
in an appropriate manner;
the impact that risks associated with subprime mortgage loans and consumer loans, as well as
deficiencies in servicing and foreclosure practices, may have on the value of our Excess MSRs, servicer
advances, RMBS and loan portfolios;
the risks that default and recovery rates on our Excess MSRs, servicer advances, real estate securities,
residential mortgage loans and consumer loans deteriorate compared to our underwriting estimates;
changes in prepayment rates on the loans underlying certain of our assets, including, but not limited
to, our Excess MSRs;
the risk that projected recapture rates on the loan pools underlying our Excess MSRs are not achieved;
the relationship between yields on assets which are paid off and yields on assets in which such monies
can be reinvested;
the relative spreads between the yield on the assets we invest in and the cost of financing;
changes in economic conditions generally and the real estate and bond markets specifically;
adverse changes in the financing markets we access affecting our ability to finance our investments on
attractive terms, or at all;
changing risk assessments by lenders that potentially lead to increased margin calls, not extending our
repurchase agreements or other financings in accordance with their current terms or not entering into
new financings with us;
changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may
undertake in relation to such changes;
impairments in the value of the collateral underlying our investments and the relation of any such
impairments to our judgments as to whether changes in the market value of our securities or loans are
temporary or not and whether circumstances bearing on the value of such assets warrant changes in
carrying values;
the availability and terms of capital for future investments;
competition within the finance and real estate industries;
i
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•
•
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the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Act,
U.S. government programs intended to stabilize the economy, the federal conservatorship of Fannie
Mae and Freddie Mac and legislation that permits modification of the terms of loans;
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal
income tax purposes and the potentially onerous consequences that any failure to maintain such
qualification would have on our business; and
our ability to maintain our exclusion from registration under the 1940 Act and the fact that maintaining
such exclusion imposes limits on our operations.
We also direct readers to other risks and uncertainties referenced in this report, including those set forth under “Risk Factors.” We
caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to
predict those events or how they may affect us. Except as required by law, we are under no obligation (and expressly disclaim any
obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether
as a result of new information, future events or otherwise.
ii
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SPECIAL NOTE REGARDING EXHIBITS
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to
provide you with information regarding their terms and are not intended to provide any other factual or disclosure information
about New Residential Investment Corp. (the “Company,” “New Residential” or “we,” “our” and “us”) or the other parties to the
agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These
representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
•
•
•
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating
the risk to one of the parties if those statements provide to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation
of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to
you or other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified
in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at
any other time. Additional information about the Company may be found elsewhere in this Annual Report on Form 10-K and the
Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. See “Business
– Corporate Governance and Internet Address; Where Readers Can Find Additional Information.”
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for
considering whether additional specific disclosures of material information regarding material contractual provisions are required
to make the statements in this report not misleading.
iii
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NEW RESIDENTIAL INVESTMENT CORP.
FORM 10-K
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
INDEX
PART I
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
General
Market Considerations
Our Portfolio
Application of Critical Accounting Policies
Recent Accounting Pronouncements
Results of Operations
Liquidity and Capital Resources
Interest Rate, Credit and Spread Risk
Off-Balance Sheet Arrangements
Contractual Obligations
Inflation
Core Earnings
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Balance Sheets as of December 31, 2014 and 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and
2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Segment Reporting
Investments in Excess Mortgage Servicing Rights
Investments in Excess Mortgage Servicing Rights, Equity Method Investees
Investments in Servicer Advances
Investments in Real Estate Securities
Investments in Residential Mortgage Loans
Investments in Consumer Loans, Equity Method Investees
Note 1. Organization
Note 2.
Note 3.
Note 4.
Note 5.
Note 6.
Note 7.
Note 8.
Note 9.
Note 10. Derivatives
Note 11. Debt Obligations
Note 12. Fair Value of Financial Instruments
Note 13. Equity and Earnings Per Share
Note 14. Commitments and Contingencies
iv
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Note 15. Transactions with Affiliates and Affiliated Entities
Note 16. Reclassification from Accumulated Other Comprehensive Income into Net Income
Note 17. Income Taxes
Note 18. Recent Activities
Note 19. Summary Quarterly Consolidated Financial Information (Unaudited)
Item 9.
Item 9A. Controls and Procedures
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Management’s Report on Internal Control over Financial Reporting
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
Item 15. Exhibits; Financial Statement Schedules
Signatures
PART IV
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v
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PART I
Item 1. Business.
General
New Residential is a publicly traded real estate investment trust (“REIT”) primarily focused on opportunistically investing in, and
actively managing, investments related to residential real estate. We were formed as a wholly owned subsidiary of Newcastle
Investment Corp. (“Newcastle”) in September 2011 and were spun-off from Newcastle on May 15, 2013, which we refer to as
the “distribution date.” Our stock is traded on the New York Stock Exchange under the symbol “NRZ.” We are externally managed
and advised by an affiliate (our “Manager”) of Fortress Investment Group LLC (“Fortress”) pursuant to a management agreement
(the “Management Agreement”).
Our goal is to drive strong risk-adjusted returns primarily through investments in (i) excess mortgage servicing rights ("MSRs"),
(ii) residential mortgage backed securities ("RMBS") and non-agency RMBS call rights, as well as (iii) other related opportunistic
investments. We generally target assets that generate significant current cash flows and/or have the potential for meaningful capital
appreciation. We aim to generate attractive returns for our stockholders without the excessive use of financial leverage.
We intend to continue to invest opportunistically across the residential real estate market. Our investment guidelines are purposefully
broad to enable us to make investments in a wide array of assets in diverse markets. In the past, we have taken advantage of this
flexibility to invest in assets that are not strictly real estate related (e.g., consumer loans), and we may do so again in the future.
We expect our asset allocation and target assets to change over time depending on the types of investments our Manager identifies
and the investment decisions our Manager makes in light of prevailing market conditions. For more information about our
investment guidelines, see “—Investment Guidelines.”
The residential real estate market includes the approximately $10 trillion U.S. mortgage market. This market is comprised of
numerous components, including the following:
Mortgage Loans: Performing, Non-performing, Re-performing, and Reverse Loans and Real Estate Owned
Performing loans are mortgage loans where the borrower is generally current on required payments; by contrast, non-
performing loans are mortgage loans where the borrower is delinquent or in default. Re-performing loans were formally
non-performing but became performing again, often as a result of a loan modification where the lender agrees to modified
terms with the borrower rather than foreclosing on the underlying property. Reverse mortgage loans are a special type
of loan that pay the borrower a monthly amount, increasing the balance of the loan, and are typically collected when the
property is sold or the borrower no longer resides at the property. If a loan defaults and the lender forecloses on the
underlying property, that property is referred to as real estate owned (“REO”).
Residential Mortgage Backed Securities: Agency and Non-Agency and Call Rights
Mortgage loans are often packaged into pools held in securitization entities which issue bonds (RMBS) collateralized by
the loans. Agency RMBS are RMBS issued or guaranteed by a U.S. government agency, such as Ginnie Mae, or by a
government-sponsored enterprise (“GSE”), such as Fannie Mae or Freddie Mac. Non-Agency RMBS are issued by either
public trusts or private label securitization (“PLS”) entities.
Mortgage loans within a securitization may be subject to call rights. Call rights permit the holder of the rights to pay off
all of the outstanding RMBS at their face amount (or “par”) in exchange for ownership of the remaining mortgage loans
which served as collateral for the RMBS, subject to certain costs. Call rights may be subject to limitations on when they
may be exercised (such as specific dates or upon the reduction of the outstanding balances of the remaining mortgage
loans to a specified level).
Mortgage Servicing Rights and Excess Mortgage Servicing Rights
An MSR provides a mortgage servicer with the right to service a pool of mortgage loans in exchange for a portion of the
interest payments made on the underlying mortgage loans. An MSR is made up of two components: a basic fee and an
excess MSR. The basic fee is the amount of compensation for the performance of servicing duties, and the excess MSR
is the amount that exceeds the basic fee. An owner of an excess MSR is not required to assume any servicing duties,
advance obligations or liabilities associated with the loan pool underlying the MSR.
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Servicer Advances
Servicer advances are a customary feature of residential mortgage securitization transactions and represent one of the
duties for which a servicer is compensated through the basic fee component of the related MSR, since the advances are
non-interest bearing. Servicer advances are generally reimbursable cash payments made by a servicer (i) when the borrower
fails to make scheduled payments due on a mortgage loan or (ii) to support the value of the collateral property. The
purpose of the advances is to provide liquidity, rather than credit enhancement, to the underlying residential mortgage
securitization transaction. Servicer advances are usually repaid from amounts received with respect to the related mortgage
loan.
For more information, see “Mortgage Industry Overview” below.
We currently conduct our business through the following segments:
Servicing Related Assets
•
•
Excess Mortgage Servicing Rights ("Excess MSRs"): We have acquired Excess MSRs on residential mortgage
loans with an aggregate UPB as of December 31, 2014 of $248.7 billion. As of December 31, 2014, the carrying
value of our Excess MSRs was approximately $748.6 million, representing 9.2% of our total assets or 46.9%
of our equity.
Servicer Advances: We have made two investments in servicer advances, including the basic fee component
of the related MSRs. The first, and larger, investment was made through a joint venture entity of which we
are the managing member (the “Buyer”), and which we consolidate in our financial statements. As of
December 31, 2014, the carrying value of our servicer advances, including the basic fee component of the
related MSRs, was approximately $3.3 billion, representing 40.4% of our total assets, or 6.3% of our equity,
net of financing and interests held by third party investors in the Buyer.
Residential Securities and Loans
•
•
Real Estate Securities: We acquire and manage a diversified portfolio of credit sensitive real estate securities,
including Non-Agency and Agency RMBS. As of December 31, 2014, the carrying value of our real estate
securities was approximately $2.5 billion ($1.7 billion for Agency RMBS and $0.7 billion for Non-Agency
RMBS), representing 30.4% of our total assets, or 12.5% of our equity, net of financing. In addition, we own
call rights with respect to approximately 780 securitization entities which are collateralized by mortgage loans
with an unpaid principal balance (“UPB”) of approximately $95.3 billion.
Real Estate Loans: We have acquired residential mortgage loans, including performing, non-performing, re-
performing and reverse mortgage loans. As of December 31, 2014, the carrying value of our residential
mortgage loans (including REO) was $1.2 billion, representing 15.3% of our total assets, or 18.0% of our
equity, net of financing.
Other Investments
•
Consumer Loans: In April 2013, we acquired an interest in a pool of consumer loans, including unsecured
and homeowner loans, held in an unconsolidated entity. In October 2014, we refinanced this entity and received
a distribution in excess of our basis such that, as of December 31, 2014, the carrying value of our investment
in consumer loans had been reduced to zero. We continue to own an interest in this entity, from which we
expect to receive significant future cash flows.
In addition, as of December 31, 2014, we had cash and cash equivalents, restricted cash, derivative assets, and other assets of $0.4
billion, representing 4.6% of our total assets, or 16.3% of our equity, net of dividends and other payables.
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The following table summarizes our segments as of December 31, 2014 (in thousands):
Servicing Related Assets
Residential Securities and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
$
748,609
$ 3,270,839
$
2,463,163
$
1,236,210
$
— $
— $ 7,718,821
—
—
—
—
59,383
29,418
194
14,652
43,728
—
32,091
69,980
$
$
748,609
$ 3,374,486
— $ 2,890,230
$
$
2,608,962
2,246,651
$
$
215
215
25,467
17,511
2,915,697
2,264,162
748,394
458,789
344,800
7,757
—
312
14,159
1,258,438
925,418
24,141
949,559
308,879
$
$
—
253,836
—
—
—
—
—
609
609
102,117
212,985
—
—
469
29,418
32,597
99,869
$
102,586
$ 8,093,690
— $
— $ 6,062,299
195
195
414
—
113,937
113,937
181,466
6,243,765
(11,351)
1,849,925
—
253,836
$
748,394
$
204,953
$
344,800
$
308,879
$
414
$
(11,351) $ 1,596,089
December 31, 2014
Investments
Cash and cash equivalents
Restricted cash
Derivative assets
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total Equity
Noncontrolling interests
in equity of consolidated
subsidiaries
Total New Residential
stockholders' equity
Recent Developments
On February 22, 2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Home Loan Servicing
Solutions, Ltd., a Cayman Islands exempted company (“HLSS”), and Hexagon Merger Sub, Ltd., a Cayman Islands exempted
company and our wholly owned subsidiary (“Merger Sub”). The Merger Agreement provides that, upon the terms and subject to
the conditions set forth therein, Merger Sub will merge with and into HLSS (the “Merger”), with HLSS continuing as the surviving
company and our wholly owned subsidiary.
Pursuant to the Merger Agreement, and upon the terms and conditions set forth therein, at the effective time of the Merger (the
“Effective Time”), each ordinary share of HLSS, par value $0.01 per share, issued and outstanding immediately prior to the
Effective Time, will be automatically converted into the right to receive $18.25 in cash, without interest (the “Merger
Consideration”), other than those shares of HLSS (i) with respect to which dissenting rights under section 238 of the Companies
Law (2013 Revision) of the Cayman Islands are properly exercised and not withdrawn or (ii) owned by us, HLSS or their subsidiaries.
Each option to purchase HLSS shares, whether vested or unvested, that is outstanding and unexercised immediately prior to the
Effective Time will be cancelled as of the Effective Time.
The Merger Agreement contains certain customary representations and warranties made by each party, which in the case of HLSS
are qualified by the confidential disclosures provided to us in connection with the Merger Agreement, as well as matters included
in HLSS’s reports filed with the Securities and Exchange Commission (the “SEC”) prior to the date of the Merger Agreement.
We and HLSS have agreed to various customary covenants, including covenants regarding the conduct of HLSS’s business prior
to the closing of the Merger (“Closing”), covenants requiring HLSS to recommend that its shareholders approve the Merger
Agreement and covenants prohibiting HLSS from soliciting alternative acquisition proposals or providing information to or
engaging in discussions with third-parties, in each case, except in limited circumstances as provided in the Merger Agreement.
The Merger does not require the approval of our stockholders and is not conditioned on the receipt of financing by us. However,
consummation of the Merger is subject to, among other things: (i) approval of the Merger by the requisite vote of HLSS’s
shareholders (the “HLSS Shareholder Approval”) and (ii) certain other customary closing conditions. Moreover, each party’s
obligation to consummate the Merger is subject to certain other conditions, including without limitation, (i) the accuracy of the
other party’s representations and warranties and (ii) the other party’s compliance with its covenants and agreements contained in
the Merger Agreement (in each case subject to customary materiality qualifiers). In addition, our obligation to consummate the
Merger is subject to the absence of any Company Material Adverse Effect (as defined, and subject to the exclusions set forth, in
the Merger Agreement).
The Merger Agreement may be terminated by either party under certain circumstances, including, among others: (i) if the Closing
has not occurred by the six-month anniversary of the Merger Agreement; (ii) if a court or other governmental entity has issued a
final and non-appealable order prohibiting the Closing; (iii) if HLSS fails to obtain the HLSS Shareholder Approval; (iv) upon a
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material uncured breach by the other party that would result in a failure of the conditions to the Closing to be satisfied; or (v) if
the Board of Directors of HLSS makes an Adverse Recommendation Change (as defined in the Merger Agreement). In addition,
prior to obtaining the HLSS Shareholder Approval and subject to the payment of a termination fee, HLSS may terminate the
Merger Agreement in order to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). Upon
termination of the Merger Agreement under specified circumstances (including in connection with a Superior Proposal), HLSS
will be required to pay us a termination fee of $45,400,000. In the event that the Merger Agreement is terminated for failure to
obtain the HLSS Shareholder Approval, HLSS will be required to reimburse us for out-of-pocket expenses, up to a maximum
amount of $7,000,000.
The foregoing description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete
and is subject to, and qualified in its entirety by, the full text of the Merger Agreement, which filed as Exhibit 2.7 hereto and
incorporated herein by reference.
The Market Opportunity
We believe that unfolding developments in the U.S. residential housing market are generating significant investment opportunities.
The U.S. residential real estate market is vast: the value of the housing market totaled approximately $21 trillion as of January
2015, including about $11 trillion of home equity and $10 trillion of mortgage debt outstanding, according to Inside Mortgage
Finance and Federal Reserve Statistical Release. The residential mortgage industry is undergoing major structural changes that
are transforming the way mortgages are originated, owned and serviced.
We also believe that we are one of only a select number of market participants that have the combination of capital, industry
expertise and key business relationships we think are necessary to take advantage of these opportunities.
Mortgage Industry Overview
Over the last few decades the complexity of the market for residential mortgage loans in the U.S. has dramatically increased. A
borrower seeking credit for a home purchase will typically obtain financing from a financial institution, such as a bank, savings
association or credit union. In the past, these institutions would generally have held a majority of their originated mortgage loans
as interest-earning assets on their balance sheets and would have performed all activities associated with servicing the loans,
including accepting principal and interest payments, making advances for real estate taxes and property and casualty insurance
premiums, initiating collection actions for delinquent payments and conducting foreclosures.
Now, institutions that originate mortgage loans generally hold a smaller portion of such loans as assets on their balance sheets and
instead sell a significant portion of the loans they originate to third parties. The GSEs are currently the largest purchasers of home
mortgage loans. Under a process known as securitization, the GSEs and financial institutions typically package residential mortgage
loans into pools that are sold to securitization trusts. These securitization trusts fund the acquisition of mortgage loans by issuing
securities, known as RMBS, that entitle the owner of such securities to receive a portion of the interest and principal collected on
the mortgage loans in the pool. The purchasers of the RMBS are typically large institutions, such as pension funds, mutual funds,
insurance companies and REITs. The agreement that governs the packaging of mortgage loans into a pool, the servicing of such
mortgage loans and the terms of the RMBS issued by the securitization trust is often referred to as a pooling and servicing agreement.
In the ten years prior to the credit dislocation in 2007, the securitization market drove an increase in the number of residential
mortgage loans outstanding. Since 2007, the mortgage industry has been characterized by reduced origination and securitization
activities, particularly for subprime and Alt-A mortgage loans.
In connection with a securitization, a number of entities perform specific roles with respect to the mortgage loans in a pool,
including the trustee and the mortgage servicer. The trustee holds legal title to the mortgage loans on behalf of the owner of the
RMBS and either maintains the mortgage note and related documents itself or with a custodian. The trustee or a separate securities
administrator for the trust receives the payments collected by the servicer on the mortgage loans and distributes them to the investors
in the RMBS pursuant to the terms of the pooling and servicing agreement. One or more other entities are appointed pursuant to
the pooling and servicing agreement to service the mortgage loans. In some cases, the servicer is the same institution that originated
the loan, and, in other cases, it may be a different institution. The duties of servicers for mortgage loans that have been securitized
are generally discussed below, and are generally required to be performed in accordance with industry-accepted servicing practices
and the terms of the pooling and servicing agreement, mortgage note and applicable law. A servicer generally takes actions, such
as foreclosure, in the name and on behalf of the trustee.
Segments of the Residential Mortgage Loan Market
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The residential mortgage market is commonly divided into a number of categories based on certain mortgage loan characteristics,
including the credit quality of borrowers and the types of institutions that originate or finance such loans. While there are no
universally accepted definitions, the residential mortgage loan market is commonly divided by market participants into the following
categories.
•
•
GSE and Government Guaranteed Loans. This category of mortgage loans includes “conforming
loans,” which are first lien mortgage loans that are secured by single-family residences that meet or
“conform” to the underwriting standards established by Fannie Mae or Freddie Mac. The conforming
loan limit is established by statute and currently is $417,000 with certain exceptions for high-priced
real estate markets. This category also includes mortgage loans issued to borrowers that do not meet
conforming loan standards, but who qualify for a loan that is insured or guaranteed by the government
through Ginnie Mae, primarily through federal programs operated by the Federal Housing
Administration and the Department of Veterans Affairs.
Non-GSE or Government Guaranteed Loans. Residential mortgage loans that are not guaranteed by
the GSEs or the government are generally referred to as “non-conforming loans” and fall into one of
the following categories: jumbo, subprime, Alt-A or second lien loans. The loans may be non-
conforming due to various factors, including mortgage balances in excess of Agency underwriting
guidelines, borrower characteristics, loan characteristics and level of documentation.
•
•
•
•
Jumbo. Jumbo mortgage loans have original principal amounts that exceed the
statutory conforming limit for GSE loans. Jumbo borrowers generally have strong
credit histories and provide full loan documentation, including verification of income
and assets.
Subprime. Subprime mortgage loans are generally issued to borrowers with
blemished credit histories, who make low or no down payments on the properties
they purchase or have limited documentation of their income or assets. Subprime
borrowers generally pay higher interest rates and fees than prime borrowers.
Alt-A. Alt-A mortgage loans are generally issued to borrowers with risk profiles that
fall between prime and subprime. These loans have one or more high-risk features,
such as the borrower having a high debt-to-income ratio, limited documentation
verifying the borrower’s income or assets, or the option of making monthly payments
that are lower than required for a fully amortizing loan. Alt-A mortgage loans
generally have interest rates that fall between the interest rates on conforming loans
and subprime loans.
Second Lien. Second mortgages and home equity lines are often referred to as second
liens and fall into a separate category of the residential mortgage market. These loans
typically have higher interest rates than loans secured by first liens because the lender
generally will only receive proceeds from a foreclosure of a property after the first
lien holder is paid in full. In addition, these loans often feature higher loan-to -value
ratios and are less secure than first lien mortgages.
Servicing Related Assets
Excess MSRs
An MSR provides a mortgage servicer with the right to service a pool of mortgage loans in exchange for a portion of the interest
payments made on the underlying mortgage loans. This amount typically ranges from 25 to 50 bps times the UPB of the mortgage
loans. An MSR is made up of two components: a basic fee and an Excess MSR. The basic fee is the amount of compensation for
the performance of servicing duties, and the Excess MSR is the amount that exceeds the basic fee. For example, if an MSR is 30
bps and the basic fee is 5 bps, then the Excess MSR is 25 bps. In our capacity as the owner of an Excess MSR, we are not required
to assume any servicing duties, advance obligations or liabilities associated with the loan pools underlying our investment. However,
we have purchased servicer advances, including the basic fee component of the related MSRs, on certain loan pools underlying
our Excess MSRs.
Approximately 74% of MSRs were owned by banks as of the third quarter of 2014, according to Inside Mortgage Finance. We
expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve
requirements under Basel III, regulatory scrutiny and a more challenging servicing environment, among other reasons. As banks
sell MSRs, there may be an opportunity for us to invest in the corresponding Excess MSRs.
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There are a number of reasons why we believe Excess MSRs may represent a compelling investment opportunity:
•
•
•
Supply-Demand Imbalance. Since 2010, banks have sold or committed to sell MSRs totaling more than
$2 trillion of the approximately $10 trillion mortgage market. As a result of the regulatory and other
pressures facing bank servicers, we believe the volume of MSR sales is likely to be substantial for some
period of time. We estimate that MSRs on approximately $150 billion of mortgages are currently for
sale, which would require a capital investment of approximately $1 to 1.5 billion based on current
pricing dynamics. We believe that nonbank servicers, who acquire MSRs and are constrained by capital
limitations, such as Nationstar, will continue to sell a portion of the Excess MSRs. In addition,
approximately $1 trillion of new loans are expected to be created annually according to the Mortgage
Bankers Association. We believe this creates an opportunity to enter into “flow arrangements,” whereby
loan originators agree to sell Excess MSRs on newly originated loans on a recurring basis (often monthly
or quarterly). Given this combined dynamic, we believe $1 - 2 trillion of MSRs could be sold or available
over the next few years. We believe that MSRs are being sold at a discount to historical pricing levels,
although increased competition for these assets has driven prices higher recently. There can be no
assurance that we will make additional investments in Excess MSRs or that any future investment in
Excess MSRs will generate returns similar to the returns on our original investments in Excess MSRs.
Attractive Pricing. We believe MSRs are currently being sold at a discount to historical pricing levels.
While prices have rebounded from the lows, we believe that prices remain lower than their peak. At
current prices, we believe investments in Excess MSRs can generate attractive returns without leverage.
Significant Barrier to Entry. Non-servicers, like us, cannot directly own an MSR as a named servicer
and would therefore need to partner with a servicer in order to invest in MSRs. The number of strong,
scalable non-bank servicers is limited. Moreover, in the case of Excess MSRs on Agency pools, the
servicer must be Agency-approved. As a result, non-servicers seeking to invest in Excess MSRs
generally face a significant barrier to entering the market, particularly if they do not have a relationship
with a quality servicer. We believe our track record of investing in Excess MSRs and our established
relationship with Nationstar give us a competitive advantage over other potential investors.
We pioneered investments in Excess MSRs (while we were a wholly owned subsidiary of Newcastle). We believe we remain the
most active REIT in the sector. However, the timing, size and potential returns of future investments in Excess MSRs may be less
attractive than our prior investments in this sector due to a number of factors, most of which are beyond our control.
Servicer Advances
Servicer advances are a customary feature of residential mortgage securitization transactions and represent one of the duties for
which a servicer is compensated through the basic fee component of the related MSR, since the advances are non-interest bearing.
Our investments in servicer advances include the rights to the basic fee component of the related MSR.
Servicer advances are generally reimbursable cash payments made by a servicer when the borrower fails to make scheduled
payments due on a mortgage loan or when the servicer makes cash payments (i) on behalf of a borrower for real estate taxes and
insurance premiums on the property that have not been paid on a timely basis by the borrower and (ii) to third parties for the costs
and expenses incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including attorneys’
and other professional fees. The purpose of the advances is to provide liquidity, rather than credit enhancement, to the underlying
residential mortgage securitization transaction. Servicer advances are usually repaid from amounts received with respect to the
related mortgage loan, including payments from the borrower or amounts received from the liquidation of the property securing
the loan, which is referred to as “loan-level recovery.”
Servicer advances typically fall into one of three categories:
•
•
•
Principal and Interest Advances: Cash payments made by the servicer to cover scheduled payments of
principal of, and interest on, a mortgage loan that have not been paid on a timely basis by the borrower.
Escrow Advances (Taxes and Insurance Advances): Cash payments made by the servicer to third parties
on behalf of the borrower for real estate taxes and insurance premiums on the property that have not
been paid on a timely basis by the borrower.
Foreclosure Advances: Cash payments made by the servicer to third parties for the costs and expenses
incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including
attorneys’ and other professional fees.
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Residential mortgage servicing agreements generally require a servicer to make advances in respect of serviced mortgage loans
unless the servicer determines in good faith that the advance would not be ultimately recoverable from the proceeds of the related
mortgage loan or the mortgaged property. In many cases, if the servicer determines that an advance previously made would not
be recoverable from these sources, or if such advance is not recovered when the loan is repaid or related property is liquidated,
then, the servicer is, most often, entitled to withdraw funds from the custodial account for payments on the serviced mortgage
loans to reimburse the applicable advance. This is what is often referred to as a “general collections backstop.” See “Risk Factors
—Risks Related to Our Business—Servicer advances may not be recoverable or may take longer to recover than we expect, which
could cause us to fail to achieve our targeted return on our investment in servicer advances.”
The status of investments in servicer advances for purposes of the REIT requirements is uncertain, and therefore our ability to
make these kinds of investments may be limited. We currently hold our investment in servicer advances in a taxable REIT subsidiary.
Residential Securities and Loans
RMBS
We invest in both Agency RMBS and Non-Agency RMBS. RMBS are securities created through the securitization of a pool of
residential mortgage loans. As of the third quarter of 2014, approximately $7 trillion of the $10 trillion of residential mortgage
loans outstanding was securitized, according to Inside Mortgage Finance. Of the securitized mortgage loans, approximately
$6 trillion were Agency RMBS, according to Inside Mortgage Finance, which are RMBS issued or guaranteed by a U.S. Government
agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The balance was securitized by either public trusts
or PLS, and these securities are referred to as Non-Agency RMBS.
Agency RMBS generally offer more stable cash flows and historically have been subject to lower credit risk and greater price
stability than the other types of residential mortgage investments we intend to target. The Agency RMBS that we may acquire
could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. More information about
certain types of Agency RMBS in which we have invested or may invest is set forth below.
Mortgage pass-through certificates. Mortgage pass-through certificates are securities representing interests in “pools” of mortgage
loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities
are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers
on the mortgage loans that underlie the securities, net of fees paid in connection with the issuance of the securities and the servicing
of the underlying mortgage loans.
Interest Only Agency RMBS. This type of stripped security only entitles the holder to interest payments. The yield to maturity of
interest only Agency RMBS is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying
pool of mortgage loans. If we decide to invest in these types of securities, we anticipate doing so primarily to take advantage of
particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.
TBAs. We utilize TBAs in order to invest in Agency RMBS. Pursuant to these TBAs, we agree to purchase or sell, for future
delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular
Agency RMBS to be delivered would not be identified until shortly before the TBA settlement date. Our ability to purchase Agency
RMBS through TBAs may be limited by the 75% income and asset tests applicable to REITs.
The onset of the financial crisis in 2007 led to significant volatility in the prices for Non-Agency RMBS. The crisis resulted in a
widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling
by institutional investors (often in response to rating agency downgrades). While the prices of these assets have recovered from
their lows, we believe a meaningful gap still exists between current prices and the recovery value of many Non-Agency RMBS.
Accordingly, we believe there are opportunities to acquire Non-Agency RMBS at attractive risk-adjusted yields, with the potential
for meaningful upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing Non-
Agency RMBS may also rise if the number of buyers returns to pre-2007 levels.
Furthermore, we believe that in many Non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the
Non-Agency RMBS and the recovery value of the underlying collateral. We intend to pursue opportunities to structure transactions
that would enable us to realize this difference, particularly through the acquisition and execution of call rights.
The Non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-
rate mortgages. The mortgage loan collateral may be classified as “conforming” or “non-conforming,” depending on a variety of
factors.
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Real Estate Loans
We believe there may be attractive opportunities to invest in portfolios of non-performing and other residential mortgage loans.
In certain of these investments, we would expect to acquire the loans at a deep discount to their face amount, and we (either
independently or with a servicing co-investor) would seek to resolve the loans at a substantially higher valuation. We would seek
to improve performance by transferring the servicing to Nationstar or another reputable servicer, which we believe could increase
unlevered yields. In addition, we may seek to employ leverage to increase returns, either through traditional financing lines or, if
available, securitization options.
While a number of portfolios of non-performing residential loans have been sold since the financial crisis, we believe the volume
of such sales may increase for a number of reasons. For example, with improved balance sheets, many large banks have more
financial flexibility to recognize losses on non-performing assets. HUD, which acquires the non-performing loans from Ginnie
Mae securitizations, has been increasing the number of portfolio sales. In addition, we believe that residential loan servicers—
which have traditionally resorted to loan foreclosure procedures and subsequent property sales to maximize recoveries on non-
performing loans—may increase sales of defaulted loans. To the extent any of these dynamics results in a meaningful volume of
non-performing loan sales, we believe they may pose attractive investment opportunities for us.
Other Investments
We may pursue other types of investments as the market evolves, such as our opportunistic investment in consumer loans in April
2013. Our Manager makes decisions about our investments in accordance with broad investment guidelines adopted by our board
of directors. Accordingly, we may, without a stockholder vote, change our target asset classes and acquire a variety of assets that
may differ from, and are possibly riskier than, our current portfolio of target assets. For more information about our investment
guidelines, see “—Investment Guidelines.”
Our Portfolio
Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments, as described
in more detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Portfolio.” The
following table summarizes our consolidated investment portfolio as of December 31, 2014 (dollars in thousands):
Investments in:
Excess MSRs(C)
Servicer Advances(C)
Agency RMBS
Non-Agency RMBS
Residential Mortgage Loans
Real Estate Owned
Consumer Loans(C)
Total / Weighted Average
Reconciliation to GAAP total assets:
Cash and restricted cash
Derivative assets
Other assets
GAAP total assets
Outstanding
Face Amount
Amortized
Cost Basis(A)
$ 248,739,579
3,102,492
1,646,361
1,896,150
1,433,797
N/A
2,589,748
$ 259,408,127
$
$
589,551
3,186,622
1,724,329
710,515
1,174,277
61,933
N/A
7,447,227
Percentage of
Total
Amortized
Cost Basis
Carrying Value
Weighted
Average Life
(years)(B)
6.0
4.0
5.0
6.4
4.0
N/A
3.6
4.6
7.9% $
42.8
23.2
9.5
15.8
0.8
N/A
100.0% $
$
748,609
3,270,839
1,740,163
723,000
1,174,277
61,933
—
7,718,821
242,403
32,597
99,869
8,093,690
(A)
(B)
(C)
Net of impairment.
Weighted average life is based on the timing of our expected principal reduction on the asset.
The outstanding face amount of Excess MSRs, servicer advances, and consumer loans is based on 100% of the face
amount of the underlying residential mortgage loans, currently outstanding advances, and consumer loans respectively.
Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions.
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Investment Guidelines
Our board of directors has adopted a broad set of investment guidelines to be used by our Manager to evaluate specific investments.
Our general investment guidelines prohibit any investment that would cause us to fail to qualify as a REIT, and any investment
that would cause us to be regulated as an investment company. These investment guidelines may be changed by our board of
directors without the approval of our stockholders. If our board changes any of our investment guidelines, we will disclose such
changes in our next required periodic report.
Financing Strategy
Our objective is to generate attractive risk-adjusted returns for our stockholders without the excessive use of leverage. We have
funded the acquisition of Excess MSRs primarily on an unlevered basis. We do not have a predetermined target leverage level.
The amount of leverage we deploy for a particular investment depends upon an assessment of a variety of factors, which may
include the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including
hedges; the availability and cost of financing the assets; our opinion of the creditworthiness of financing counterparties; the health
of the U.S. economy and the residential mortgage and housing markets; our outlook for the level, slope and volatility of interest
rates; the credit quality of the loans underlying our investments; and our outlook for asset spreads relative to financing costs. See
“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—
Debt Obligations” for further details about our debt obligations.
Hedging Strategy
Subject to maintaining our qualification as a REIT and exclusion from registration under the Investment Company Act of 1940
(the “1940 Act”), we may, from time to time, utilize derivative financial instruments to hedge the interest rate risk associated with
our borrowings. Under the U.S. federal income tax laws applicable to REITs, we generally will be able to enter into certain
transactions to hedge indebtedness that we may incur, or plan to incur, to acquire or carry real estate assets, although our total
gross income from interest rate hedges that do not meet this requirement and other non-qualifying sources generally must not
exceed 5% of our gross income.
Subject to maintaining our qualification as a REIT and exclusion from registration under the 1940 Act, we may also engage in a
variety of interest rate management techniques that seek on the one hand to mitigate the influence of interest rate changes on the
values of some of our assets and on the other hand help us achieve our risk management objectives. The U.S. federal income tax
rules applicable to REITs may require us to implement certain of these techniques through a domestic TRS that is fully subject to
U.S. federal corporate income taxation. Our interest rate management techniques may include:
•
•
•
•
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interest rate swap agreements, interest rate cap agreements, exchange-traded derivatives and
swaptions;
puts and calls on securities or indices of securities;
U.S. Treasury securities and options on U.S. Treasury securities;
TBAs; and
other similar transactions.
Subject to maintaining our REIT qualification, we may utilize hedging instruments, including interest rate swap agreements,
interest rate cap agreements, interest rate floor or collar agreements or other financial instruments that we deem appropriate.
Specifically, we may attempt to reduce interest rate risks and to minimize exposure to interest rate fluctuations through the use of
match funded financing structures, when appropriate, whereby we may seek (1) to match the maturities of our debt obligations
with the maturities of our assets and (2) to match the interest rates on our assets with like-kind debt (i.e., we may finance floating
rate assets with floating rate debt and fixed-rate assets with fixed-rate debt), directly or through the use of interest rate swap
agreements, interest rate cap agreements, or other financial instruments, or through a combination of these strategies. We expect
these instruments will allow us to minimize, but not eliminate, the risk that we have to refinance our liabilities before the maturities
of our assets and to reduce the impact of changing interest rates on our earnings and liquidity.
The Management Agreement
We entered into a Management Agreement with our Manager, an affiliate of Fortress, which was subsequently amended and
restated on August 1, 2013 and on August 5, 2014, pursuant to which our Manager provides for a management team and other
professionals who are responsible for implementing our business strategy, subject to the supervision of our board of directors.
Our Manager is responsible for, among other things, (i) setting investment criteria in accordance with broad investment guidelines
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adopted by our board of directors, (ii) sourcing, analyzing and executing acquisitions, (iii) providing financial and accounting
management services and (iv) performing other duties as specified in the Management Agreement.
We pay our Manager an annual management fee equal to 1.5% of our gross equity. Gross equity is generally the equity that was
transferred to us by Newcastle on the distribution date, plus total net proceeds from stock offerings, plus certain capital contributions
to subsidiaries, less capital distributions and repurchases of common stock.
Our Manager is entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar
amount by which (1)(a) the funds from operations before the incentive compensation, excluding funds from operations from
investments in the Consumer Loan Companies and any unrealized gains or losses from mark-to-market valuation changes on
investments and debt (and any deferred tax impact thereof), per share of common stock, plus (b) earnings (or losses) from the
Consumer Loan Companies computed on a level-yield basis (such that the loans are treated as if they qualified as loans acquired
with a discount for credit quality as set forth in ASC 310-30, as such codification was in effect on June 30, 2013) as if the Consumer
Loan Companies had been acquired at their GAAP basis on the distribution date, earnings (or losses) from equity method investees
invested in Excess MSRs as if such equity method investees had not made a fair value election, and gains (or losses) from debt
restructuring and gains (or losses) from sales of property, in each case per share of common stock, exceed (2) an amount equal to
(a) the weighted average of the book value per share of the equity that was transferred to us by Newcastle on the distribution date
and the prices per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions)
multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common
stock outstanding.
“Funds from operations” means net income (computed in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”)), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real
estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations is computed on an
unconsolidated basis. The computation of funds from operations may be adjusted at the direction of our independent directors
based on changes in, or certain applications of, GAAP. Funds from operations is determined from the date of our separation from
Newcastle and without regard to Newcastle’s prior performance. Funds from operations does not represent cash generated from
operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of our
performance or to cash flows as a measure of liquidity or ability to make distributions.
The initial term of our Management Agreement expired on May 15, 2014, and the Management Agreement was and will be renewed
automatically each year for an additional one-year period unless (i) a majority consisting of at least two-thirds of our independent
directors or a simple majority of the holders of outstanding shares of our common stock, agree that there has been unsatisfactory
performance that is materially detrimental to us or (ii) a simple majority of our independent directors agree that the management
fee payable to our Manager is unfair; provided, that we shall not have the right to terminate our Management Agreement under
clause (ii) foregoing if the Manager agrees to continue to provide the services under the Management Agreement at a fee that our
independent directors have determined to be fair.
If we elect not to renew our Management Agreement at the expiration of any such one-year extension term as set forth above, our
Manager will be provided with 60 days’ prior notice of any such termination. In the event of such termination, we would be required
to pay the termination fee. The termination fee is a fee equal to the sum of (1) the amount of the management fee during the 12
months immediately preceding the date of termination, and (2) the “Incentive Compensation Fair Value Amount.” The Incentive
Compensation Fair Value Amount is an amount equal to the incentive compensation that would be paid to the Manager if our
assets were sold for cash at their then current fair market value (as determined by an appraisal, taking into account, among other
things, the expected future value of the underlying investments).
Fortress, through its affiliates, and principals of Fortress held 2.4 million shares of our common stock, and Fortress, through its
affiliates, held options to purchase an additional 8.9 million shares of our common stock, representing approximately 7.4% of our
common stock on a fully diluted basis, as of December 31, 2014.
Policies with Respect to Certain Other Activities
Subject to the approval of our board of directors, we have the authority to offer our common stock or other equity or debt securities
in exchange for property and to repurchase or otherwise reacquire our shares or any other securities and may engage in such
activities in the future.
We also may make loans to, or provide guarantees of certain obligations of, our subsidiaries.
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Subject to the percentage ownership and gross income and asset tests necessary for REIT qualification, we may invest in securities
of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising
control over such entities.
We may engage in the purchase and sale of investments.
Our officers and directors may change any of these policies and our investment guidelines without a vote of our stockholders.
In the event that we determine to raise additional equity capital, our board of directors has the authority, without stockholder
approval (subject to certain NYSE requirements), to issue additional common stock or preferred stock in any manner and on such
terms and for such consideration it deems appropriate, including in exchange for property.
Decisions regarding the form and other characteristics of the financing for our investments are made by our manager subject to
the general investment guidelines adopted by our board of directors.
Conflicts of Interest
Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance
that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest
could give rise to investor dissatisfaction, litigation or regulatory enforcement actions.
One or more of our officers and directors have responsibilities and commitments to entities other than us, including, but not limited
to, Newcastle, Nationstar (the servicer for a significant portion of our loans, and the loans underlying our Excess MSRs, servicer
advances, and Non-Agency RMBS), and Springleaf (the servicer for the consumer loans in which we have invested). For example,
we have some of the same directors and officers as Newcastle, Nationstar and Springleaf. In addition, we do not have a policy
that expressly prohibits our directors, officers, securityholders or affiliates from engaging for their own account in business activities
of the types conducted by us. Moreover, our certificate of incorporation provides that if Newcastle or Fortress or any of their
officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no
duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event
that any of our directors and officers who is also a director, officer or employee of Newcastle or Fortress acquires knowledge of
a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s
capacity as a director or officer of New Residential and such person acts in good faith, then to the fullest extent permitted by law
such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Newcastle or
Fortress, or their affiliates, pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity
to us. However, subject to the terms of our certificate of incorporation, our code of business conduct and ethics prohibits the
directors, officers and employees of our Manager from engaging in any transaction that involves an actual conflict of interest with
us. See “Risk Factors—Risks Related to Our Manager—There are conflicts of interest in our relationship with our Manager.”
Our key agreements, including our Management Agreement, were negotiated among related parties, and their respective terms,
including fees and other amounts payable, may not be as favorable to us as terms negotiated on an arm’s-length basis with
unaffiliated parties. Our independent directors may not vigorously enforce the provisions of our Management Agreement against
our Manager. For example, our independent directors may refrain from terminating our Manager because doing so could result in
the loss of key personnel. The structure of the Manager’s compensation arrangement may have unintended consequences for us.
We have agreed to pay our Manager a management fee that is not tied to our performance and incentive compensation that is based
entirely on our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted
returns for us, while the performance-based incentive compensation component may cause our Manager to place undue emphasis
on the maximization of earnings, including through the use of leverage, at the expense of other objectives, such as preservation
of capital, to achieve higher incentive distributions. Investments with higher yield potential are generally riskier or more speculative
than investments with lower yield potential. This could result in increased risk to the value of our portfolio of assets and a
stockholder's investment in us.
We may compete with entities affiliated with our Manager or Fortress, including Newcastle, for certain target assets. From time
to time, affiliates of Fortress may focus on investments in assets with a similar profile as our target assets that we may seek to
acquire. These affiliates may have meaningful purchasing capacity, which may change over time depending upon a variety of
factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. As of
December 31, 2014, Fortress had two funds primarily focused on investing in Excess MSRs with approximately $1.6 billion in
capital commitments in aggregate. We intend to co-invest with these funds in Excess MSRs. Fortress funds generally have a fee
structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.
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Our Manager may determine, in its discretion, to make a particular investment through an investment vehicle other than us.
Investment allocation decisions will reflect a variety of factors, such as a particular vehicle’s availability of capital (including
financing), investment objectives and concentration limits, legal, regulatory, tax and other similar considerations, the source of
the investment opportunity and other factors that the Manager, in its discretion, deems appropriate. Our Manager does not have
an obligation to offer us the opportunity to participate in any particular investment, even if it meets our investment objectives.
Operational and Regulatory Structure
REIT Qualification
We have elected and intend to qualify to be taxed as a REIT for U.S. federal income tax purposes. Our qualification as a REIT
will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of
1986, as amended, (the “Internal Revenue Code”), relating to, among other things, the sources of our gross income, the composition
and values of our assets, our distribution levels to our stockholders and the concentration of ownership of our capital stock. We
believe that, commencing with our initial taxable year ended December 31, 2013, we are organized in conformity with the
requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our manner of operation will
enable us to meet the requirements for qualification and taxation as a REIT.
1940 Act Exclusion
We intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an
investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is
or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C)
of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing,
reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding
40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis
(the “40% test”). Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities
issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from
the definition of investment company for private funds set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.
We are organized as a holding company that conducts its businesses primarily through wholly owned and majority owned
subsidiaries. We intend to continue to conduct our operations so that we do not come within the definition of an investment company
because less than 40% of the value of our adjusted total assets on an unconsolidated basis will consist of “investment securities”
in compliance with the 40% test under Section 3(a)(1)(C) of the 1940 Act. The value of securities issued by any wholly owned or
majority owned subsidiaries that we may form in the future that are excluded from the definition of “investment company” based
on Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not exceed the 40%
test under Section 3(a)(1)(C) of the 1940 Act. For purposes of the foregoing, we currently treat our interests in our taxable REIT
subsidiaries (“TRSs”) that hold our servicer advances and our subsidiaries that hold consumer loans as investment securities
because these subsidiaries presently rely on the exclusion provided by Section 3(c)(7) of the 1940 Act. We will monitor our holdings
to ensure continuing and ongoing compliance with the 40% test under Section 3(a)(1)(C) of the 1940 Act. In addition, we believe
we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because we will not engage primarily
or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through
our wholly owned subsidiaries, we will be primarily engaged in the non-investment company businesses of these subsidiaries.
If the value of securities issued by our subsidiaries that are excluded from the definition of “investment company” by Section 3
(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds the 40% test under Section 3(a)
(1)(C) of the 1940 Act (e.g., the value of our interests in the taxable REIT subsidiaries that hold servicer advances increases
significantly in proportion to the value of our other assets), or if one or more of such subsidiaries fail to maintain an exclusion or
exception from the 1940 Act, we could, among other things, be required either (a) to substantially change the manner in which
we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company
under the 1940 Act, either of which could have an adverse effect on us and the market price of our securities. As discussed above,
for purposes of the foregoing, we currently treat our interests in our TRSs that hold our servicer advances and our subsidiaries
that hold consumer loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3
(c)(7) of the 1940 Act. If we were required to register as an investment company under the 1940 Act, we could, among other things,
be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment
company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register
as an investment company, any of which could negatively affect the value of our common stock, the sustainability of our business
model, and our ability to make distributions.
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For purposes of the foregoing, we treat our interests in certain of our wholly owned and majority owned subsidiaries, which
constitutes more than 60% of the value of our adjusted total assets on an unconsolidated basis, as non-investment securities because
such subsidiaries qualify for exclusion from the definition of an investment company under the 1940 Act pursuant to Section 3(c)
(5)(C) of the 1940 Act (the “Section 3(c)(5)(C) exclusion”). The Section 3(c)(5)(C) exclusion is available for entities “primarily
engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The
Section 3(c)(5)(C) exclusion generally requires that at least 55% of these subsidiaries’ assets comprise qualifying real estate assets
and at least 80% of each of their portfolios must comprise qualifying real estate assets and real estate-related assets under the 1940
Act. Maintenance of our exclusion under the 1940 Act generally limits the amount of our Section 3(c)(5)(C) subsidiaries’
investments in non-real estate assets to no more than 20% of our total assets.
In satisfying the 55% requirement under the Section 3(c)(5)(C) exclusion, based on guidance from the SEC and its staff, we treat
Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the
pool as qualifying real estate assets. The SEC and its staff have not published guidance with respect to the treatment of whole pool
Non-Agency RMBS for purposes of the Section 3(c)(5)(C) exclusion. Accordingly, based on our own judgment and analysis of
the guidance from the SEC and its staff identifying Agency whole pool certificates as qualifying real estate assets under Section
3(c)(5)(C), we treat whole pool Non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which our
subsidiary relying on Section 3(c)(5)(C) holds all of the certificates issued by the pool as qualifying real estate assets. We also
treat whole mortgage loans that each of our subsidiaries relying on Section 3(c)(5)(C) may acquire directly as qualifying real estate
assets provided that 100% of the loan is secured by real estate when such subsidiary acquires the loan and the subsidiary has the
unilateral right to foreclose on the mortgage.
Based on our own judgment and analysis of the guidance from the SEC and its staff with respect to analogous assets, we treat
Excess MSRs as real estate-related assets for purposes of satisfying the 80% test under the Section 3(c)(5)(C) exclusion. We treat
investments in Agency partial pool RMBS and Non-Agency partial pool RMBS as real estate-related assets for purposes of
satisfying the 80% test under the Section 3(c)(5)(C) exclusion.
We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or on our analyses
of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real
estate-related assets. The SEC may in the future take a view different than or contrary to our analysis with respect to the types of
assets we have determined to be qualifying real estate assets or real estate-related assets. To the extent that the SEC staff publishes
new or different guidance with respect to these matters, or disagrees with our analysis, we may be required to adjust our strategy
accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the
subsidiary holding assets we might wish to sell or selling assets we might wish to hold.
In August 2011, the SEC issued a concept release soliciting public comments on a wide range of issues relating to companies,
which are typically REITs, engaged in the business of acquiring mortgages and mortgage-related instruments and that rely on
Section 3(c)(5)(C) of the 1940 Act, including the nature of the assets that qualify for purposes of the Section 3(c)(5)(C) exclusion
and whether such REITs should be regulated in a manner similar to investment companies. Therefore, there can be no assurance
that the laws and regulations governing the 1940 Act status of REITs, or guidance from the SEC or its staff regarding the Section
3(c)(5)(C) exclusion, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain
an exclusion or exception from the 1940 Act, we could, among other things, be required either to (a) change the manner in which
we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner
that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could
negatively affect the value of our common stock, the sustainability of our business model, and our ability to make distributions.
Although we monitor our portfolio periodically and prior to each investment origination or acquisition, there can be no assurance
that we will be able to maintain the Section 3(c)(5)(C) exclusion from the definition of an investment company under the 1940
Act for these subsidiaries.
To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exclusions or
exceptions we and our subsidiaries rely on from the 1940 Act, we may be required to adjust our strategy accordingly. Any additional
guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies
we have chosen.
Qualification for an exclusion from registration under the 1940 Act will limit our ability to make certain investments. See “Risk
Factors — Risks Related to Our Business — Maintenance of our 1940 Act exclusion imposes limits on our operations.”
Competition
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Our success depends, in large part, on our ability to acquire target assets on terms consistent with our business and economic
model. In acquiring these assets, we expect to compete with banks, independent mortgage loan servicers, private equity firms,
hedge funds and other large financial services companies. Many of our anticipated competitors are significantly larger than we
are, have access to greater capital and other resources and may have other advantages over us. In addition, some of our competitors
may have higher risk tolerances or different risk assessments, which could lead them to offer higher prices for assets that we might
be interested in acquiring and cause us to lose bids for those assets. In addition, other potential purchasers of our target assets may
be more attractive to sellers of such assets if the sellers believe that these potential purchasers could obtain any necessary third
party approvals and consents more easily than us.
In the face of this competition, we expect to take advantage of the experience of members of our management team and their
industry expertise which may provide us with a competitive advantage and help us assess potential risks and determine appropriate
pricing for certain potential acquisitions of our target assets. In addition, we expect that these relationships will enable us to compete
more effectively for attractive acquisition opportunities. However, we may not be able to achieve our business goals or expectations
due to the competitive risks that we face.
Employees
We are managed by our Manager pursuant to the Management Agreement between our Manager and us. All of our officers are
employees of our Manager or an affiliate of our Manager. We do not have any employees.
Legal Proceedings
From time to time, we are or may be involved in various disputes and litigation matters that arise in the ordinary course of business.
We are not party to any material legal proceedings as of the date on which this report is filed.
Corporate Governance and Internet Address; Where Readers Can Find Additional Information
We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board
of directors consists of a majority of independent directors; the Audit, Nominating and Corporate Governance, and Compensation
committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance
guidelines, and our Manager has adopted a code of business conduct and ethics, which delineate our standards for our officers
and directors, and employees of our Manager.
New Residential files annual, quarterly and current reports, proxy statements and other information required by the Securities
Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), with the Securities and Exchange Commission (“SEC”). Readers may
read and copy any document that New Residential files at the SEC’s Public Reference Room located at 100 F Street, N.E.,
Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room.
Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov. Copies of these reports, proxy
statements and other information can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New
York, New York 10005, U.S.A.
Our internet site is http://www.newresi.com. We make available free of charge through our internet site our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of
directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the
‘‘Investor Relations—Corporate Governance” section are charters for the company’s Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee as well as our Corporate Governance Guidelines and our Code of Business
Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a
part of, and is not incorporated into, this report.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully read and consider the following risk factors
and all other information contained in this report. If any of the following risks, as well as additional risks and uncertainties not
currently known to us or that we currently deem immaterial, occur, our business, financial condition or results of operations could
be materially and adversely affected. The risk factors summarized below are categorized as follows: (i) Risks Related to Our
Business, (ii) Risks Related to Our Manager, (iii) Risks Related to the Financial Markets, (iv) Risks Related to Our Taxation as a
REIT, and (v) Risks Related to Our Common Stock. However, these categories do overlap and should not be considered exclusive.
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Risks Related to Our Business
We have limited operating history as an independent company and may not be able to successfully operate our business
strategy or generate sufficient revenue to make or sustain distributions to our stockholders. The financial information
included in this report for periods prior to our spin-off in May 2013 may not be indicative of the results we would have
achieved as a separate stand-alone company and are not a reliable indicator of our future performance or results.
We have limited experience operating as an independent company and cannot assure you that we will be able to successfully
operate our business or implement our operating policies and strategies. We were formed in September 2011 as a subsidiary of
Newcastle and spun-off from Newcastle on May 15, 2013. We completed our first investment in Excess MSRs in December 2011,
and our Manager has limited experience with transactions involving GSEs. The timing, terms, price and form of consideration
that we and servicers pay in future transactions may vary meaningfully from prior transactions.
There can be no assurance that we will be able to generate sufficient returns to pay our operating expenses and make satisfactory
distributions to our stockholders, or any distributions at all. Our results of operations and our ability to make or sustain distributions
to our stockholders depend on several factors, including the availability of opportunities to acquire attractive assets, the level and
volatility of interest rates, the availability of adequate short- and long-term financing, conditions in the real estate market, the
financial markets and economic conditions.
We did not operate as a separate, stand-alone company for the entirety of the historical periods presented in the financial information
included in this report, which has been derived from Newcastle’s historical financial statements for the periods prior to the spin-
off. Therefore, the financial information in this report for the periods prior to the spin-off does not necessarily reflect what our
financial condition, results of operations or cash flows would have been had we been a separate, stand-alone public company prior
to our separation from Newcastle. This is primarily a result of the following factors:
•
•
•
The financial information in this report for the periods prior to the spin-off does not reflect all of the
expenses we incur as a public company;
The working capital requirements and capital for general corporate purposes for our assets were satisfied
prior to the spin-off as part of Newcastle’s corporate-wide cash management policies. Following the
spin-off, Newcastle does not provide us with funds to finance our working capital or other cash
requirements, so we are required to satisfy our liquidity needs by obtaining financing from banks,
through public offerings or private placements of debt or equity securities, strategic relationships or
other arrangements; and
Our cost structure, management, financing and business operations following the spin-off are
significantly different as a result of operating as an independent public company. These changes result
in increased costs, including, but not limited to, fees paid to our Manager, legal, accounting, compliance
and other costs associated with being a public company with equity securities traded on the NYSE.
The value of our investments in Excess MSRs and servicer advances is based on various assumptions that could prove to
be incorrect and could have a negative impact on our financial results.
When we invest in Excess MSRs and servicer advances, we base the price we pay and the rate of amortization of those assets on,
among other things, our projection of the cash flows from the related pool of mortgage loans. We record Excess MSRs and servicer
advances on our balance sheet at fair value, and we measure their fair value on a recurring basis. Our projections of the cash flow
from Excess MSRs and servicer advances, and the determination of the fair value of Excess MSRs and servicer advances, are
based on assumptions about various factors, including, but not limited to:
•
•
•
•
rates of prepayment and repayment of the underlying mortgage loans;
interest rates;
rates of delinquencies and defaults; and
recapture rates (in the case of Excess MSRs only) and the amount and timing of servicer advances (in
the case of servicer advances only).
Our assumptions could differ materially from actual results. The use of different estimates or assumptions in connection with the
valuation of these assets could produce materially different fair values for such assets, which could have a material adverse effect
on our consolidated financial position, results of operations and cash flows. The ultimate realization of the value of our Excess
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MSRs and servicer advances may be materially different than the fair values of such assets as reflected in our consolidated statement
of financial position as of any particular date.
When mortgage loans underlying our Excess MSRs are prepaid as a result of a refinancing or otherwise, the related cash flows
payable to us cease (unless the loans are recaptured upon a refinancing). Borrowers under residential mortgage loans are generally
permitted to prepay their loans at any time without penalty. Our expectation of prepayment speeds is a significant assumption
underlying our cash flow projections. Prepayment speed is the measurement of how quickly borrowers pay down the UPB of their
loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. If the fair value of our Excess MSRs
decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results.
Furthermore, a significant increase in prepayment speeds could materially reduce the ultimate cash flows we receive from Excess
MSRs, and we could ultimately receive substantially less than what we paid for such assets. Consequently, the price we pay to
acquire Excess MSRs may prove to be too high.
The values of Excess MSRs and our servicer advances are highly sensitive to changes in interest rates. Historically, the value of
MSRs, which underpin the value of our Excess MSRs and servicer advances, has increased when interest rates rise and decreased
when interest rates decline due to the effect of changes in interest rates on prepayment speeds. However, prepayment speeds could
increase in spite of the current interest rate environment, as a result of a general economic recovery or other factors, which would
reduce the value of our interests in MSRs.
Moreover, delinquency rates have a significant impact on the value of Excess MSRs. When delinquent loans are resolved through
foreclosure (or repurchased by the GSEs), the UPB of such loans cease to be a part of the aggregate UPB of the serviced loan pool
when the related properties are foreclosed on and liquidated and the related cash flows payable to us, as the holder of the Excess
MSR or basic fee, cease. An increase in delinquencies will generally result in lower revenue because typically we will only collect
on our Excess MSRs from GSEs or mortgage owners for performing loans. An increase in delinquencies with respect to the loans
underlying our servicer advances could also result in a higher advance balance and the need to obtain additional financing, which
we may not be able to do on favorable terms or at all. In addition, delinquencies on the loans underlying our servicer advances
give rise to accrued but unpaid servicing fees, or “deferred servicing fees,” which we have agreed to purchase in connection with
our purchase of servicer advances, and deferred servicing fees generally cannot be financed on terms as favorable as the terms
available to other types of servicer advances. If delinquencies are significantly greater than expected, the estimated fair value of
the Excess MSRs and servicer advances could be diminished. As a result, we could suffer a loss, which would have a negative
impact on our financial results.
We are party to “recapture agreements” whereby we receive a new Excess MSR with respect to a loan that was originated by the
servicer and used to repay a loan underlying an Excess MSR that we previously acquired from that same servicer. In lieu of
receiving an Excess MSR with respect to the loan used to repay a prior loan, the servicer may supply a similar Excess MSR. We
believe that recapture agreements will mitigate the impact on our returns in the event of a rise in voluntary prepayment rates. There
are no assurances, however, that servicers will enter into recapture agreements with us in connection with any future investment
in Excess MSRs.
If the servicer does not meet anticipated recapture targets, the servicing cash flow on a given pool could be significantly lower
than projected, which could have a material adverse effect on the value of our Excess MSRs and consequently on our business,
financial condition, results of operations and cash flows. Our recapture target for each of our current recapture agreements is stated
in the table in Note 12 to our Consolidated Financial Statements included herein. In our investment in servicer advances, we are
not entitled to the cash flows from recaptured loans.
Servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to
achieve our targeted return on our investment in servicer advances.
We have agreed, together with certain third-party investors, to purchase from Nationstar all servicer advances related to certain
loan pools, as a result of which we are entitled to amounts representing repayment for such advances. During any period in which
a borrower is not making payments, a servicer (including Nationstar) is generally required under the applicable servicing agreement
to advance its own funds to cover the principal and interest remittances due to investors in the loans, pay property taxes and
insurance premiums to third parties, and to make payments for legal expenses and other protective advances. The servicer also
advances funds to maintain, repair and market real estate properties on behalf of investors in the loans.
Repayment for servicer advances and payment of deferred servicing fees are generally made from late payments and other
collections and recoveries on the related mortgage loan (including liquidation, insurance and condemnation proceeds) or, if a
“general collections backstop” is available, from collections on other mortgage loans to which the applicable servicing agreement
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relates. The rate and timing of payments on the servicer advances and the deferred servicing fees, are unpredictable for several
reasons, including the following:
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•
•
payments on the servicer advances and the deferred servicing fees depend on the source of repayment,
and whether and when the related servicer receives such payment (certain servicer advances are
reimbursable only out of late payments and other collections and recoveries on the related mortgage
loan, while others are also reimbursable out of principal and interest collections with respect to all
mortgage loans serviced under the related servicing agreement, and as a consequence, the timing of
such reimbursement is highly uncertain);
the length of time necessary to obtain liquidation proceeds may be affected by conditions in the real
estate market or the financial markets generally, the availability of financing for the acquisition of the
real estate and other factors, including, but not limited to, government intervention;
the length of time necessary to effect a foreclosure may be affected by variations in the laws of the
particular jurisdiction in which the related mortgaged property is located, including whether or not
foreclosure requires judicial action;
the requirements for judicial actions for foreclosure (which can result in substantial delays in
reimbursement of servicer advances and payment of deferred servicing fees), which vary from time to
time as a result of changes in applicable state law; and
the ability of the related servicer to sell delinquent mortgage loans to third parties prior to liquidation,
resulting in the early reimbursement of outstanding unreimbursed servicer advances in respect of such
mortgage loans.
As home values change, the servicer may have to reconsider certain of the assumptions underlying its decisions to make advances.
In certain situations, its contractual obligations may require the servicer to make certain advances for which it may not be reimbursed.
In addition, when a mortgage loan defaults or becomes delinquent, the repayment of the advance may be delayed until the mortgage
loan is repaid or refinanced, or a liquidation occurs. To the extent that Nationstar fails to recover the servicer advances in which
we have invested, or takes longer than we expect to recover such advances, the value of our investment could be adversely affected
and we could fail to achieve our expected return and suffer losses.
Servicing agreements related to residential mortgage securitization transactions generally require a residential mortgage servicer
to make servicer advances in respect of serviced mortgage loans unless the servicer determines in good faith that the servicer
advance would not be ultimately recoverable from the proceeds of the related mortgage loan, the mortgaged property or the related
mortgagor. In many cases, if the servicer determines that a servicer advance previously made would not be recoverable from these
sources, the servicer is entitled to withdraw funds from the related custodial account in respect of payments on the related pool
of serviced mortgages to reimburse the related servicer advance. This is what is often referred to as a “general collections backstop.”
The timing of when a servicer may utilize a general collections backstop can vary (some contracts require actual liquidation of
the related loan first, while others do not), and contracts vary in terms of the types of servicer advances for which reimbursement
from a general collections backstop is available. Accordingly, a servicer may not ultimately be reimbursed if both (i) the payments
from related loan, property or mortgagor payments are insufficient for reimbursement, and (ii) a general collections backstop is
not available or is insufficient. Also, if a servicer improperly makes a servicer advance, it would not be entitled to reimbursement.
Historically, Nationstar has recovered more than 99% of the advances that it has made. While we do not expect this recovery rate
to vary materially during the term of our investment, there can be no assurance regarding future recovery rates related to our
portfolio.
We rely heavily on mortgage servicers to achieve our investment objective and have no direct ability to influence their
performance.
The value of our investments in Excess MSRs, servicer advances and Non-Agency RMBS is dependent on the satisfactory
performance of servicing obligations by the mortgage servicer. The duties and obligations of mortgage servicers are defined through
contractual agreements, generally referred to as Servicing Guides in the case of GSEs, or Pooling and Servicing Agreements in
the case of private-label securities (collectively, the “Servicing Guidelines”). Our investment in Excess MSRs is subject to all of
the terms and conditions of the applicable Servicing Guidelines. Servicing Guidelines generally provide for the possibility of
termination of the contractual rights of the servicer in the absolute discretion of the owner of the mortgages being serviced (or a
majority of the bondholders of a residential mortgage backed securitization). Under the GSE Servicing Guidelines, the servicer
may be terminated by the applicable GSE for any reason, “with” or “without” cause, for all or any portion of the loans being
serviced for such GSE. In the event mortgage owners (or bondholders) terminate the servicer, the related Excess MSRs and basic
fees would under most circumstances lose all value on a going forward basis. If the servicer is terminated as servicer for any
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Agency Pools, the related Excess MSRs will be extinguished and our investment in such Excess MSRs will likely lose all of its
value. Any recovery in such circumstances will be highly conditioned and will require, among other things, a new servicer willing
to pay for the right to service the applicable mortgage loans while assuming responsibility for the origination and prior servicing
of the mortgage loans. In addition, any payment received from a successor servicer will be applied first to pay the GSE for all of
its claims and costs, including claims and costs against the servicer that do not relate to the mortgage loans for which we own the
Excess MSRs. A termination could also result in an event of default under our financings for servicer advances. It is expected that
any termination of a servicer by mortgage owners (or bondholders) would take effect across all mortgages of such mortgage owners
(or bondholders) and would not be limited to a particular vintage or other subset of mortgages. Therefore, it is expected that all
investments with a given servicer would lose all their value in the event mortgage owners (or bondholders) terminate such servicer.
Nationstar is the servicer of most of the loans underlying our investments in Excess MSRs and servicer advances, and it is the
servicer or master servicer of the vast majority of the loans underlying our Non-Agency RMBS to date. See “—We have significant
counterparty concentration risk in Nationstar and Springleaf and are subject to other counterparty concentration and default risks.”
As a result, we could be materially and adversely affected if Nationstar or any other servicer of the loans underlying our investments
is unable to adequately carry out it's duties as a result of:
•
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•
•
•
•
•
•
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its failure to comply with applicable laws and regulation;
a downgrade in its servicer rating;
its failure to maintain sufficient liquidity or access to sources of liquidity;
its failure to perform its loss mitigation obligations;
its failure to perform adequately in its external audits;
a failure in or poor performance of its operational systems or infrastructure;
regulatory or legal scrutiny regarding any aspect of a servicer’s operations, including, but not limited
to, servicing practices and foreclosure processes lengthening foreclosure timelines;
a GSE’s or a whole-loan owner’s transfer of servicing to another party; or
any other reason.
Nationstar is subject to numerous legal proceedings, federal, state or local governmental examinations, investigations or
enforcement actions, which could adversely affect its reputation and its liquidity, financial position and results of operations. For
example, on March 5, 2014, Nationstar received a letter from Benjamin Lawsky, Superintendent of the New York Department of
Financial Services, in connection with Nationstar’s recent growth, certain operational issues, and certain alleged recent complaints
from certain New York consumers. Other servicers have experienced heightened regulatory scrutiny, and Nationstar could be
adversely affected by the market's perception that Nationstar could experience similar regulatory issues.
Loss mitigation techniques are intended to reduce the probability that borrowers will default on their loans and to minimize losses
when defaults occur, and they may include the modification of mortgage loan rates, principal balances and maturities. If Nationstar
(or any other applicable servicer or subservicer) fail to adequately perform their loss mitigation obligations, we could be required
to purchase servicer advances in excess of those that we might otherwise have had to purchase, and the time period for collecting
servicer advances may extend. Any increase in servicer advances or material increase in the time to resolution of a defaulted loan
could result in increased capital requirements and financing costs for us and our co-investors and could adversely affect our liquidity
and net income. In the event that Nationstar receives requests for advances in excess of amounts that we or the co-investors is
willing or able to fund, Nationstar may not be able to fund these advance requests, which could result in a termination event under
the applicable Servicing Guidelines, an event of default under our advance facilities and a breach of our purchase agreement with
Nationstar. As a result, we could experience a partial or total loss of the value of our investment in servicer advances.
MSRs and servicer advances are subject to numerous federal, state and local laws and regulations and may be subject to various
judicial and administrative decisions. If the servicer actually or allegedly failed to comply with applicable laws, rules or regulations,
it could be terminated as the servicer, which could have a material adverse effect on our business, financial condition, results of
operations or cash flows. In addition, servicer advances that are improperly made may not be eligible for financing under our
facilities and may not be reimbursable by the related securitization trust or other owner of the mortgage loan, which could cause
us to suffer losses.
Favorable ratings from third-party rating agencies such as Standard & Poor’s, Moody’s and Fitch are important to the conduct of
a mortgage servicer’s loan servicing business, and a downgrade in a mortgage servicer’s ratings could have an adverse effect on
the value of our Excess MSRs and servicer advances, and result in an event of default under our financing for advances. Downgrades
in a mortgage servicer’s servicer ratings could adversely affect their and our ability to finance servicer advances and maintain
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their status as an approved servicer by Fannie Mae and Freddie Mac. Downgrades in servicer ratings could also lead to the early
termination of existing advance facilities and affect the terms and availability of match funded advance facilities that a mortgage
servicer or we may seek in the future. A mortgage servicer’s failure to maintain favorable or specified ratings may cause their
termination as a servicer and may impair their ability to consummate future servicing transactions, which could result in an event
of default under our financing for servicer advances and have an adverse effect on the value of our investments since we will rely
heavily on mortgage servicers to achieve our investment objective and have no direct ability to influence their performance.
In addition, a bankruptcy by any mortgage servicer that services the mortgage loans underlying our Excess MSRs and servicer
advances could result in:
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the validity and priority of our ownership in the Excess MSRs or servicer advances being challenged
in a bankruptcy proceeding;
payments made by such servicer to us, or obligations incurred by it, being voided by a court under
federal or state preference laws or federal or state fraudulent conveyance laws;
a re-characterization of any sale of Excess MSRs, servicer advances or other assets to us as a pledge
of such assets in a bankruptcy proceeding;
any agreement pursuant to which we acquired the Excess MSRs or servicer advances being rejected
in a bankruptcy proceeding; or
a default under our financing for servicer advances and a partial or total loss of the value of our investment
in servicer advances.
For additional information about the ways in which we may be affected by mortgage servicers, see “—The value of our Excess
MSRs, servicer advances and RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as
related delays in the foreclosure process.”
We have significant counterparty concentration risk in Nationstar and Springleaf and are subject to other counterparty
concentration and default risks.
We are not restricted from dealing with any particular counterparty or from concentrating any or all of our transactions with a few
counterparties. Any loss suffered by us as a result of a counterparty defaulting, refusing to conduct business with us or imposing
more onerous terms on us would also negatively affect our business, results of operations, cash flows and financial condition.
To date, all of our co-investments in Excess MSRs and servicer advances relate to loans serviced by Nationstar. If Nationstar is
terminated as the servicer of some or all of these portfolios, or in the event that it files for bankruptcy, our expected returns on
these investments would be severely impacted. In addition, the vast majority of the loans underlying our Non-Agency RMBS are
serviced by Nationstar. We closely monitor Nationstar’s mortgage servicing performance and overall operating performance,
financial condition and liquidity, as well as its compliance with regulations and Servicing Guidelines. We have various information,
access and inspection rights in our agreements with Nationstar that enable us to monitor Nationstar’s financial and operating
performance and credit quality, which we periodically evaluate and discuss with Nationstar’s management. However, we have no
direct ability to influence Nationstar’s performance, and our diligence cannot prevent, and may not even help us anticipate, the
termination of a Nationstar servicing agreement.
Furthermore, Nationstar is subject to numerous legal proceedings, federal, state or local governmental examinations, investigations
or enforcement actions, which could adversely affect its reputation and its liquidity, financial position and results of operations. For
example, on March 5, 2014, Nationstar received a letter from Benjamin Lawsky, Superintendent of the New York Department of
Financial Services, in connection with Nationstar’s recent growth, certain operational issues, and certain alleged recent complaints
from certain New York consumers.
Nationstar has no obligation to offer us any future co-investment opportunity on the same terms as prior transactions, or at all,
and we may not be able to find suitable counterparties other than Nationstar from which to acquire Excess MSRs and servicer
advances, which could impact our business strategy. See “—We will rely heavily on mortgage servicers to achieve our investment
objective and have no direct ability to influence their performance.”
Repayment of the outstanding amount of servicer advances (including payment with respect to deferred servicing fees) may be
subject to delay, reduction or set-off in the event that Nationstar (or any other applicable servicer or subservicer) breaches any of
its obligations under the related servicing agreements, including, without limitation, any failure of Nationstar (or any other
applicable servicer or subservicer) to perform its servicing and advancing functions in accordance with the terms of such servicing
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agreements. If Nationstar (or any other applicable servicer) is terminated or resigns as servicer and the applicable successor servicer
does not purchase all outstanding servicer advances at the time of transfer, collection of the servicer advances will be dependent
on the performance of such successor servicer and, if applicable, reliance on such successor servicer’s compliance with the “first-
in, first-out” or “FIFO” provisions of the Servicing Guidelines. In addition, such successor servicers may not agree to purchase
the outstanding advances on the same terms as our current purchase arrangements and may require, as a condition of their purchase,
modification to such FIFO provisions, which could further delay our repayment and have adversely affect the returns from our
investment.
We are subject to substantial other operational risks associated to Nationstar or any other applicable servicer or subservicer in
connection with the financing of servicer advances. In our current financing facilities for servicer advances, the failure of Nationstar
to satisfy various covenants and tests can result in a target amortization event, a facility early amortization event and/or an event
of default. We have no direct ability to control Nationstar’s compliance with those covenants and tests. Failure of Nationstar to
satisfy any such covenants or tests could result in a partial or total loss on our investment.
In addition, the consumer loans in which we have invested are serviced by Springleaf. If Springleaf is terminated as the servicer
of some or all of these portfolios, or in the event that it files for bankruptcy, our expected returns on these investments could be
severely impacted.
Moreover, we are party to repurchase agreements with a limited number of counterparties. If any of our counterparties elected not
to roll our repurchase agreements, we may not be able to find a replacement counterparty, which would have a material adverse
effect on our financial condition.
Our risk-management processes may not accurately anticipate the impact of market stress or counterparty financial condition, and
as a result, we may not take sufficient action to reduce our risks effectively. Although we will monitor our credit exposures, default
risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, concerns about, or a default
by, one large participant could lead to significant liquidity problems for other participants, which may in turn expose us to significant
losses.
In the event of a counterparty default, particularly a default by a major investment bank, we could incur material losses rapidly,
and the resulting market impact of a major counterparty default could seriously harm our business, results of operations, cash
flows and financial condition. In the event that one of our counterparties becomes insolvent or files for bankruptcy, our ability to
eventually recover any losses suffered as a result of that counterparty’s default may be limited by the liquidity of the counterparty
or the applicable legal regime governing the bankruptcy proceeding.
Counterparty risks have increased in complexity and magnitude as a result of the insolvency of a number of major financial
institutions (such as Lehman Brothers) in recent years and the consequent decrease in the number of potential counterparties. In
addition, counterparties have generally tightened their underwriting standards and increased their margin requirements for
financing, which could negatively impact us in several ways, including by decreasing the number of counterparties willing to
provide financing to us, decreasing the overall amount of leverage available to us, and increasing the costs of borrowing.
GSE initiatives and other actions may adversely affect returns from investments in Excess MSRs.
On January 17, 2011, the Federal Housing Finance Agency (“FHFA”) announced that it had instructed Fannie Mae and Freddie
Mac to study possible alternatives to the current residential mortgage servicing and compensation system used for single-family
mortgage loans. It is unclear what the GSEs, including Fannie Mae or Freddie Mac, may propose as alternatives to current servicing
compensation practices, or when any such alternatives may become effective. Although we do not expect MSRs that have already
been created to be subject to any changes implemented by Fannie Mae or Freddie Mac, it is possible that, because of the significant
role of Fannie Mae or Freddie Mac in the secondary mortgage market, any changes they implement could become prevalent in
the mortgage servicing industry generally. Other industry stakeholders or regulators may also implement or require changes in
response to the perception that the current mortgage servicing practices and compensation do not appropriately serve broader
housing policy objectives. These proposals are still evolving. To the extent the GSEs implement reforms that materially affect the
market for conforming loans, there may be secondary effects on the subprime and Alt-A markets. These reforms may have a
material adverse effect on the economics or performance of any Excess MSRs that we may acquire in the future.
Changes to the minimum servicing amount for GSE loans could occur at any time and could impact us in significantly
negative ways that we are unable to predict or protect against.
Currently, when a loan is sold into the secondary market for Fannie Mae or Freddie Mac loans, the servicer is generally required
to retain a minimum servicing amount (“MSA”) of 25 bps of the UPB for fixed rate mortgages. As has been widely publicized,
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in September 2011, the FHFA announced that a Joint Initiative on Mortgage Servicing Compensation was seeking public comment
on two alternative mortgage servicing compensation structures detailed in a discussion paper. Changes to the MSA structure could
significantly impact our business in negative ways that we cannot predict or protect against. For example, the elimination of a
MSA could radically change the mortgage servicing industry and could severely limit the supply of Excess MSRs available for
sale. In addition, a removal of, or reduction in, the MSA could significantly reduce the recapture rate on the affected loan portfolio,
which would negatively affect the investment return on our Excess MSRs. We cannot predict whether any changes to current MSA
rules will occur or what impact any changes will have on our business, results of operations, liquidity or financial condition.
Our investments in Excess MSRs and servicer advances may involve complex or novel structures.
Investments in Excess MSRs and servicer advances are new types of transactions and may involve complex or novel structures.
Accordingly, the risks associated with the transactions and structures are not fully known to buyers and sellers. In the case of
Excess MSRs on Agency pools, GSEs may require that we submit to costly or burdensome conditions as a prerequisite to their
consent to an investment in Excess MSRs on Agency pools. GSE conditions may diminish or eliminate the investment potential
of Excess MSRs on Agency pools by making such investments too expensive for us or by severely limiting the potential returns
available from Excess MSRs on Agency pools.
It is possible that a GSE’s views on whether any such acquisition structure is appropriate or acceptable may not be known to us
when we make an investment and may change from time to time for any reason or for no reason, even with respect to a completed
investment. A GSE’s evolving posture toward an acquisition or disposition structure through which we invest in or dispose of
Excess MSRs on Agency pools may cause such GSE to impose new conditions on our existing investments in Excess MSRs on
Agency pools, including the owner’s ability to hold such Excess MSRs on Agency pools directly or indirectly through a grantor
trust or other means. Such new conditions may be costly or burdensome and may diminish or eliminate the investment potential
of the Excess MSRs on Agency pools that are already owned by us. Moreover, obtaining such consent may require us or our co-
investment counterparties to agree to material structural or economic changes, as well as agree to indemnification or other terms
that expose us to risks to which we have not previously been exposed and that could negatively affect our returns from our
investments.
Many of our investments may be illiquid, and this lack of liquidity could significantly impede our ability to vary our
portfolio in response to changes in economic and other conditions or to realize the value at which such investments are
carried if we are required to dispose of them.
Many of our investments are illiquid. Illiquidity may result from the absence of an established market for the investments, as well
as legal or contractual restrictions on their resale, refinancing or other disposition. Dispositions of investments may be subject to
contractual and other limitations on transfer or other restrictions that would interfere with subsequent sales of such investments
or adversely affect the terms that could be obtained upon any disposition thereof.
Excess MSRs and servicer advances are highly illiquid and may be subject to numerous restrictions on transfers, including without
limitation the receipt of third-party consents. For example, the Servicing Guidelines of a mortgage owner generally require that
holders of Excess MSRs obtain the mortgage owner’s prior approval of any change of direct ownership of such Excess MSRs.
Such approval may be withheld for any reason or no reason in the discretion of the mortgage owner. Moreover, we have not
received and do not expect to receive any assurances from any GSEs that their conditions for the sale by us of any Excess MSRs
will not change. Therefore, the potential costs, issues or restrictions associated with receiving such GSEs’ consent for any such
dispositions by us cannot be determined with any certainty. Additionally, investments in Excess MSRs and servicer advances are
new types of transaction, and the risks associated with the transactions and structures are not fully known to buyers or sellers. As
a result of the foregoing, we may be unable to locate a buyer at the time we wish to sell Excess MSRs or servicer advances. There
is some risk that we will be required to dispose of Excess MSRs or servicer advances either through an in-kind distribution or
other liquidation vehicle, which will, in either case, provide little or no economic benefit to us, or a sale to a co-investor in the
Excess MSRs or servicer advances, which may be an affiliate. Accordingly, we cannot provide any assurance that we will obtain
any return or any benefit of any kind from any disposition of Excess MSRs or servicer advances. We may not benefit from the
full term of the assets and for the aforementioned reasons may not receive any benefits from the disposition, if any, of such assets.
In addition, some of our real estate related securities may not be registered under the relevant securities laws, resulting in a
prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, those laws. There are also no established trading markets for a majority of
our intended investments. Moreover, certain of our investments, including our investments in consumer loans, servicer advances
and certain investments in Excess MSRs, are made indirectly through a vehicle that owns the underlying assets. Our ability to sell
our interest may be contractually limited or prohibited. As a result, our ability to vary our portfolio in response to changes in
economic and other conditions may be limited.
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Our real estate related securities have historically been valued based primarily on third-party quotations, which are subject to
significant variability based on the liquidity and price transparency created by market trading activity. A disruption in these trading
markets could reduce the trading for many real estate related securities, resulting in less transparent prices for those securities,
which would make selling such assets more difficult. Moreover, a decline in market demand for the types of assets that we hold
would make it more difficult to sell our assets. If we are required to liquidate all or a portion of our illiquid investments quickly,
we may realize significantly less than the amount at which we have previously valued these investments.
Market conditions could negatively impact our business, results of operations, cash flows and financial condition.
The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have
a potentially significant, negative impact on us. These factors include, among other things:
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interest rates and credit spreads;
the availability of credit, including the price, terms and conditions under which it can be obtained;
the quality, pricing and availability of suitable investments and credit losses with respect to our
investments;
the ability to obtain accurate market-based valuations;
loan values relative to the value of the underlying real estate assets;
default rates on the loans underlying our investments and the amount of the related losses;
prepayment speeds, delinquency rates and legislative/regulatory changes with respect to our
investments in Excess MSRs, servicer advances, RMBS, and loans, and the timing and amount of
servicer advances;
the actual and perceived state of the real estate markets, market for dividend-paying stocks and public
capital markets generally;
unemployment rates; and
the attractiveness of other types of investments relative to investments in real estate or REITs generally.
Changes in these factors are difficult to predict, and a change in one factor can affect other factors. For example, during 2007,
increased default rates in the subprime mortgage market played a role in causing credit spreads to widen, reducing availability of
credit on favorable terms, reducing liquidity and price transparency of real estate related assets, resulting in difficulty in obtaining
accurate mark-to-market valuations, and causing a negative perception of the state of the real estate markets and of REITs generally.
These conditions worsened during 2008, and intensified meaningfully during the fourth quarter of 2008 as a result of the global
credit and liquidity crisis, resulting in extraordinarily challenging market conditions. Since then, market conditions have generally
improved, but they could deteriorate in the future as a result of a variety of factors beyond our control.
The geographic distribution of the loans underlying, and collateral securing, certain of our investments subjects us to
geographic real estate market risks, which could adversely affect the performance of our investments, our results of
operations and financial condition.
The geographic distribution of the loans underlying, and collateral securing, our investments, including our Excess MSRs, servicer
advances, Non-Agency RMBS and consumer loans, exposes us to risks associated with the real estate and commercial lending
industry in general within the states and regions in which we hold significant investments. These risks include, without limitation:
possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability
of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses;
changes in zoning laws; increased energy costs; unemployment; costs resulting from the clean-up of, and liability to third parties
for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods,
earthquakes or other natural disasters; and changes in interest rates.
As of December 31, 2014, 26.7% of the total UPB of the residential mortgage loans underlying our Excess MSRs was secured by
properties located in California and 8.4% was secured by properties located in Florida. As of December 31, 2014, 41.1% of the
collateral securing our Non-Agency RMBS was located in the Western U.S., 21.6% was located in the Southeastern U.S., 18.2%
was located in the Northeastern U.S., 10.0% was located in the Midwestern U.S. and 9.0% was located in the Southwestern U.S.
We were unable to obtain geographical information for 0.1% of the collateral. To the extent any of the foregoing risks arise in
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states and regions where we hold significant investments, the performance of our investments, our results of operations, cash flows
and financial condition could suffer a material adverse effect.
Many of the RMBS in which we invest are collateralized by subprime mortgage loans, which are subject to increased risks.
Many of the RMBS in which we invest are backed by collateral pools of subprime residential mortgage loans. “Subprime” mortgage
loans refer to mortgage loans that have been originated using underwriting standards that are less restrictive than the underwriting
requirements used as standards for other first and junior lien mortgage loan purchase programs, such as the programs of Fannie
Mae and Freddie Mac. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit
histories (including outstanding judgments or prior bankruptcies), mortgage loans where the amount of the loan at origination is
80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans
made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers
whose income is not required to be disclosed or verified. Due to economic conditions, including increased interest rates and lower
home prices, as well as aggressive lending practices, subprime mortgage loans have in recent periods experienced increased rates
of delinquency, foreclosure, bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy
and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a
more traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans, the
performance of RMBS backed by subprime mortgage loans could be correspondingly adversely affected, which could adversely
impact our results of operations, liquidity, financial condition and business.
The value of our Excess MSRs, servicer advances and RMBS may be adversely affected by deficiencies in servicing and
foreclosure practices, as well as related delays in the foreclosure process.
Allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage
loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents
used in foreclosure proceedings (so-called “robo signing”), inadequate documentation of transfers and registrations of mortgages
and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization
and failure to enforce put-backs.
As a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings
beginning in the second half of 2010 while they evaluated their foreclosure practices. In late 2010, a group of state attorneys
general and state bank and mortgage regulators representing nearly all 50 states and the District of Columbia, along with the U.S.
Justice Department and the Department of Housing and Urban Development, began an investigation into foreclosure practices of
banks and servicers. The investigations and lawsuits by several state attorneys general led to a settlement agreement in early
February 2012 with five of the nation’s largest banks, pursuant to which the banks agreed to pay more than $25 billion to settle
claims relating to improper foreclosure practices. The settlement does not prohibit the states, the federal government, individuals
or investors from pursuing additional actions against the banks and servicers in the future.
Under the terms of the agreement governing our investment in servicer advances, we (together with third-party co-investors) are
required to purchase from Nationstar advances on certain pools. While a mortgage loan is in foreclosure, servicers, including
Nationstar, are generally required to continue to advance delinquent principal and interest and to also make advances for delinquent
taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent it determines that such
amounts are recoverable. Servicer advances are generally recovered when the delinquency is resolved.
Foreclosure moratoria or other actions that lengthen the foreclosure process increase the amount of servicer advances Nationstar
is required to make and we are required to purchase, lengthen the time it takes for us to be repaid for such advances and increase
the costs incurred during the foreclosure process. In addition, our advance financing facilities contain provisions that modify the
advance rates for, and limit the eligibility of, servicer advances to be financed based on the length of time that servicer advances
are outstanding, and, as a result, an increase in foreclosure timelines could further increase the amount of servicer advances that
we need to fund with our own capital. Such increases in foreclosure timelines could increase our need for capital to fund servicer
advances (which do not bear interest), which would increase our interest expense, reduce the value of our investment and potentially
reduce the cash that we have available to pay our operating expenses or to pay dividends.
Even in states where servicers have not suspended foreclosure proceedings or have lifted (or will soon lift) any such delayed
foreclosures, servicers, including Nationstar, have faced, and may continue to face, increased delays and costs in the foreclosure
process. For example, the current legislative and regulatory climate could lead borrowers to contest foreclosures that they would
not otherwise have contested under ordinary circumstances, and servicers may incur increased litigation costs if the validity of a
foreclosure action is challenged by a borrower. In general, regulatory developments with respect to foreclosure practices could
result in increases in the amount of servicer advances and the length of time to recover servicer advances, fines or increases in
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operating expenses, and decreases in the advance rate and availability of financing for servicer advances. This would lead to
increased borrowings, reduced cash and higher interest expense which could negatively impact our liquidity and profitability.
Although the terms of our investment in servicer advances contain adjustment mechanisms that would reduce the amount of
performance fees payable to Nationstar if servicer advances exceed pre-determined amounts, those fee reductions may not be
sufficient to cover the expenses resulting from longer foreclosure timelines.
A failure by any or all of the members to make capital contributions for amounts required to fund servicer advances could
result in an event of default under our advance facilities and a complete loss of our investment.
The integrity of the servicing and foreclosure processes are critical to the value of the mortgage loan portfolios underlying our
Excess MSRs, servicer advances and RMBS, and our financial results could be adversely affected by deficiencies in the conduct
of those processes. For example, delays in the foreclosure process that have resulted from investigations into improper servicing
practices may adversely affect the values of, and result in losses on, these investments. Foreclosure delays may also increase the
administrative expenses of the securitization trusts for the RMBS, thereby reducing the amount of funds available for distribution
to investors.
In addition, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments while
the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of credit support
available for the senior classes of RMBS that we own, thus possibly adversely affecting these securities. Additionally, a substantial
portion of the $25 billion settlement is a “credit” to the banks and servicers for principal write-downs or reductions they may make
to certain mortgages underlying RMBS. There remains uncertainty as to how these principal reductions will work and what effect
they will have on the value of related RMBS. As a result, there can be no assurance that any such principal reductions will not
adversely affect the value of our Excess MSRs, servicer advances and RMBS.
While we believe that the sellers and servicers would be in violation of their servicing contracts to the extent that they have
improperly serviced mortgage loans or improperly executed documents in foreclosure or bankruptcy proceedings, or do not comply
with the terms of servicing contracts when deciding whether to apply principal reductions, it may be difficult, expensive, time
consuming and, ultimately, uneconomic for us to enforce our contractual rights. While we cannot predict exactly how the servicing
and foreclosure matters or the resulting litigation or settlement agreements will affect our business, there can be no assurance that
these matters will not have an adverse impact on our results of operations, cash flows and financial condition.
The loans underlying the securities we invest in and the loans we directly invest in are subject to delinquency, foreclosure
and loss, which could result in losses to us.
Mortgage backed securities are securities backed by mortgage loans. The ability of borrowers to repay these mortgage loans is
dependent upon the income or assets of these borrowers. If a borrower has insufficient income or assets to repay these loans, it
will default on its loan. Our investments in RMBS will be adversely affected by defaults under the loans underlying such securities.
To the extent losses are realized on the loans underlying the securities in which we invest, we may not recover the amount invested
in, or, in extreme cases, any of our investment in such securities.
Residential mortgage loans, manufactured housing loans and subprime mortgage loans are secured by single-family residential
property and are also subject to risks of delinquency and foreclosure, and risks of loss. The ability of a borrower to repay a loan
secured by a residential property is dependent upon the income or assets of the borrower. A number of factors may impair borrowers’
abilities to repay their loans, including, among other things, changes in the borrower’s employment status, changes in national,
regional or local economic conditions, changes in interest rates or the availability of credit on favorable terms, changes in regional
or local real estate values, changes in regional or local rental rates and changes in real estate taxes.
In the event of default under a loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency
between the value of the collateral and the outstanding principal and accrued but unpaid interest of the loan, which could adversely
affect our results of operations, cash flows and financial condition.
Our investments in real estate related securities are subject to changes in credit spreads, which could adversely affect our
ability to realize gains on the sale of such investments.
Real estate related securities are subject to changes in credit spreads. Credit spreads measure the yield demanded on securities by
the market based on their credit relative to a specific benchmark.
Fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity.
Floating rate securities are valued based on a market credit spread over LIBOR and are affected similarly by changes in LIBOR
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spreads. As of December 31, 2014, 85.0% of our Non-Agency RMBS Portfolio consisted of floating rate securities and 15.0%
consisted of fixed rate securities, and 38.4% of our Agency RMBS portfolio consisted of floating rate securities and 61.6% consisted
of fixed rate securities, based on the amortized cost basis of all securities (including the amortized cost basis of interest-only and
residual classes). Excessive supply of these securities combined with reduced demand will generally cause the market to require
a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such securities.
Under such conditions, the value of our real estate related securities portfolios would tend to decline. Conversely, if the spread
used to value such securities were to decrease, or “tighten,” the value of our real estate related securities portfolio would tend to
increase. Such changes in the market value of our real estate securities portfolios may affect our net equity, net income or cash
flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize
gains on such securities, or indirectly through their impact on our ability to borrow and access capital. During 2008 through the
first quarter of 2009, credit spreads widened substantially. Widening credit spreads could cause the net unrealized gains on our
securities and derivatives, recorded in accumulated other comprehensive income or retained earnings, and therefore our book
value per share, to decrease and result in net losses.
Prepayment rates on the mortgage loans underlying our real estate related securities may adversely affect our profitability.
In general, the mortgage loans backing our real estate related securities may be prepaid at any time without penalty. Prepayments
on our real estate related securities result when homeowners/mortgagees satisfy (i.e., pay off) the mortgage upon selling or
refinancing their mortgaged property. When we acquire a particular security, we anticipate that the underlying mortgage loans
will prepay at a projected rate which, together with expected coupon income, provides us with an expected yield on such securities.
If we purchase assets at a premium to par value, and borrowers prepay their mortgage loans faster than expected, the corresponding
prepayments on the real estate related security may reduce the expected yield on such securities because we will have to amortize
the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay
their mortgage loans slower than expected, the decrease in corresponding prepayments on the real estate related security may
reduce the expected yield on such securities because we will not be able to accrete the related discount as quickly as originally
anticipated.
Prepayment rates on loans are influenced by changes in mortgage and market interest rates and a variety of economic, geographic
and other factors, all of which are beyond our control. Consequently, such prepayment rates cannot be predicted with certainty
and no strategy can completely insulate us from prepayment or other such risks. In periods of declining interest rates, prepayment
rates on mortgage loans generally increase. If general interest rates decline at the same time, the proceeds of such prepayments
received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid.
In addition, the market value of our real estate related securities may, because of the risk of prepayment, benefit less than other
fixed-income securities from declining interest rates.
With respect to Agency RMBS, we intend to purchase securities that have a higher coupon rate than the prevailing market interest
rates. In exchange for a higher coupon rate, we would then pay a premium over par value to acquire these securities. In accordance
with GAAP, we will amortize the premiums on our Agency RMBS over the life of the related securities. If the mortgage loans
securing these securities prepay at a more rapid rate than anticipated, we will have to amortize our premiums on an accelerated
basis which may adversely affect our profitability. Defaults on the mortgage loans underlying Agency RMBS typically have the
same effect as prepayments because of the underlying Agency guarantee.
Prepayments, which are the primary feature of mortgage backed securities that distinguish them from other types of bonds, are
difficult to predict and can vary significantly over time. As the holder of the security, on a monthly basis, we receive a payment
equal to a portion of our investment principal in a particular security as the underlying mortgages are prepaid. In general, on the
date each month that principal prepayments are announced (i.e., factor day), the value of our real estate related security pledged
as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will
typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal,
in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with
respect to our Agency RMBS, the announcement on factor day of principal prepayments is in advance of our receipt of the related
scheduled payment, thereby creating a short-term receivable for us in the amount of any such principal prepayments. However,
under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS
and, prior to receipt of this short-term receivable, be required to post additional collateral or cash in the amount of the principal
prepayment on or about factor day, which would reduce our liquidity during the period in which the short-term receivable is
outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity.
Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales made in the normal
course of business. If our real estate related securities were liquidated at prices below our amortized cost (i.e., the cost basis) of
such assets, we would incur losses, which could adversely affect our earnings. In addition, in order to continue to earn a return on
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this prepaid principal, we must reinvest it in additional real estate related securities or other assets; however, if interest rates decline,
we may earn a lower return on our new investments as compared to the real estate related securities that prepay.
Prepayments may have a negative impact on our financial results, the effects of which depend on, among other things, the timing
and amount of the prepayment delay on our Agency RMBS, the amount of unamortized premium on our real estate related securities,
the rate at which prepayments are made on our Non-Agency RMBS, the reinvestment lag and the availability of suitable reinvestment
opportunities.
Our investments in RMBS may be subject to significant impairment charges, which would adversely affect our results of
operations.
We will be required to periodically evaluate our investments for impairment indicators. The value of an investment is impaired
when our analysis indicates that, with respect to a security, it is probable that the value of the security is other than temporarily
impaired. The judgment regarding the existence of impairment indicators is based on a variety of factors depending upon the
nature of the investment and the manner in which the income related to such investment was calculated for purposes of our financial
statements. If we determine that an impairment has occurred, we are required to make an adjustment to the net carrying value of
the investment, which would adversely affect our results of operations in the applicable period and thereby adversely affect our
ability to pay dividends to our stockholders.
The lenders under our repurchase agreements may elect not to extend financing to us, which could quickly and seriously
impair our liquidity.
We finance a meaningful portion of our investments in RMBS with repurchase agreements, which are short-term financing
arrangements. Under the terms of these agreements, we will sell a security to a counterparty for a specified price and concurrently
agree to repurchase the same security from our counterparty at a later date for a higher specified price. During the term of the
repurchase agreement—which can be as short as 30 days—the counterparty will make funds available to us and hold the security
as collateral. Our counterparties can also require us to post additional margin as collateral at any time during the term of the
agreement. When the term of a repurchase agreement ends, we will be required to repurchase the security for the specified repurchase
price, with the difference between the sale and repurchase prices serving as the equivalent of paying interest to the counterparty
in return for extending financing to us. If we want to continue to finance the security with a repurchase agreement, we ask the
counterparty to extend-or “roll”-the repurchase agreement for another term.
Our counterparties are not required to roll our repurchase agreements upon the expiration of their stated terms, which subjects us
to a number of risks. Counterparties electing to roll our repurchase agreements may charge higher spread and impose more onerous
terms upon us, including the requirement that we post additional margin as collateral. More significantly, if a repurchase agreement
counterparty elects not to extend our financing, we would be required to pay the counterparty the full repurchase price on the
maturity date and find an alternate source of financing. Alternate sources of financing may be more expensive, contain more
onerous terms or simply may not be available. If we were unable to pay the repurchase price for any security financed with a
repurchase agreement, the counterparty has the right to sell the underlying security being held as collateral and require us to
compensate it for any shortfall between the value of our obligation to the counterparty and the amount for which the collateral
was sold (which may be a significantly discounted price). As of December 31, 2014, we had outstanding repurchase agreements
with an aggregate face amount of approximately $539.0 million to finance Non-Agency RMBS and approximately $1.7 billion
to finance Agency RMBS. Moreover, our repurchase agreement obligations are currently with a limited number of counterparties.
If any of our counterparties elected not to roll our repurchase agreements, we may not be able to find a replacement counterparty
in a timely manner. Finally, some of our repurchase agreements contain covenants and our failure to comply with such covenants
could result in a loss of our investment.
The financing sources under our servicer advance financing facilities may elect not to extend financing to us, which could
quickly and seriously impair our liquidity.
We finance a meaningful portion of our investments in servicer advances with structured financing arrangements. These
arrangements are commonly of a short-term nature. These arrangements are generally accomplished by having the Buyer transfer
its right to repayment for certain servicer advances it has acquired from Nationstar to a wholly owned bankruptcy remote subsidiary
of the Buyer (a “Depositor”). The Buyer is generally required to continue to transfer to the related Depositor all of its rights to
repayment for any particular pool of servicer advances as they arise (and are transferred from Nationstar) until the related financing
arrangement is paid in full and is terminated. The related Depositor then transfers such rights to an Issuer. The Issuer then issues
limited recourse notes to the financing sources backed by such rights to repayment.
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The outstanding balance of servicer advances securing these arrangements is not likely to be repaid on or before the maturity date
of such financing arrangements. Accordingly, we rely heavily on our financing sources to extend or refinance the terms of such
financing arrangements. Our financing sources are not required to extend the arrangements upon the expiration of their stated
terms, which subjects us to a number of risks. Financing sources electing to extend may charge higher interest rates and impose
more onerous terms upon us, including without limitation, lowering the amount of financing that can be extended against any
particular pool of servicer advances.
If a financing source is unable or unwilling to extend financing, the related Issuer will be required to repay the outstanding balance
of the financing on the related maturity date. Additionally, there may be substantial increases in the interest rates under a financing
arrangement if the related notes are not repaid, extended or refinanced prior to the expected repayment dated, which may be before
the related maturity date. If an Issuer is unable to pay the outstanding balance of the notes, the financing sources generally have
the right to foreclose on the servicer advances pledged as collateral.
As of December 31, 2014, certain of the notes issued under our structured servicer advance financing arrangements accrued interest
at a floating rate of interest. Servicer advances are non-interest bearing assets. Accordingly, if there is an increase in prevailing
interest rates and/or our financing sources increase the interest rate “margins” or “spreads.” the amount of financing that we could
obtain against any particular pool of servicer advances may decrease substantially and/or we may be required to obtain interest
rate hedging arrangements. There is no assurance that we will be able to obtain any such interest rate hedging arrangements.
Alternate sources of financing may be more expensive, contain more onerous terms or simply may not be available. Moreover,
our structured servicer advance financing arrangements are currently with a limited number of sources. If any of our sources are
unable to or elected not to extend or refinance such arrangements, we may not be able to find a replacement counterparty in a
timely manner.
We may not be able to finance our investments on attractive terms or at all, and financing for Excess MSRs may be
particularly difficult to obtain.
The ability to finance investments with securitizations or other long-term non-recourse financing not subject to margin requirements
has been more challenging since 2007 as a result of market conditions. In addition, it may be particularly challenging to securitize
our investments in consumer loans, given that consumer loans are generally riskier than mortgage financing. These conditions
may result in having to use less efficient forms of financing for any new investments, which will likely require a larger portion of
our cash flows to be put toward making the initial investment and thereby reduce the amount of cash available for distribution to
our stockholders and funds available for operations and investments, and which will also likely require us to assume higher levels
of risk when financing our investments. In addition, there is no established market for financing of investments in Excess MSRs,
and it is possible that one will not develop for a variety of reasons, such as the challenges with perfecting security interests in the
underlying collateral.
Certain of our advance facilities mature in March 2015, and there can be no assurance that we will be able to renew these facilities
on favorable terms or at all. Moreover, an increase in delinquencies with respect to the loans underlying our servicer advances
could result in the need for additional financing, which may not be available to us on favorable terms or at all. If we are not able
to obtain adequate financing to purchase servicer advances from Nationstar in accordance with our agreement, Nationstar could
default on its obligation to fund such advances, which could result in their termination as servicer under the applicable pooling
and servicing agreements and a partial or total loss of our investment in servicer advances and Excess MSRs.
The non-recourse long-term financing structures we use expose us to risks, which could result in losses to us.
We use securitization and other non-recourse long-term financing for our investments to the extent available and appropriate. In
such structures, our lenders typically would have only a claim against the assets included in the securitizations rather than a general
claim against us as an entity. Prior to any such financing, we would seek to finance our investments with relatively short-term
facilities until a sufficient portfolio is accumulated. As a result, we would be subject to the risk that we would not be able to acquire,
during the period that any short-term facilities are available, sufficient eligible assets or securities to maximize the efficiency of
a securitization. We also bear the risk that we would not be able to obtain new short-term facilities or would not be able to renew
any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets or securities for
a securitization. In addition, conditions in the capital markets may make the issuance of any such securitization less attractive to
us even when we do have sufficient eligible assets or securities. While we would intend to retain the unrated equity component
of securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into
such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including
the risk of default. Our inability to refinance any short-term facilities would also increase our risk because borrowings thereunder
would likely be recourse to us as an entity. If we are unable to obtain and renew short-term facilities or to consummate securitizations
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to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing
or to liquidate assets at an inopportune time or price.
Risks associated with our investment in the consumer loan sector could have a material adverse effect on our business and
financial results.
Our portfolio includes an investment in the consumer loan sector. Although many of the risks applicable to consumer loans are
also applicable to residential real estate loans, and thus the type of risks that we have experience managing, there are nevertheless
substantial risks and uncertainties associated with engaging in a new category of investment. There may be factors that affect the
consumer loan sector with which we are not as familiar compared to the residential mortgage loan sector. Moreover, our underwriting
assumptions for these investments may prove to be materially incorrect. It is also possible that the addition of consumer loans to
our investment portfolio could divert our Manager’s time away from our other investments. Furthermore, external factors, such
as compliance with regulations, may also impact our ability to succeed in the consumer loan investment sector. Failure to
successfully manage these risks could have a material adverse effect on our business and financial results.
The consumer loans underlying our investments are subject to delinquency and loss, which could have a negative impact
on our financial results.
The ability of borrowers to repay the consumer loans underlying our investments may be adversely affected by numerous personal
factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including an economic
downturn, high energy costs or acts of God or terrorism, may also affect the financial stability of borrowers and impair their ability
or willingness to repay the consumer loans in our investment portfolio. In the event of any default under a loan in the consumer
loan portfolio in which we have invested, we will bear a risk of loss of principal to the extent of any deficiency between the value
of the collateral securing the loan, if any, and the principal and accrued interest of the loan. In addition, our investments in consumer
loans may entail greater risk than our investments in residential real estate loans, particularly in the case of consumer loans that
are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may
not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. Further, repossessing personal property securing a consumer loan can present
additional challenges, including locating the collateral and taking possession of it. In addition, borrowers under consumer loans
may have lower credit scores. There can be no guarantee that we will not suffer unexpected losses on our investments as a result
of the factors set out above, which could have a negative impact on our financial results.
The servicer of the loans underlying our consumer loan investment may not be able to accurately track the default status
of senior lien loans in instances where our consumer loan investments are secured by second or third liens on real estate.
A portion of our investment in consumer loans is secured by second and third liens on real estate. When we hold the second or
third lien another creditor or creditors, as applicable, holds the first and/or second, as applicable, lien on the real estate that is the
subject of the security. In these situations our second or third lien is subordinate in right of payment to the first and/or second, as
applicable, holder’s right to receive payment. Moreover, as the servicer of the loans underlying our consumer loan portfolio is not
able to track the default status of a senior lien loan in instances where we do not hold the related first mortgage, the value of the
second or third lien loans in our portfolio may be lower than our estimates indicate.
The consumer loan investment sector is subject to various initiatives on the part of advocacy groups and extensive regulation
and supervision under federal, state and local laws, ordinances and regulations, which could have a negative impact on
our financial results.
In recent years consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe
restrictions on the types of short-term consumer loans in which we have invested. Such consumer advocacy groups and media
reports generally focus on the Annual Percentage Rate to a consumer for this type of loan, which is compared unfavorably to the
interest typically charged by banks to consumers with top-tier credit histories.
The fees charged on the consumer loans in the portfolio in which we have invested may be perceived as controversial by those
who do not focus on the credit risk and high transaction costs typically associated with this type of investment. If the negative
characterization of these types of loans becomes increasingly accepted by consumers, demand for the consumer loan products in
which we have invested could significantly decrease. Additionally, if the negative characterization of these types of loans is
accepted by legislators and regulators, we could become subject to more restrictive laws and regulations in the area.
In addition, we are, or may become, subject to federal, state and local laws, regulations, or regulatory policies and practices,
including the Dodd-Frank Act (which, among other things, established the Consumer Financial Protection Bureau with broad
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authority to regulate and examine financial institutions), which may, amongst other things, limit the amount of interest or fees
allowed to be charged on the consumer loans underlying our investments, or the number of consumer loans that customers may
receive or have outstanding. The operation of existing or future laws, ordinances and regulations could interfere with the focus of
our investments which could have a negative impact on our financial results.
A significant portion of the residential mortgage loans that we acquire are, or may become, sub-performing loans, non-
performing loans or REO assets, which increases our risk of loss.
We acquire distressed residential mortgage loans where the borrower has failed to make timely payments of principal and/or
interest. As part of the residential mortgage loan portfolios we purchase, we also may acquire performing loans that are or
subsequently become sub-performing or non-performing, meaning the borrowers fail to timely pay some or all of the required
payments of principal and/or interest. Under current market conditions, it is likely that some of these loans will have current loan-
to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate.
The borrowers on sub-performing or non-performing loans may be in economic distress and may have become unemployed,
bankrupt or otherwise unable or unwilling to make payments when due. Borrowers may also face difficulties with refinancing
such loans, including due to reduced availability of refinancing alternatives and insufficient equity in their homes to permit them
to refinance. Increases in mortgage interest rates would exacerbate these difficulties. We may need to foreclose on collateral
securing such loans, and the foreclosure process can be lengthy and expensive. Furthermore, REO assets (i.e., real estate owned
by the lender upon completion of the foreclosure process) are relatively illiquid, and we may not be able to sell such REO assets
on terms acceptable to us or at all.
Even though we typically pay less than the amount owed on these loans to acquire them, if actual results differ from our assumptions
in determining the price we paid to acquire such loans, we may incur significant losses. Any loss we incur may be significant and
could materially and adversely affect us.
Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans, and we may not be able
to obtain and/or maintain such licenses.
Certain jurisdictions require a license to purchase, hold, enforce or sell residential mortgage loans. We currently do not hold any
such licenses. In the event that any licensing requirement is applicable to us, there can be no assurance that we will obtain such
licenses or, if obtained, that we will be able to maintain them. Our failure to obtain or maintain such licenses could restrict our
ability to invest in loans in these jurisdictions if such licensing requirements are applicable. In lieu of obtaining such licenses, we
may contribute our acquired residential mortgage loans to one or more wholly owned trusts whose trustee is a national bank, which
may be exempt from state licensing requirements. We may form one or more subsidiaries to apply for certain state licenses. If
these subsidiaries obtain the required licenses, any trust holding loans in the applicable jurisdictions may transfer such loans to
such subsidiaries, resulting in these loans being held by a state-licensed entity. There can be no assurance that we will be able to
obtain the requisite licenses in a timely manner or at all or in all necessary jurisdictions, or that the use of the trusts will reduce
the requirement for licensing. In addition, even if we obtain necessary licenses, we may not be able to maintain them. Any of these
circumstances could limit our ability to invest in residential mortgage loans in the future and have a material adverse effect on us.
Our determination of how much leverage to apply to our investments may adversely affect our return on our investments
and may reduce cash available for distribution.
We leverage certain of our assets through a variety of borrowings. Our investment guidelines do not limit the amount of leverage
we may incur with respect to any specific asset or pool of assets. The return we are able to earn on our investments and cash
available for distribution to our stockholders may be significantly reduced due to changes in market conditions, which may cause
the cost of our financing to increase relative to the income that can be derived from our assets.
Certain of our investments are not match funded, which may increase the risks associated with these investments.
When available, a match funding strategy mitigates the risk of not being able to refinance an investment on favorable terms or at
all. However, our Manager may elect for us to bear a level of refinancing risk on a short-term or longer-term basis, as in the case
of investments financed with repurchase agreements, when, based on its analysis, our Manager determines that bearing such risk
is advisable or unavoidable (as is the case with our investments in servicer advances and our Agency and Non-Agency RMBS
portfolios). In addition, we may be unable, as a result of conditions in the credit markets, to match fund our investments. For
example since the 2008 recession, non-recourse term financing not subject to margin requirements has been more difficult to
obtain, which impairs our ability to match fund our investments. Moreover, we may not be able to enter into interest rate swaps.
A decision not to, or the inability to, match fund certain investments exposes us to additional risks.
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Furthermore, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with
respect to maturity (as is the case with most of our RMBS portfolios), the income from such assets may respond more slowly to
interest rate fluctuations than the cost of our borrowings. Because of this dynamic, interest income from such investments may
rise more slowly than the related interest expense, with a consequent decrease in our net income. Interest rate fluctuations resulting
in our interest expense exceeding interest income would result in operating losses for us from these investments.
Accordingly, to the extent our investments are not match funded with respect to maturities and interest rates, we are exposed to
the risk that we may not be able to finance or refinance our investments on economically favorable terms, or at all, or may have
to liquidate assets at a loss.
Interest rate fluctuations and shifts in the yield curve may cause losses.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors beyond our control. Our primary interest rate exposures relate to our
investments in Excess MSRs, servicer advances, RMBS, consumer loans and any floating rate debt obligations that we may incur.
Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in a number of ways.
Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income
earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities and hedges.
Changes in the level of interest rates also can affect, among other things, our ability to acquire real estate related securities at
attractive prices, the value of our real estate related securities and derivatives and our ability to realize gains from the sale of such
assets. We may wish to use hedging transactions to protect certain positions from interest rate fluctuations, but we may not be able
to do so as a result of market conditions, REIT rules or other reasons. In such event, interest rate fluctuations could adversely
affect our financial condition, cash flows and results of operations.
In the event of a significant rising interest rate environment and/or economic downturn, loan and collateral defaults may increase
and result in credit losses that would adversely affect our liquidity and operating results.
Our ability to execute our business strategy, particularly the growth of our investment portfolio, depends to a significant degree
on our ability to obtain additional capital. Our financing strategy for our real estate related securities and loans is dependent on
our ability to place the debt we use to finance our investments at rates that provide a positive net spread. If spreads for such
liabilities widen or if demand for such liabilities ceases to exist, then our ability to execute future financings will be severely
restricted.
Interest rate changes may also impact our net book value as our real estate related securities are marked to market each quarter.
Debt obligations are not marked to market. Generally, as interest rates increase, the value of our fixed rate securities decreases,
which will decrease the book value of our equity.
Furthermore, shifts in the U.S. Treasury yield curve reflecting an increase in interest rates would also affect the yield required on
our real estate related securities and therefore their value. For example, increasing interest rates would reduce the value of the
fixed rate assets we hold at the time because the higher yields required by increased interest rates result in lower market prices on
existing fixed rate assets in order to adjust the yield upward to meet the market, and vice versa. This would have similar effects
on our real estate related securities portfolio and our financial position and operations to a change in interest rates generally.
Any hedging transactions that we enter into may limit our gains or result in losses.
We may use, when feasible and appropriate, derivatives to hedge a portion of our interest rate exposure, and this approach has
certain risks, including the risk that losses on a hedge position will reduce the cash available for distribution to stockholders and
that such losses may exceed the amount invested in such instruments. We have adopted a general policy with respect to the use
of derivatives, which generally allows us to use derivatives where appropriate, but does not set forth specific policies and procedures
or require that we hedge any specific amount of risk. From time to time, we may use derivative instruments, including forwards,
futures, swaps and options, in our risk management strategy to limit the effects of changes in interest rates on our operations. A
hedge may not be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely
affected during any period as a result of the use of derivatives.
There are limits to the ability of any hedging strategy to protect us completely against interest rate risks. When rates change, we
expect the gain or loss on derivatives to be offset by a related but inverse change in the value of any items that we hedge. We
cannot assure you, however, that our use of derivatives will offset the risks related to changes in interest rates. We cannot assure
you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our
hedging transactions will not result in losses. In addition, our hedging strategy may limit our flexibility by causing us to refrain
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from taking certain actions that would be potentially profitable but would cause adverse consequences under the terms of our
hedging arrangements. The REIT provisions of the Internal Revenue Code limit our ability to hedge. In managing our hedge
instruments, we consider the effect of the expected hedging income on the REIT qualification tests that limit the amount of gross
income that a REIT may receive from hedging. We need to carefully monitor, and may have to limit, our hedging strategy to assure
that we do not realize hedging income, or hold hedges having a value, in excess of the amounts that would cause us to fail the
REIT gross income and asset tests. See "Risks Related to Our Taxation as a REIT -Complying with the REIT requirements may
limit our ability to hedge effectively."
Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in
accordance with GAAP in our financial statements could adversely affect our earnings. In addition, under applicable accounting
standards, we may be required to treat some of our investments as derivatives, which could adversely affect our results of operations.
Maintenance of our 1940 Act exclusion imposes limits on our operations.
We intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an
investment company under the 1940 Act. We believe we will not be considered an investment company under Section 3(a)(1)(A)
of the 1940 Act because we will not engage primarily, or hold ourselves out as being engaged primarily, in the business of investing,
reinvesting or trading in securities. However, under Section 3(a)(1)(C) of the 1940 Act, because we are a holding company that
will conduct its businesses primarily through wholly owned and majority owned subsidiaries, the securities issued by our
subsidiaries that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940
Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of
our total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis (the “40% test”). For purposes
of the foregoing, we currently treat our interests in our TRSs that hold our servicer advances and our subsidiaries that hold consumer
loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3(c)(7) of the 1940
Act. The 40% test under Section 3(a)(1)(C) of the 1940 Act limits the types of businesses in which we may engage through our
subsidiaries. In addition, the assets we and our subsidiaries may originate or acquire are limited by the provisions of the 1940 Act
and the rules and regulations promulgated under the 1940 Act, which may adversely affect our business.
If the value of securities issued by our subsidiaries that are excluded from the definition of “investment company” by Section 3
(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds the 40% test under Section 3(a)
(1)(C) of the 1940 Act (e.g., the value of our interests in the taxable REIT subsidiaries that hold servicer advances increases
significantly in proportion to the value of our other assets), or if one or more of such subsidiaries fail to maintain an exclusion or
exception from the 1940 Act, we could, among other things, be required either (a) to substantially change the manner in which
we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company
under the 1940 Act, either of which could have an adverse effect on us and the market price of our securities. As discussed above,
for purposes of the foregoing, we currently treat our interests in our TRSs that hold our servicer advances and our subsidiaries
that hold consumer loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3
(c)(7) of the 1940 Act. If we or any of our subsidiaries were required to register as an investment company under the 1940 Act,
the registered entity would become subject to substantial regulation with respect to capital structure (including the ability to use
leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition,
including restrictions with respect to diversification and industry concentration, compliance with reporting, record keeping, voting,
proxy disclosure and other rules and regulations that would significantly change our operations.
Failure to maintain an exclusion would require us to significantly restructure our investment strategy. For example, because affiliate
transactions are generally prohibited under the 1940 Act, we would not be able to enter into transactions with any of our affiliates
if we are required to register as an investment company, and we might be required to terminate our management agreement and
any other agreements with affiliates, which could have a material adverse effect on our ability to operate our business and pay
distributions. If we were required to register us as an investment company but failed to do so, we would be prohibited from engaging
in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable
unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.
For purposes of the foregoing, we treat our interests in certain of our wholly owned and majority owned subsidiaries, which
constitutes more than 60% of the value of our adjusted total assets on an unconsolidated basis, as non-investment securities because
such subsidiaries qualify for exclusion from the definition of an investment company under the 1940 Act pursuant to Section 3(c)
(5)(C) of the 1940 Act (the “Section 3(c)(5)(C) exclusion”). The Section 3(c)(5)(C) exclusion is available for entities “primarily
engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The
Section 3(c)(5)(C) exclusion generally requires that at least 55% of these subsidiaries’ assets must comprise qualifying real estate
assets and at least 80% of each of their portfolios must comprise qualifying real estate assets and real estate-related assets under
the 1940 Act. We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or
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on our analyses of such guidance to determine which assets are qualifying real estate assets and real estate-related assets. However,
the SEC’s guidance was issued in accordance with factual situations that may be substantially different from the factual situations
each of our subsidiaries may face, and much of the guidance was issued more than 20 years ago. No assurance can be given that
the SEC staff will concur with the classification of each of our subsidiaries’ assets. In addition, the SEC staff may, in the future,
issue further guidance that may require us to re-classify some of our subsidiaries’ assets for purposes of qualifying for an exclusion
from regulation under the 1940 Act. For example, the SEC and its staff have not published guidance with respect to the treatment
of whole pool Non-Agency RMBS for purposes of the Section 3(c)(5)(C) exclusion. Accordingly, based on our own judgment
and analysis of the guidance from the SEC and its staff identifying Agency whole pool certificates as qualifying real estate assets
under Section 3(c)(5)(C), we treat whole pool Non-Agency RMBS issued with respect to an underlying pool of mortgage loans
in which our subsidiary relying on Section 3(c)(5)(C) holds all of the certificates issued by the pool as qualifying real estate assets.
Based on our own judgment and analysis of the guidance from the SEC and its staff with respect to analogous assets, we treat
Excess MSRs as real estate-related assets for purposes of satisfying the 80% test under the Section 3(c)(5)(C) exclusion. If we are
required to re-classify any of our subsidiaries’ assets, including those subsidiaries holding whole pool Non-Agency RMBS and/
or Excess MSRs, such subsidiaries may no longer be in compliance with the exclusion from the definition of an “investment
company” provided by Section 3(c)(5)(C) of the 1940 Act, and in turn, we may not satisfy the requirements to avoid falling within
the definition of an “investment company” provided by Section 3(a)(1)(C). To the extent that the SEC staff publishes new or
different guidance or disagrees with our analysis with respect to any assets of our subsidiaries we have determined to be qualifying
real estate assets or real estate-related assets, we may be required to adjust our strategy accordingly. In addition, we may be limited
in our ability to make certain investments and these limitations could result in a subsidiary holding assets we might wish to sell
or selling assets we might wish to hold.
In August 2011, the SEC issued a concept release soliciting public comments on a wide range of issues relating to companies
engaged in the business of acquiring mortgages and mortgage-related instruments and that rely on Section 3(c)(5)(C) of the 1940
Act. Therefore, there can be no assurance that the laws and regulations governing the 1940 Act status of REITs, or guidance from
the SEC or its staff regarding the Section 3(c)(5)(C) exclusion, will not change in a manner that adversely affects our operations.
If we or our subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required
either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company,
(b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an
investment company, any of which could negatively affect the value of our common stock, the sustainability of our business model,
and our ability to make distributions. In addition, if we or any of our subsidiaries were required to register as an investment
company under the 1940 Act, the registered entity would become subject to substantial regulation with respect to capital structure
(including the ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act),
portfolio composition, including restrictions with respect to diversification and industry concentration, compliance with reporting,
record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.
Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our
exclusion from the 1940 Act.
If the market value or income potential of qualifying assets for purposes of our qualification as a REIT or our exclusion from
registration as an investment company under the 1940 Act declines as a result of increased interest rates, changes in prepayment
rates or other factors, or the market value or income from non-qualifying assets increases, we may need to increase our investments
in qualifying assets and/or liquidate our non-qualifying assets to maintain our REIT qualification or our exclusion from registration
under the 1940 Act. If the change in market values or income occurs quickly, this may be especially difficult to accomplish. This
difficulty may be exacerbated by the illiquid nature of any non-qualifying assets we may own. We may have to make investment
decisions that we otherwise would not make absent the intent to maintain our qualification as a REIT and exclusion from registration
under the 1940 Act.
We are subject to significant competition, and we may not compete successfully.
We are subject to significant competition in seeking investments. We compete with other companies, including other REITs,
insurance companies and other investors, including funds and companies affiliated with our Manager. Some of our competitors
have greater resources than we possess or have greater access to capital or various types of financing structures than are available
to us, and we may not be able to compete successfully for investments or provide attractive investment returns relative to our
competitors. These competitors may be willing to accept lower returns on their investments and, as a result, our profit margins
could be adversely affected. Furthermore, competition for investments that are suitable for us may lead to the returns available
from such investments decreasing, which may further limit our ability to generate our desired returns. We cannot assure you that
other companies will not be formed that compete with us for investments or otherwise pursue investment strategies similar to ours
or that we will be able to compete successfully against any such companies.
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Furthermore, we currently do not have a mortgage servicing platform. Therefore, we may not be an attractive buyer for those
sellers of MSRs that prefer to sell MSRs and their mortgage servicing platform in a single transaction. Since our business model
does not currently include acquiring and running servicing platforms, to engage in a bid for such a business we would need to find
a servicer to acquire and run the platform or we would need to incur additional costs to shut down the acquired servicing platform.
The need to work with a servicer in these situations increases the complexity of such potential acquisitions, and Nationstar may
be unwilling or unable to act as servicer or subservicer on any acquisitions of Excess MSRs or servicer advances we want to
execute. The complexity of these transactions and the additional costs incurred by us if we were to execute future acquisitions of
this type could adversely affect our future operating results.
The valuations of our assets are subject to uncertainty since most of our assets are not traded in an active market.
There is not anticipated to be an active market for most of the assets in which we will invest. In the absence of market comparisons,
we will use other pricing methodologies, including, for example, models based on assumptions regarding expected trends, historical
trends following market conditions believed to be comparable to the then current market conditions and other factors believed at
the time to be likely to influence the potential resale price of, or the potential cash flows derived from, an investment. Such
methodologies may not prove to be accurate and any inability to accurately price assets may result in adverse consequences for
us. A valuation is only an estimate of value and is not a precise measure of realizable value. Ultimate realization of the market
value of a private asset depends to a great extent on economic and other conditions beyond our control. Further, valuations do not
necessarily represent the price at which a private investment would sell since market prices of private investments can only be
determined by negotiation between a willing buyer and seller. If we were to liquidate a particular private investment, the realized
value may be more than or less than the valuation of such asset as carried on our books.
Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable
to predict or protect against.
As has been widely publicized, the SEC, the Financial Accounting Standards Board (the “FASB”) and other regulatory bodies
that establish the accounting rules applicable to us have recently proposed or enacted a wide array of changes to accounting rules.
Moreover, in the future these regulators may propose additional changes that we do not currently anticipate. Changes to accounting
rules that apply to us could significantly impact our business or our reported financial performance in negative ways that we cannot
predict or protect against. We cannot predict whether any changes to current accounting rules will occur or what impact any
codified changes will have on our business, results of operations, liquidity or financial condition.
A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations.
We believe the risks associated with our business are more severe during periods in which an economic slowdown or recession
is accompanied by declining real estate values, as was the case in 2008. Declining real estate values generally reduce the level of
new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase
of, or investment in, additional properties. Borrowers may also be less able to pay principal and interest on the loans underlying
our securities, Excess MSRs and servicer advances, if the real estate economy weakens. Further, declining real estate values
significantly increase the likelihood that we will incur losses on our securities in the event of default because the value of our
collateral may be insufficient to cover our basis. Any sustained period of increased payment delinquencies, foreclosures or losses
could adversely affect our net interest income from the assets in our portfolio, which would significantly harm our revenues, results
of operations, financial condition, liquidity, business prospects and our ability to make distributions to our stockholders.
Compliance with changing regulation of corporate governance and public disclosure has and will continue to result in
increased compliance costs and pose challenges for our management team.
Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to
anticipate the overall financial impact on us and, more generally, the financial services and mortgage industries. Additionally, we
cannot predict whether there will be additional proposed laws or reforms that would affect us, whether or when such changes may
be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying
with any additional laws or regulations could have a material effect on our financial condition and results of operations.
Risks Related to Our Manager
We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management
Agreement.
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We have no employees. Our officers and other individuals who perform services for us are employees of our Manager. We are
completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies,
to conduct our business. We are subject to the risk that our Manager will terminate the Management Agreement and that we will
not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all. Furthermore, we are
dependent on the services of certain key employees of our Manager whose compensation is partially or entirely dependent upon
the amount of incentive or management compensation earned by our Manager and whose continued service is not guaranteed, and
the loss of such services could adversely affect our operations.
There are conflicts of interest in our relationship with our Manager.
Our Management Agreement with our Manager was not negotiated at arm’s-length, and its terms, including fees payable, may not
be as favorable to us as if it had been negotiated with an unaffiliated third party.
There are conflicts of interest inherent in our relationship with our Manager insofar as our Manager and its affiliates—including
investment funds, private investment funds, or businesses managed by our Manager, including Newcastle, Nationstar and Springleaf
—invest in real estate related securities, consumer loans and Excess MSRs and servicer advances and whose investment objectives
overlap with our investment objectives. Certain investments appropriate for us may also be appropriate for one or more of these
other investment vehicles. Certain members of our board of directors and employees of our Manager who are our officers also
serve as officers and/or directors of these other entities. For example, we have some of the same directors and officers as Newcastle.
Although we have the same Manager, we may compete with entities affiliated with our Manager or Fortress, including Newcastle,
for certain target assets. From time to time, affiliates of Fortress focus on investments in assets with a similar profile as our target
assets that we may seek to acquire. These affiliates may have meaningful purchasing capacity, which may change over time
depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions
and cash on hand. As of December 31, 2014, Fortress has two funds primarily focused on investing in Excess MSRs with
approximately $1.6 billion in capital commitments in aggregate. We intend to co-invest with these funds in Excess MSRs. We
have broad investment guidelines, and we may co-invest with Fortress funds or portfolio companies of private equity funds managed
by our Manager (or an affiliate thereof) in a variety of investments. We also may invest in securities that are senior or junior to
securities owned by funds managed by our Manager. Fortress funds generally have a fee structure similar to ours, but the fees
actually paid will vary depending on the size, terms and performance of each fund. Fortress had approximately $67.5 billion of
assets under management as of December 31, 2014.
Our Management Agreement with our Manager generally does not limit or restrict our Manager or its affiliates from engaging in
any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives. Our
Manager intends to engage in additional real estate related management and real estate and other investment opportunities in the
future, which may compete with us for investments or result in a change in our current investment strategy. In addition, our
certificate of incorporation provides that if Fortress or an affiliate or any of their officers, directors or employees acquire knowledge
of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer
such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also
a director, officer or employee of Fortress or its affiliates acquires knowledge of a corporate opportunity or is offered a corporate
opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of New
Residential and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully
satisfied such person’s fiduciary duties owed to us and is not liable to us if Fortress or its affiliates pursues or acquires the corporate
opportunity or if such person did not present the corporate opportunity to us.
The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our
Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend
managing us. In addition, we may engage (subject to our investment guidelines) in material transactions with our Manager or
another entity managed by our Manager or one of its affiliates, including Newcastle, Nationstar, Springleaf and Holiday which
may include, but are not limited to, certain financing arrangements, purchases of debt, co-investments in Excess MSRs, consumer
loans, servicer advances, senior housing and other assets that present an actual, potential or perceived conflict of interest. It is
possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction, litigation or regulatory enforcement
actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail,
or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of,
or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially
adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of
counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation
and regulatory enforcement actions.
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The management compensation structure that we have agreed to with our Manager, as well as compensation arrangements that
we may enter into with our Manager in the future (in connection with new lines of business or other activities), may incentivize
our Manager to invest in high risk investments. In addition to its management fee, our Manager is currently entitled to receive
incentive compensation. In evaluating investments and other management strategies, the opportunity to earn incentive
compensation may lead our Manager to place undue emphasis on the maximization of earnings, including through the use of
leverage, at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation.
Investments with higher yield potential are generally riskier or more speculative than lower-yielding investments. Moreover,
because our Manager receives compensation in the form of options in connection with the completion of our common equity
offerings, our Manager may be incentivized to cause us to issue additional common stock, which could be dilutive to existing
stockholders. In addition, our Manager’s management fee is not tied to our performance and may not sufficiently incentivize our
Manager to generate attractive risk-adjusted returns for us.
It would be difficult and costly to terminate our Management Agreement with our Manager.
It would be difficult and costly for us to terminate our Management Agreement with our Manager. The Management Agreement
may only be terminated annually upon (i) the affirmative vote of at least two-thirds of our independent directors, or by a vote of
the holders of a simple majority of the outstanding shares of our common stock, that there has been unsatisfactory performance
by our Manager that is materially detrimental to us or (ii) a determination by a simple majority of our independent directors that
the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination by accepting
a mutually acceptable reduction of fees. Our Manager will be provided 60 days’ prior notice of any termination and will be paid
a termination fee equal to the amount of the management fee earned by the Manager during the twelve-month period preceding
such termination. In addition, following any termination of the Management Agreement, our Manager may require us to purchase
its right to receive incentive compensation at a price determined as if our assets were sold for their fair market value (as determined
by an appraisal, taking into account, among other things, the expected future value of the underlying investments) or otherwise
we may continue to pay the incentive compensation to our Manager. These provisions may increase the effective cost to us of
terminating the Management Agreement, thereby adversely affecting our ability to terminate our Manager without cause.
Our directors have approved broad investment guidelines for our Manager and do not approve each investment decision
made by our Manager. In addition, we may change our investment strategy without a stockholder vote, which may result
in our making investments that are different, riskier or less profitable than our current investments.
Our Manager is authorized to follow broad investment guidelines. Consequently, our Manager has great latitude in determining
the types and categories of assets it may decide are proper investments for us, including the latitude to invest in types and categories
of assets that may differ from those in which we currently invest. Our directors will periodically review our investment guidelines
and our investment portfolio. However, our board does not review or pre-approve each proposed investment or our related financing
arrangements. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our
Manager. Furthermore, transactions entered into by our Manager may be difficult or impossible to unwind by the time they are
reviewed by the directors even if the transactions contravene the terms of the Management Agreement. In addition, we may change
our investment strategy, including our target asset classes, without a stockholder vote.
Our investment strategy may evolve in light of existing market conditions and investment opportunities, and this evolution may
involve additional risks depending upon the nature of the assets in which we invest and our ability to finance such assets on a
short or long-term basis. Investment opportunities that present unattractive risk-return profiles relative to other available investment
opportunities under particular market conditions may become relatively attractive under changed market conditions and changes
in market conditions may therefore result in changes in the investments we target. Decisions to make investments in new asset
categories present risks that may be difficult for us to adequately assess and could therefore reduce our ability to pay dividends
on our common stock or have adverse effects on our liquidity, results of operations or financial condition. A change in our investment
strategy may also increase our exposure to interest rate, foreign currency, real estate market or credit market fluctuations and
expose us to new legal and regulatory risks. In addition, a change in our investment strategy may increase our use of non-match-
funded financing, increase the guarantee obligations we agree to incur or increase the number of transactions we enter into with
affiliates. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such
assets could adversely affect our results of operations, liquidity and financial condition.
Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement,
including with respect to the performance of our investments.
Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called
for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow
its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of
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our subsidiaries, to our board of directors, or our or any subsidiary’s stockholders or partners for any acts or omissions by our
Manager, its members, managers, officers or employees, except by reason of acts constituting bad faith, willful misconduct, gross
negligence or reckless disregard of our Manager’s duties under our Management Agreement. We shall, to the full extent lawful,
reimburse, indemnify and hold our Manager, its members, managers, officers and employees and each other person, if any,
controlling our Manager harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of
any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made
in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified
party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management
Agreement.
Our Manager’s due diligence of investment opportunities or other transactions may not identify all pertinent risks, which
could materially affect our business, financial condition, liquidity and results of operations.
Our Manager intends to conduct due diligence with respect to each investment opportunity or other transaction it pursues. It is
possible, however, that our Manager’s due diligence processes will not uncover all relevant facts, particularly with respect to any
assets we acquire from third parties. In these cases, our Manager may be given limited access to information about the investment
and will rely on information provided by the target of the investment. In addition, if investment opportunities are scarce, the process
for selecting bidders is competitive, or the timeframe in which we are required to complete diligence is short, our ability to conduct
a due diligence investigation may be limited, and we would be required to make investment decisions based upon a less thorough
diligence process than would otherwise be the case. Accordingly, investments and other transactions that initially appear to be
viable may prove not to be over time, due to the limitations of the due diligence process or other factors.
The ownership by our executive officers and directors of shares of common stock, options, or other equity awards of
Springleaf, Nationstar, and other entities either owned by Fortress funds managed by affiliates of our Manager or managed
by our Manager may create, or may create the appearance of, conflicts of interest.
Some of our directors, officers and other employees of our Manager hold positions with Springleaf, Nationstar, and other entities
either owned by Fortress funds managed by affiliates of our Manager or managed by our Manager and own such entities’ common
stock, options to purchase such entities’ common stock or other equity awards. Such ownership may create, or may create the
appearance of, conflicts of interest when these directors, officers and other employees are faced with decisions that could have
different implications for such entities than they do for us.
Risks Related to the Financial Markets
We do not know what impact the Dodd-Frank Act will have on our business.
On July 21, 2010, the U.S. enacted the Dodd-Frank Act. The Dodd-Frank Act affects almost every aspect of the U.S. financial
services industry, including certain aspects of the markets in which we operate. The Dodd-Frank Act imposes new regulations on
us and how we conduct our business. For example, the Dodd-Frank Act will impose additional disclosure requirements for public
companies and generally require issuers or originators of asset-backed securities to retain at least five percent of the credit risk
associated with the securitized assets.
The Dodd-Frank Act imposes mandatory clearing and exchange-trading requirements on many derivatives transactions (including
formerly unregulated over-the-counter derivatives) in which we may engage. In addition, the Dodd-Frank Act is expected to
increase the margin requirements for derivatives transactions that are not subject to mandatory clearing requirements, which may
impact our activities. The Dodd-Frank Act also creates new categories of regulated market participants, such as “swap-dealers,”
“security-based swap dealers,” “major swap participants” and “major security-based swap participants,” and subjects (or, once
the applicable rules have been finalized, will subject) these regulated entities to significant new capital, registration, recordkeeping,
reporting, disclosure, business conduct and other regulatory requirements that will give rise to new administrative costs.
Even if certain new requirements are not directly applicable to us, they may still increase our costs of entering into transactions
with the parties to whom the requirements are directly applicable. Moreover, new exchange-trading and trade reporting requirements
may lead to reductions in the liquidity of derivative transactions, causing higher pricing or reduced availability of derivatives, or
the reduction of arbitrage opportunities for us, which could adversely affect the performance of certain of our trading strategies.
Importantly, many key aspects of the changes imposed by the Dodd-Frank Act will continue to be established by various regulatory
bodies and other groups over the next several years. As a result, we do not know how significantly the Dodd-Frank Act will affect
us. It is possible that the Dodd-Frank Act could, among other things, increase our costs of operating as a public company, impose
restrictions on our ability to securitize assets and reduce our investment returns on securitized assets.
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We do not know what impact certain U.S. government programs intended to stabilize the economy and the financial markets
will have on our business.
In recent years, the U.S. government has taken a number of steps to attempt to strengthen the financial markets and U.S. economy,
including direct government investments in, and guarantees of, troubled financial institutions as well as government-sponsored
programs such as the Term Asset-Backed Securities Loan Facility program and the Public Private Investment Partnership Program.
The U.S. government continues to evaluate or implement an array of other measures and programs intended to help improve U.S.
financial and market conditions. While conditions appear to have improved relative to the depths of the global financial crisis, it
is not clear whether this improvement is real or will last for a significant period of time. It is not clear what impact the government’s
future actions to improve financial and market conditions will have on our business. We may not derive any meaningful benefit
from these programs in the future. Moreover, if any of our competitors are able to benefit from one or more of these initiatives,
they may gain a significant competitive advantage over us.
The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and
regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business.
The payments we receive on the Agency Securities in which we invest depend upon a steady stream of payments by borrowers
on the underlying mortgages and the fulfillment of guarantees by GSEs. Ginnie Mae is part of a U.S. Government agency and its
guarantees are backed by the full faith and credit of the U.S. Fannie Mae and Freddie Mac are GSEs, but their guarantees are not
backed by the full faith and credit of the U.S Government.
In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the credit market disruption beginning in
2007, Congress and the U.S. Treasury undertook a series of actions to stabilize these GSEs and the financial markets, generally.
The Housing and Economic Recovery Act of 2008 was signed into law on July 30, 2008, and established the FHFA, with enhanced
regulatory authority over, among other things, the business activities of Fannie Mae and Freddie Mac and the size of their portfolio
holdings. On September 7, 2008, FHFA placed Fannie Mae and Freddie Mac into federal conservatorship and, together with the
U.S. Treasury, established a program designed to boost investor confidence in Fannie Mae’s and Freddie Mac’s debt and Agency
Securities.
As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac
and may (1) take over the assets of and operate Fannie Mae and Freddie Mac with all the powers of the stockholders, the directors
and the officers of Fannie Mae and Freddie Mac and conduct all business of Fannie Mae and Freddie Mac; (2) collect all obligations
and money due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and Freddie Mac which are consistent
with the conservator’s appointment; (4) preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty of the conservator.
Those efforts resulted in significant U.S. Government financial support and increased control of the GSEs.
The U.S. Federal Reserve (the “Fed”) announced in November 2008 a program of large-scale purchases of Agency Securities in
an attempt to lower longer-term interest rates and contribute to an overall easing of adverse financial conditions. Subject to specified
investment guidelines, the portfolios of Agency Securities purchased through the programs established by the U.S. Treasury and
the Fed may be held to maturity and, based on mortgage market conditions, adjustments may be made to these portfolios. This
flexibility may adversely affect the pricing and availability of Agency Securities that we seek to acquire during the remaining term
of these portfolios.
There can be no assurance that the U.S. Government’s intervention in Fannie Mae and Freddie Mac will be adequate for the longer-
term viability of these GSEs. These uncertainties lead to questions about the availability of and trading market for, Agency
Securities. Accordingly, if these government actions are inadequate and the GSEs defaulted on their guaranteed obligations, suffered
losses or ceased to exist, the value of our Agency Securities and our business, operations and financial condition could be materially
and adversely affected.
Additionally, because of the financial problems faced by Fannie Mae and Freddie Mac that led to their federal
conservatorships, many policymakers have been examining the value of a federal mortgage guarantee and the appropriate role for
the U.S. government in providing liquidity for mortgage loans. In June 2013, legislation titled “Housing Finance Reform and
Taxpayer Protection Act of 2013” was introduced in the U.S. Senate; in July 2013, legislation titled “Protecting American Taxpayers
and Homeowners Act of 2013” was introduced in the U.S. House of Representatives. The bills differ in many respects, but both
require the wind-down of the GSEs. Other bills have been introduced that change the GSEs’ business charters and eliminate the
entities. We cannot predict whether or when the introduced legislation, the amended legislation or any future legislation may be
enacted. Such legislation could materially and adversely affect the availability of, and trading market for, Agency Securities and
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could, therefore, materially and adversely affect the value of our Agency Securities and our business, operations and financial
condition.
Legislation that permits modifications to the terms of outstanding loans may negatively affect our business, financial
condition, liquidity and results of operations.
The U.S. government has enacted legislation that enables government agencies to modify the terms of a significant number of
residential and other loans to provide relief to borrowers without the applicable investor’s consent. These modifications allow for
outstanding principal to be deferred, interest rates to be reduced, the term of the loan to be extended or other terms to be changed
in ways that can permanently eliminate the cash flow (principal and interest) associated with a portion of the loan. These
modifications are currently reducing, or in the future may reduce, the value of a number of our current or future investments,
including investments in mortgage backed securities and Excess MSRs. As a result, such loan modifications are negatively affecting
our business, results of operations, liquidity and financial condition. In addition, certain market participants propose reducing the
amount of paperwork required by a borrower to modify a loan, which could increase the likelihood of fraudulent modifications
and materially harm the U.S. mortgage market and investors that have exposure to this market. Additional legislation intended to
provide relief to borrowers may be enacted and could further harm our business, results of operations and financial condition.
Risks Related to Our Taxation as a REIT
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.
Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which
only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT
qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution,
stockholder ownership and other requirements on a continuing basis. Compliance with these requirements must be carefully
monitored on a continuing basis. Monitoring and managing our REIT compliance has become challenging due to the increased
size and complexity of the assets in our portfolio, a meaningful portion of which are not qualifying REIT assets. There can be no
assurance that our Manager’s personnel responsible for doing so will be able to successfully monitor our compliance or maintain
our REIT status.
Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.
We intend to operate in a manner intended to qualify us as a REIT for U.S. federal income tax purposes. Our ability to satisfy the
asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise
determination, and for which we do not obtain independent appraisals. See “Risks Related to our Business–The valuations of our
assets are subject to uncertainty since most of our assets are not traded in an active market,” and “Risks Related to Our Business–
Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion
from the 1940 Act.” Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to
successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of one or
more of our investments (such as TBAs) may be uncertain in some circumstances, which could affect the application of the REIT
qualification requirements. Accordingly, there can be no assurance that the U.S. Internal Revenue Service (“IRS”) will not contend
that our investments violate the REIT requirements.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible
by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash
available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for,
our stock. See also “–Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.”
Unless entitled to relief under certain provisions of the Internal Revenue Code, we also would be disqualified from taxation as a
REIT for the four taxable years following the year during which we initially ceased to qualify as a REIT. The rule against re-
electing REIT status following a loss of such status would also apply to us if Newcastle fails to qualify as a REIT for its taxable
years ending on or before December 31, 2014, and we are treated as a successor to Newcastle for U.S. federal income tax purposes.
Although, as described under the heading “Certain Relationships and Transactions with Related Persons, Affiliates and Affiliated
Entities,” Newcastle has (i) represented in the separation and distribution agreement that it entered into with us on April 26, 2013
(the “Separation and Distribution Agreement”) that it has no knowledge of any fact or circumstance that would cause us to fail to
qualify as a REIT and (ii) covenanted in the Separation and Distribution Agreement to use its reasonable best efforts to maintain
its REIT status for each of Newcastle’s taxable years ending on or before December 31, 2014 (unless Newcastle obtains an opinion
from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’s failure to maintain
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its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above), no assurance can
be given that such representation and covenant would prevent us from failing to qualify as a REIT. Although, in the event of a
breach, we may be able to seek damages from Newcastle, there can be no assurance that such damages, if any, would appropriately
compensate us. In addition, if Newcastle were to fail to qualify as a REIT despite its reasonable best efforts, we would have no
claim against Newcastle.
Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.
The NYSE requires, as a condition to the listing of our shares, that we maintain our REIT status. Consequently, if we fail to
maintain our REIT status, our shares would promptly be delisted from the NYSE, which would decrease the trading activity of
such shares. This could make it difficult to sell shares and would likely cause the market volume of the shares trading to decline.
If we were delisted as a result of losing our REIT status and desired to relist our shares on the NYSE, we would have to reapply
to the NYSE to be listed as a domestic corporation. As the NYSE’s listing standards for REITs are less onerous than its standards
for domestic corporations, it would be more difficult for us to become a listed company under these heightened standards. We
might not be able to satisfy the NYSE’s listing standards for a domestic corporation. As a result, if we were delisted from the
NYSE, we might not be able to relist as a domestic corporation, in which case our shares could not trade on the NYSE.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to
qualify as a REIT.
We enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell
certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in
exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto.
We believe that, for purposes of the REIT asset and income tests, we should be treated as the owner of the assets that are the subject
of any such sale and repurchase agreement, notwithstanding that those agreements generally transfer record ownership of the
assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own
the assets during the term of the sale and repurchase agreement, in which case we might fail to qualify as a REIT.
The failure of our Excess MSRs to qualify as real estate assets or the income from our Excess MSRs to qualify as mortgage
interest could adversely affect our ability to qualify as a REIT.
We have received from the IRS a private letter ruling substantially to the effect that our Excess MSRs represent interests in
mortgages on real property and thus are qualifying “real estate assets” for purposes of the REIT asset test, which generate income
that qualifies as interest on obligations secured by mortgages on real property for purposes of the REIT income test. The ruling
is based on, among other things, certain assumptions as well as on the accuracy of certain factual representations and statements
that we and Newcastle have made to the IRS. If any of the representations or statements that we have made in connection with
the private letter ruling, are, or become, inaccurate or incomplete in any material respect with respect to one or more Excess MSR
investments, or if we acquire an Excess MSR investment with terms that are not consistent with the terms of the Excess MSR
investments described in the private letter ruling, then we will not be able to rely on the private letter ruling. If we are unable to
rely on the private letter ruling with respect to an Excess MSR investment, the IRS could assert that such Excess MSR investments
do not qualify under the REIT asset and income tests, and if successful, we might fail to qualify as a REIT.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
Dividends payable to domestic stockholders that are individuals, trusts, and estates are generally taxed at reduced tax rates.
Dividends payable by REITs, however, generally are not eligible for the reduced rates. The more favorable rates applicable to
regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be
relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect
the value of the stock of REITs, including our common stock. In addition, the relative attractiveness of real estate in general may
be adversely affected by the favorable tax treatment given to non-REIT corporate dividends, which could affect the value of our
real estate assets negatively.
REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, excluding any net capital gain, in order for
corporate income tax not to apply to earnings that we distribute. We intend to make distributions to our stockholders to comply
with the REIT requirements of the Internal Revenue Code. However, differences in timing between the recognition of taxable
income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet
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the 90% distribution requirement of the Internal Revenue Code. Certain of our assets, such as our investment in consumer loans,
generate substantial mismatches between taxable income and available cash. As a result, the requirement to distribute a substantial
portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms;
(iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or
(iv) make taxable distributions of our capital stock or debt securities in order to comply with REIT requirements. Further, amounts
distributed will not be available to fund investment activities. If we fail to obtain debt or equity capital in the future, it could limit
our ability to satisfy our liquidity needs, which could adversely affect the value of our common stock.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize
from them.
Based on IRS guidance concerning the classification of Excess MSRs, we intend to treat our Excess MSRs as ownership interests
in the interest payments made on the underlying mortgage loans, akin to an “interest only” strip. Under this treatment, for purposes
of determining the amount and timing of taxable income, each Excess MSR is treated as a bond that was issued with original issue
discount on the date we acquired such Excess MSR. In general, we will be required to accrue original issue discount based on the
constant yield to maturity of each Excess MSR, and to treat such original issue discount as taxable income in accordance with the
applicable U.S. federal income tax rules. The constant yield of an Excess MSR will be determined, and we will be taxed, based
on a prepayment assumption regarding future payments due on the mortgage loans underlying the Excess MSR. If the mortgage
loans underlying an Excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of original
issue discount will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, we may
be required to accrue an amount of income in respect of an Excess MSR that exceeds the amount of cash collected in respect of
that Excess MSR. Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for,
and accrue with respect to, the Excess MSR may exceed the total amount we collect on such Excess MSR. No assurance can be
given that we will be entitled to a deduction for such excess, meaning that we may be required to recognize “phantom income”
over the life of an Excess MSR.
Other debt instruments that we may acquire, including consumer loans, may be issued with, or treated as issued with, original
issue discount. Those instruments would be subject to the original issue discount accrual and income computations that are described
above with regard to Excess MSRs.
We may acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt
instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount
of such discount will nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market
discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. If we collect
less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not
be able to benefit from any offsetting loss deductions.
In addition, we may acquire debt instruments that are subsequently modified by agreement with the borrower. If the amendments
to the outstanding instrument are “significant modifications” under the applicable Treasury regulations, the modified instrument
will be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be required
to recognize taxable gain to the extent the principal amount of the modified instrument exceeds our adjusted tax basis in the
unmodified instrument, even if the value of the instrument or the payment expectations have not changed. Following such a taxable
modification, we would hold the modified loan with a cost basis equal to its principal amount for U.S. federal tax purposes.
Finally, in the event that any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or
in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue
to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may
be required to accrue interest income with respect to debt instruments at the stated rate regardless of whether corresponding cash
payments are received or are ultimately collectible. In each case, while we would in general ultimately have an offsetting loss
deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our
having taxable income of an appropriate character in that later year or thereafter.
In any event, if our investments generate more taxable income than cash in any given year, we may have difficulty satisfying our
annual REIT distribution requirement.
We may be unable to generate sufficient cash from operations to pay our operating expenses and to pay distributions to
our stockholders.
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As a REIT, we are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the
dividends paid deduction and not including net capital losses) each year to our stockholders. To qualify for the tax benefits accorded
to REITs, we intend to make distributions to our stockholders in amounts such that we distribute all or substantially all of our net
taxable income, subject to certain adjustments, although there can be no assurance that our operations will generate sufficient cash
to make such distributions. Moreover, our ability to make distributions may be adversely affected by the risk factors described
herein. See also "Risks Related to our Common Stock - We have not established a minimum distribution payment level, and we
cannot assure you of our ability to pay distributions in the future."
The stock ownership limit imposed by the Internal Revenue Code for REITs and our certificate of incorporation may
inhibit market activity in our stock and restrict our business combination opportunities.
In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our
outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities) at any time during the last half of each taxable year after our first taxable year. Our certificate of
incorporation, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to
preserve our qualification as a REIT. Stockholders are generally restricted from owning more than 9.8% by value or number of
shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever
is more restrictive, of our outstanding shares of capital stock. Our board may grant an exemption in its sole discretion, subject to
such conditions, representations and undertakings as it may determine in its sole discretion. These ownership limits could delay
or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in
the best interest of our stockholders.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and
assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure,
and state or local income, property and transfer taxes. Moreover, if a REIT distributes less than 85% of its taxable income to its
stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the
subsequent year), then it is required to pay an excise tax on 4% of any shortfall between the required 85% and the amount that
was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order
to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a
REIT from dealer property or inventory, we currently hold some of our assets through TRSs, such as our investment in servicer
advances and we may contribute other non-qualifying investments, such as our investment in consumer loans, to a TRS. Such
subsidiaries will be subject to corporate level income tax at regular rates and the payment of such taxes would reduce our return
on the applicable investment.
Complying with the REIT requirements may negatively impact our investment returns or cause us to forego otherwise
attractive opportunities, liquidate assets or contribute assets to a TRS.
To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the
sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership
of our stock. As a result of these tests, we may be required to make distributions to stockholders at disadvantageous times or when
we do not have funds readily available for distribution, forego otherwise attractive investment opportunities, liquidate assets in
adverse market conditions or contribute assets to a TRS that is subject to regular corporate federal income tax. Our ability to
acquire and hold Excess MSRs, interests in consumer loans, servicer advances and other investments is subject to the applicable
REIT qualification tests, and we may have to hold these interests through TRSs, which would negatively impact our returns from
these assets. In general, compliance with the REIT requirements may hinder our ability to make and retain certain attractive
investments.
Complying with the REIT requirements may limit our ability to hedge effectively.
The existing REIT provisions of the Internal Revenue Code may substantially limit our ability to hedge our operations because a
significant amount of the income from those hedging transactions is likely to be treated as non-qualifying income for purposes of
both REIT gross income tests. In addition, we must limit our aggregate income from non-qualified hedging transactions, from our
provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without
regard to gross income from qualified hedging transactions).
As a result, we may have to limit our use of certain hedging techniques or implement those hedges through TRSs. This could result
in greater risks associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our
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hedging activities. If we fail to comply with these limitations, we could lose our REIT qualification for U.S. federal income tax
purposes, unless our failure was due to reasonable cause, and not due to willful neglect, and we meet certain other technical
requirements. Even if our failure were due to reasonable cause, we might incur a penalty tax. See also "-Risks Related to Our
Business -Any hedging transactions that we enter into may limit our gains or result in losses."
Distributions to tax-exempt investors may be classified as unrelated business taxable income.
Neither ordinary nor capital gain distributions with respect to our stock nor gain from the sale of stock should generally constitute
unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:
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part of the income and gain recognized by certain qualified employee pension trusts with respect to
our stock may be treated as unrelated business taxable income if shares of our stock are predominantly
held by qualified employee pension trusts, and we are required to rely on a special look-through rule
for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid
treatment of such income or gain as unrelated business taxable income;
part of the income and gain recognized by a tax-exempt investor with respect to our stock would
constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock;
and
to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a “taxable mortgage
pool,” or if we hold residual interests in a real estate mortgage investment conduit (“REMIC”), a portion
of the distributions paid to a tax exempt stockholder that is allocable to excess inclusion income may
be treated as unrelated business taxable income.
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner
in which we effect future securitizations.
We may enter into securitization or other financing transactions that result in the creation of taxable mortgage pools for U.S. federal
income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we would generally
not be adversely affected by the characterization of a securitization as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax
exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their
dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax
exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject
to tax on unrelated business income, we could incur a corporate level tax on a portion of our income from the taxable mortgage
pool. In that case, we might reduce the amount of our distributions to any disqualified organization whose stock ownership gave
rise to the tax. Moreover, we may be precluded from selling equity interests in these securitizations to outside investors, or selling
any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes.
These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.
Uncertainty exists with respect to the treatment of TBAs for purposes of the REIT asset and income tests, and the failure
of TBAs to be qualifying assets or of income/gains from TBAs to be qualifying income could adversely affect our ability to
qualify as a REIT.
We purchase and sell Agency RMBS through TBAs and recognize income or gains from the disposition of those TBAs, through
dollar roll transactions or otherwise. In a dollar roll transaction, we exchange an existing TBA for another TBA with a different
settlement date. There is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government
securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the
sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income
for purposes of the 75% gross income test. For a particular taxable year, we would treat such TBAs as qualifying assets for purposes
of the REIT asset tests, and income and gains from such TBAs as qualifying income for purposes of the 75% gross income test,
to the extent set forth in an opinion from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes
of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for
purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of such TBAs should
be treated as gain from the sale or disposition of the underlying Agency RMBS. Opinions of counsel are not binding on the IRS,
and no assurance can be given that the IRS would not successfully challenge the conclusions set forth in such opinions. In addition,
it must be emphasized that any opinion of Skadden, Arps, Slate, Meagher & Flom LLP would be based on various assumptions
relating to any TBAs that we enter into and would be conditioned upon fact-based representations and covenants made by our
management regarding such TBAs. No assurance can be given that the IRS would not assert that such assets or income are not
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qualifying assets or income. If the IRS were to successfully challenge any conclusions of Skadden, Arps, Slate, Meagher & Flom
LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our assets consists of TBAs
or a sufficient portion of our income consists of income or gains from the disposition of TBAs.
The tax on prohibited transactions will limit our ability to engage in transactions that would be treated as prohibited
transactions for U.S. federal income tax purposes.
Net income that we derive from a "prohibited transaction" is subject to a 100% tax. The term “prohibited transaction” generally
includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below)
that is held primarily for sale to customers in the ordinary course of our trade or business. We might be subject to this tax if we
were to dispose of or securitize loans or Excess MSRs in a manner that was treated as a prohibited transaction for U.S. federal
income tax purposes.
We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as having been,
held-for-sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business.
As a result, we may choose not to engage in certain sales of loans or Excess MSRs at the REIT level, and may limit the structures
we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us. In addition,
whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular
facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held-for-sale to
customers, or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such
treatment. The 100% prohibited transaction tax does not apply to gains from the sale of property that is held through a TRS or
other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates.
We intend to structure our activities to prevent prohibited transaction characterization.
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more
difficult or impossible for us to qualify as a REIT.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial
or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The U.S.
federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS
and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations.
Revisions in U.S. federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments
and affect the tax considerations of an investment in us.
Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.
To qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If
we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we
sell assets that are treated as dealer property or inventory.
Risks Related to our Common Stock
There can be no assurance that the market for our stock will provide you with adequate liquidity.
Our common stock began trading (on a when issued basis) on the NYSE on May 2, 2013. There can be no assurance that an active
trading market for our common stock will develop or be sustained in the future, and the market price of our common stock may
fluctuate widely, depending upon many factors, some of which may be beyond our control. These factors include, without limitation:
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a shift in our investor base;
our quarterly or annual earnings, or those of other comparable companies;
actual or anticipated fluctuations in our operating results;
changes in accounting standards, policies, guidance, interpretations or principles;
announcements by us or our competitors of significant investments, acquisitions or dispositions;
the failure of securities analysts to cover our common stock;
changes in earnings estimates by securities analysts or our ability to meet those estimates;
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market performance of affiliates and other counterparties with whom we conduct business;
the operating and stock price performance of other comparable companies;
overall market fluctuations; and
general economic conditions.
Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular
company. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, we completed
a reverse stock split in October 2014. There can be no assurance that the reverse stock split will have the anticipated benefits. For
instance, there can be no assurance that the market price per share of our common stock after the reverse stock split will rise in
proportion to the reduction in the number of shares of our common stock outstanding before the reverse stock split, or that the
reverse stock split will result in a market price per share that will attract brokers and investors who do not trade in lower priced
stocks. Additionally, the liquidity of our common stock could be adversely affected by the reduced number of shares resulting
from the reverse stock split, which, in turn, could result in greater volatility in the price per share of our common stock. The
potential volatility in the price per share of our common stock may also make short-selling more attractive, which could put
additional downward pressure on the price of our common stock. Furthermore, the reverse stock split may result in some
shareholders owning "odd lots" of less than one hundred shares of our common stock on a post-split basis. Odd lots may be more
difficult to sell, or require greater transaction costs per share to sell, than shares in "round lots" of even multiples of one hundred
shares.
Sales or issuances of shares of our common stock could adversely affect the market price of our common stock.
Sales of substantial amounts of shares of our common stock in the public market, or the perception that such sales might occur,
could adversely affect the market price of our common stock. The issuance of our common stock in connection with property,
portfolio or business acquisitions or the exercise of outstanding options or otherwise could also have an adverse effect on the
market price of our common stock. We have filed a registration statement to sell common stock in a public offering in the future,
which registration statement is not yet effective.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-
Oxley Act could have a material adverse effect on our business and stock price.
As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404
of the Sarbanes-Oxley Act. Internal control over financial reporting is complex and may be revised over time to adapt to changes
in our business, or changes in applicable accounting rules. We have made investments through joint ventures, such as our investment
in consumer loans, and accounting for such investments can increase the complexity of maintaining effective internal control over
financial reporting. We cannot assure you that our internal control over financial reporting will be effective in the future or that a
material weakness will not be discovered with respect to a prior period for which we had previously believed that internal controls
were effective. If we are not able to maintain or document effective internal control over financial reporting, our independent
registered public accounting firm will not be able to certify as to the effectiveness of our internal control over financial reporting.
Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis, or may
cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including
sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative
reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence
in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm
reports a material weakness in our internal control over financial reporting. This could materially adversely affect us by, for
example, leading to a decline in our share price and impairing our ability to raise capital.
Your percentage ownership in us may be diluted in the future.
Your percentage ownership in us may be diluted in the future because of equity awards that we expect will be granted to our
Manager, to the directors, officers and employees of our Manager who perform services for us, and to our directors, officers and
employees, as well as other equity instruments such as debt and equity financing. Our board of directors has approved a Nonqualified
Stock Option and Incentive Award Plan, as amended (the “Plan”), which provides for the grant of equity-based awards, including
restricted stock, options, stock appreciation rights (“SARs”), performance awards, tandem awards and other equity-based and
non-equity based awards, in each case to our Manager, to the directors, officers, employees, service providers, consultants and
advisor of our Manager who perform services for us, and to our directors, officers, employees, service providers, consultants and
advisors. We reserved 15,000,000 shares of our common stock for issuance under the Plan. On the first day of each fiscal year
beginning during the ten-year term of the Plan and in and after calendar year 2014, that number will be increased by a number of
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shares of our common stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately
preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). For a more detailed description of
the Plan, see “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.”
In connection with any offering of our common stock, we will issue to our Manager options to purchase shares of our common
stock, representing 10% of the number of shares being offered. Our board of directors may also determine to issue options to the
Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in
connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE
rules.
We may incur or issue debt or issue equity, which may negatively affect the market price of our common stock.
We may in the future incur or issue debt or issue equity or equity-related securities. In the event of our liquidation, lenders and
holders of our debt and holders of our preferred stock (if any) would receive a distribution of our available assets before common
stockholders. Any future incurrence or issuance of debt would increase our interest cost and could adversely affect our results of
operations and cash flows. We are not required to offer any additional equity securities to existing common stockholders on a
preemptive basis. Therefore, additional issuances of common stock, directly or through convertible or exchangeable securities
(including limited partnership interests in our operating partnership), warrants or options, will dilute the holdings of our existing
common stockholders and such issuances, or the perception of such issuances, may reduce the market price of our common stock.
Any preferred stock issued by us would likely have a preference on distribution payments, periodically or upon liquidation, which
could eliminate or otherwise limit our ability to make distributions to common stockholders. Because our decision to incur or
issue debt or issue equity or equity-related securities in the future will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common
stockholders bear the risk that our future incurrence or issuance of debt or issuance of equity or equity-related securities will
adversely affect the market price of our common stock.
We have not established a minimum distribution payment level, and we cannot assure you of our ability to pay distributions
in the future.
We intend to make quarterly distributions of our REIT taxable income to holders of our common stock out of assets legally available
therefor. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely
affected by a number of factors, including the risk factors described in this report. Any distributions will be authorized by our
board of directors and declared by us based upon a number of factors, including actual results of operations, liquidity and financial
condition, restrictions under Delaware law or applicable financing covenants, our taxable income, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code, our operating expenses and other factors our directors
deem relevant. We cannot assure you that we will achieve investment results that will allow us to make a specified level of cash
distributions or year-to-year increases in cash distributions in the future.
Furthermore, while we are required to make distributions in order to maintain our REIT status (as described above under “—Risks
Related to our Taxation as a REIT—We may be unable to generate sufficient revenue from operations to pay our operating expenses
and to pay distributions to our stockholders”), we may elect not to maintain our REIT status, in which case we would no longer
be required to make such distributions. Moreover, even if we do elect to maintain our REIT status, we may elect to comply with
the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of
the required amount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to
satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively affect our business,
results of operations, liquidity and financial condition as well as the price of our common stock. No assurance can be given that
we will pay any dividends on shares of our common stock in the future.
We may in the future choose to pay dividends in our own stock, in which case you could be required to pay income taxes
in excess of the cash dividends you receive.
We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each
stockholder. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary
income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, stockholders
may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder
sells the stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in
income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect
to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of
all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell
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shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our
common stock.
It is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in later years. Moreover, various
aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given
that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a
retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.
An increase in market interest rates may have an adverse effect on the market price of our common stock.
One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution
rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily
on the earnings and return that we derive from our investments and income with respect to our investments and our related
distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and
capital market conditions will likely affect the market price of our common stock. For instance, if market interest rates rise without
an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a
higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising
interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our
ability to service our indebtedness and pay distributions.
Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our
company, which could decrease the trading price of our common stock.
Our certificate of incorporation, bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices
and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective
acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:
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a classified board of directors with staggered three-year terms;
provisions regarding the election of directors, classes of directors, the term of office of directors, the
filling of director vacancies and the resignation and removal of directors for cause only upon the
affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled
to vote thereon;
provisions regarding corporate opportunity only upon the affirmative vote of at least 80% of the then
issued and outstanding shares of our capital stock entitled to vote thereon;
removal of directors only for cause and only with the affirmative vote of at least 80% of the then issued
and outstanding shares of our capital stock entitled to vote in the election of directors;
our board of directors to determine the powers, preferences and rights of our preferred stock and to
issue such preferred stock without stockholder approval;
advance notice requirements applicable to stockholders for director nominations and actions to be taken
at annual meetings;
a prohibition, in our certificate of incorporation, stating that no holder of shares of our common stock
will have cumulative voting rights in the election of directors, which means that the holders of a majority
of the issued and outstanding shares of common stock can elect all the directors standing for election;
and
a requirement in our bylaws specifically denying the ability of our stockholders to consent in writing
to take any action in lieu of taking such action at a duly called annual or special meeting of our
stockholders.
Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if
the transaction is considered favorable to stockholders. These anti-takeover provisions could substantially impede the ability of
public stockholders to benefit from a change in control or a change in our management and board of directors and, as a result,
may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.
ERISA may restrict investments by plans in our common stock.
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A plan fiduciary considering an investment in our common stock should consider, among other things, whether such an investment
is consistent with the fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”),
including whether such investment might constitute or give rise to a prohibited transaction under ERISA, the Internal Revenue
Code or any substantially similar federal, state or local law and, if so, whether an exemption from such prohibited transaction
rules is available.
Risks Related to the Merger
Failure to complete the Merger could negatively affect our share price, future business and financial results.
Completion of the Merger is not assured and is subject to risks, including the risks that approval of the transaction by the shareholders
of HLSS will not be obtained or that certain other closing conditions will not be satisfied. In addition, HLSS may terminate the
Merger Agreement in order to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement), subject to
payment of a termination fee. If the Merger is not completed, our ongoing business and financial results may be adversely affected
and we will be subject to several risks, including:
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having to pay certain significant transaction costs relating to the Merger without receiving the benefits of the Merger;
our share price may decline to the extent that the current market prices reflect an assumption by the market that the Merger
will be completed; and
• we may be subject to litigation related to any failure to complete the Merger.
Delays in completing the Merger may substantially reduce the expected benefits of the Merger.
Satisfying the conditions to, and completion of, the Merger may take longer than, and could cost more than, we expect. Any delay
in completing or any additional conditions imposed in order to complete the Merger may materially adversely affect the benefits
that we expect to achieve from the Merger and the integration of our businesses. In addition, we and HLSS each have the right to
terminate the Merger Agreement if the Merger is not completed by August 22, 2015.
We will incur substantial transaction fees and costs in connection with the Merger, and the assertion of appraisal rights by
HLSS shareholders could significantly increase the cost of the Merger to us.
We have incurred, and expect to continue to incur, a significant amount of non-recurring expenses in connection with the Merger,
including legal, accounting and other expenses. In general, these expenses are payable by us whether or not the Merger is completed;
however, upon termination of the Merger Agreement for failure to obtain the requisite vote of HLSS’s stockholders, HLSS will
be required to reimburse us for our out-of-pocket expenses, up to a maximum amount of $7,000,000. Additional unanticipated
costs may be incurred following consummation of the Merger in the course of our integration of HLSS's business. We cannot be
certain that the benefits of the Merger will offset the transaction and integration costs in the near term, or at all.
In addition, HLSS shareholders are entitled to exercise appraisal rights in connection with the Merger, which means that they
have the right to dissent from the Merger and receive, in lieu of the Merger consideration, a payment in cash equal to the fair
value of the holder’s shares as determined in accordance with Cayman Islands law. If the fair value is determined to be higher
than the consideration we have agreed to pay HLSS shareholders, then the total cost of the Merger will be higher than the
consideration set forth in the Merger Agreement. The process of resolving any appraisal actions could require significant
amounts of time, money and effort. As of the date hereof, certain HLSS shareholders with sizeable ownership stakes have
expressed their intention to vote against the Merger.
We are obligated to complete the Merger regardless of whether we have adequate financing for the purchase price.
We are obligated to complete the Merger regardless of whether we have adequate sources of liquidity to fund the purchase price.
In order to fund the purchase price, we may sell assets, incur additional debt or issue equity, in each case on potentially non-optimal
terms. See also “-Our determination of how much leverage to apply to our investments may adversely affect our return on our
investments and may reduce cash available for distribution.” If we issue additional equity, the earnings attributable to the Merger
would be diluted on a per share basis. See also “-Sales or issuances of our common stock could adversely affect the market price
of our common stock” and “-We may incur or issue debt or issue equity, which may negatively affect the market price of our
common stock.” Moreover, our ability to issue equity is subject to market conditions, which are beyond our control, and potentially
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the cooperation of HLSS and Ocwen Financial Corporation and its subsidiaries (collectively, “Ocwen”) in order to satisfy certain
financial statement and other disclosure requirements.
Stockholder or other litigation against HLSS and/or us could result in an injunction preventing completion of the Merger, the
payment of damages in the event the Merger is completed and/or may adversely affect our business, financial condition or
results of operations following the Merger.
Transactions such as the Merger often give rise to lawsuits by stockholders or other third parties. One of the conditions to the
closing of the Merger is that no temporary restraining order, preliminary or permanent injunction or other judgment, order or
decree issued by any court of competent jurisdiction or other law, legal restraint or prohibition will be in effect preventing the
consummation of the Merger. Consequently, if any lawsuit is successful in obtaining an injunction prohibiting us or HLSS from
consummating the Merger on the agreed upon terms, the injunction may prevent the Merger from being completed within the
expected timeframe, or at all. Furthermore, if the Merger is prevented or delayed, the lawsuits could result in substantial costs,
including any costs associated with the indemnification of directors. The defense or settlement of any lawsuit or claim that remains
unresolved at the time the Merger is completed may adversely affect our business, financial condition or results of operations.
We will be subject to various uncertainties while the Merger is pending that could adversely affect our financial results.
Uncertainty about the effect of the Merger on counterparties to contracts employees and other parties may have an adverse effect
on us. These uncertainties could cause contract counterparties and others who deal with us to seek to change existing business
relationships with us, and may impair our ability to attract, retain and motivate key personnel until the Merger is completed and
for a period of time thereafter.
The pursuit of the Merger and the preparation for the integration of the two companies may place a significant burden on management
and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties
encountered in the transition and integration process could affect our financial results prior to and/or following the completion of
the Merger and could limit us from pursuing attractive business opportunities and making other changes to our business prior to
completion of the Merger or termination of the Merger Agreement.
Our assets, liabilities or results of operations could be adversely affected by events, conditions or actions that might occur at
HLSS or Ocwen.
HLSS's assets, liabilities, business, financial condition, cash flows, operating results and prospects could be adversely affected
before or after the Merger closing as a result of events or conditions occurring or existing before the closing. One of the conditions
of the closing is the absence of a Company Material Adverse Effect (as defined, and subject to the exclusions set forth, in the
Merger Agreement), and there can be no assurance that adverse changes in HLSS’s business or operations would constitute a
Company Material Adverse Effect.
Adverse changes in HLSS’s business or operations could occur or arise as a result of actions by HLSS or Ocwen, legal or regulatory
developments, including the emergence or unfavorable resolution of pre-acquisition loss contingencies, deteriorating general
business, market, industry or economic conditions, and other factors both within and beyond the control of HLSS or Ocwen.
Just as we rely heavily on Nationstar to achieve certain of our investment objectives, HLSS relies heavily on Ocwen. We and
HLSS are subject to a variety of risks as a result of our dependence on mortgage servicers, including, without limitation, the
potential loss of all of the value of our Excess MSRs in the event that the servicer of the underlying loans is terminated by the
mortgage loan owner or RMBS bondholders. See “-We rely heavily on mortgage services to achieve our investment objectives
and have no direct ability to influence their performance.” A significant decline in the value of HLSS assets or a significant increase
in HLSS liabilities could adversely affect our future business, financial condition, cash flows, operating results and prospects
following the completion of the Merger. HLSS is subject to a number of other risks and uncertainties, as outlined in its period
reports filed with the SEC, including, regulatory investigations and legal proceedings against HLSS, and others with whom HLSS
conducts business. Moreover, any insurance proceeds received with respect to such matters may be inadequate to cover the
associated losses.
If completed, we may be unable to successfully integrate HLSS's operations.
We entered into the Merger Agreement with the expectation that the Merger will result in various benefits. Achieving the anticipated
benefits of the Merger is subject to a number of uncertainties, including whether we are able to integrate HLSS’s business efficiently.
HLSS depends on Ocwen for significant accounting and operational support, which could exacerbate the difficulties associated
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with integrating two businesses and impair our ability to produce accurate financial information on a timely basis, as required by
the SEC, following the consummation of the Merger. It is possible that the integration process could take longer than anticipated
and could result in the loss of valuable employees, additional and unforeseen expenses, the disruption of our ongoing business,
processes and systems, or inconsistencies in standards, controls, procedures, practices, policies and compensation arrangements,
any of which could adversely affect our ability to achieve the anticipated benefits of the Merger. There may be increased risk due
to integrating financial reporting and internal control systems. Difficulties in combining operations of the two companies could
also result in the loss of contract counterparties or other persons with whom we or HLSS conduct business and potential disputes
or litigation with contract counterparties or other persons with whom we or HLSS conduct business. Our results of operations
following the Merger could also be adversely affected by any issues attributable to either company's operations that arise or are
based on events or actions that occur prior to the closing of the Merger. The integration process is subject to a number of uncertainties,
and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure
to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could
adversely affect our future business, financial condition, operating results and prospects.
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Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties.
None.
Item 3. Legal Proceedings.
From time to time, we are or may be involved in various disputes and litigation matters that arise in the ordinary course of business.
We are not party to any material legal proceedings as of the date on which this report is filed.
Item 4. Mine Safety Disclosures.
None.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
The following graph compares the cumulative total return for our common stock (stock price change plus reinvested dividends)
with the comparable return of four indices: NAREIT All REIT, Russell 2000, NAREIT Mortgage REIT, and S&P 500. The graph
assumes an investment of $100 in our common stock and in each of the indices on May 16, 2013 and that all dividends were
reinvested. The past performance of our common stock is not an indication of future performance.
Index
New Residential
Investment Corp.
NAREIT All REIT
Russell 2000
NAREIT Mortgage
REIT
S&P 500
5/16/2013
5/31/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
6/30/2014
9/30/2014
12/31/2014
Period Ending
100.00
100.00
100.00
97.71
100.00
99.93
100.00
98.87
97.34
97.72
99.41
96.13
97.55
98.17
95.39
109.56
94.28
102.66
102.76
95.68
119.12
94.42
113.45
102.25
103.89
120.45
104.96
115.50
103.53
111.12
122.92
111.17
121.55
98.62
108.20
113.87
106.40
122.92
111.19
121.66
124.95
111.31
128.98
We have one class of common stock, which has been listed on the New York Stock Exchange (NYSE) under the symbol “NRZ”
since May 2, 2013 on a “when issued” basis, and has been traded since our spin-off from Newcastle on May 15, 2013. The following
table sets forth, for the periods indicated, the high, low and last sale prices in U.S. dollars on the NYSE for our common stock
and the distributions we declared with respect to the periods indicated.
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2014
First Quarter
Second Quarter(A)
Third Quarter
Fourth Quarter
2013
Second Quarter(B)
Third Quarter
Fourth Quarter(A)
High
Low
Last Sale
Distributions
Declared
$
$
$
$
$
$
$
13.72
13.32
12.90
13.64
High
14.28
13.98
14.04
$
$
$
$
$
$
$
12.10
12.06
11.66
11.44
Low
11.70
11.78
11.58
$
$
$
$
$
$
$
12.94
$
0.35
12.60
11.66
12.77
Last Sale
0.50
$
0.35
$
$
0.38
Distributions
Declared
13.48
13.24
13.36
$
$
$
0.14
0.35
0.50
(A)
(B)
Includes a quarterly distribution of $0.35 per common share and a special cash distribution of $0.15 per common share.
The second quarter 2013 distribution reflects forty-five days of earnings generated following the completion of our spin-
off from Newcastle on May 15, 2013.
New Residential completed a one-for-two reverse stock split in October 2014. The impact of this reverse stock split has been
retroactively applied to all periods presented herein.
We may declare quarterly distributions on our common stock. No assurance, however, can be given that any future distributions
will be made or, if made, as to the amounts or timing of any future distributions as such distributions are subject to our earnings,
financial condition, liquidity, capital requirements, REIT requirements and such other factors as our board of directors deems
relevant.
On February 20, 2015, the closing sale price for our common stock, as reported on the NYSE, was $13.09. As of February 20,
2015, there were approximately 39 record holders of our common stock. This figure does not reflect the beneficial ownership of
shares held in nominee name.
Nonqualified Stock Option and Incentive Award Plan
On May 15, 2013, New Residential’s board of directors adopted the Plan. The Plan is intended to facilitate the use of long-term
equity-based awards and incentives for the benefit of the service providers to New Residential and its Manager. All outstanding
options granted under the Plan will be subject to the terms and conditions set forth in the agreements evidencing such options and
the terms of the Plan. The maximum number of shares available for issuance in the aggregate over the ten-year term of the Plan
is 15,000,000 shares. New Residential’s board of directors may also determine to issue options to the Manager that are not subject
to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising
efforts would not exceed 10% of the shares sold in such offering and would be subject to New York Stock Exchange rules.
In connection with our separation from Newcastle, each Newcastle option held by our Manager or by the directors, officers,
employees, service providers, consultants and advisors of our Manager at the date of the distribution of our common stock to
Newcastle’s stockholders was converted into an adjusted Newcastle option as well as a new New Residential option (a “Converted
Option”). On May 15, 2013, we issued a total of 10,728,637 Converted Options. The exercise price of each adjusted Newcastle
option and Converted Option was set to collectively maintain the intrinsic value of the Newcastle option immediately prior to the
distribution and to maintain the ratio of the exercise price of the adjusted Newcastle option and the Converted Option, respectively,
to the fair market value of the underlying shares at the time the distribution was made. The terms and conditions applicable to
each such Converted Option was substantially similar to the terms and condition otherwise applicable to the Newcastle option as
of the date of distribution. The grant of such Converted Options did not reduce the number of shares of our common stock otherwise
available for issuance under the Plan. These options are contractually required to be settled in an amount of cash equal to the
excess of the fair market value of a share on the date of exercise over the exercise price per share, unless a majority of the independent
members of the board of directors (or, with respect to a tandem award, one of our authorized officers) determines to settle the
option in shares. If the option is settled in shares, the independent members of the board of directors or an authorized officer, as
applicable, will determine whether the exercise price will be payable in cash, by withholding from shares of our common stock
otherwise issuable upon exercise of such option or through another method permitted under the plan.
The following table summarizes the total number of outstanding securities in the incentive plan and the number of securities
remaining for future issuance, as well as the weighted average exercise price of all outstanding securities as of December 31, 2014
(adjusted for options which expired unexercised on January 12, 2015).
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Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options
Number of
Securities
Remaining
Available for
Future Issuance
Under the 2013
Equity
Compensation
Plan
Weighted
Average
Exercise
Price of
Outstanding
Options
1,441,500
$
1,441,500 (A) $
12.20
12.20
14,955,337
14,955,337 (B)
Plan Category
Equity Compensation Plans Approved by Security
Holders:
Nonqualified Stock Option and Incentive
Award Plan
Total
Equity Compensation Plans Not Approved by
Security Holders:
None.
(A)
(B)
The number of securities to be issued upon exercise of outstanding options does not include 9,130,594 Converted Options
(with a weighted average exercise price of $9.60), of which 7,338,537 are held by an affiliate of our Manager, 1,791,057
were granted to our Manager and assigned to certain Fortress employees, and 1,000 were granted to our directors, other
than Mr. Edens.
No award shall be granted on or after May 15, 2023 (but awards granted may extend beyond this date). The number of
securities remaining available for future issuance is net of an aggregate of 40,663 shares of our common stock and 4,000
options awarded to our directors, other than Mr. Edens, the shares being awarded in lieu of contractual cash compensation.
The number of securities remaining available for future issuance is adjusted on the first day of each fiscal year beginning
during the ten-year term of the plan and in and after calendar year 2014, by a number of shares of our common stock
equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal
year (and, in the case of fiscal year 2013, after the effective date of the Plan). No adjustment was made on January 1,
2014. On January 1, 2015, 1,437,500 shares were added to the number of securities remaining available for future issuance;
this number has been included in the table above.
Item 6. Selected Financial Data.
The selected historical consolidated financial information set forth below as of December 31, 2014, 2013, 2012 and 2011 and for
the years ended December 31, 2014, 2013, and 2012 and the period from December 8, 2011 (commencement of operations) through
December 31, 2011, has been derived from our audited historical consolidated financial statements.
The information below should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated financial statements and notes thereto included in Part II, Item 8,
“Financial Statements and Supplementary Data.”
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Selected Consolidated Financial Information
(in thousands, except share and per share data)
Statement of Income Data
Interest income
Interest expense
Net Interest Income
Impairment
Net interest income after impairment
Other Income
Operating Expenses
Income (Loss) Before Income Taxes
Income tax expense
Net Income (Loss)
Noncontrolling Interests in Income of Consolidated Subsidiaries
Net Income (Loss) Attributable to Common Stockholders
Net Income per Share of Common Stock, Basic
Net Income per Share of Common Stock, Diluted
Weighted Average Number of Shares of Common Stock Outstanding,
Basic
Weighted Average Number of Shares of Common Stock Outstanding,
Diluted
Dividends Declared per Share of Common Stock
Year Ended December 31,
December 8
through
December 31,
2014
2013
2012
2011
$
346,857
$
87,567
$
33,759
$
140,708
206,149
11,282
194,867
375,088
104,899
465,056
22,957
442,099
89,222
352,877
2.59
2.53
$
$
$
$
$
15,024
72,543
5,454
67,089
241,008
42,474
265,623
—
704
33,055
—
33,055
17,423
9,231
41,247
—
$
$
$
$
$
265,623
$
41,247
$
(326) $
— $
265,949
2.10
2.07
$
$
$
41,247
0.33
0.33
$
$
$
1,260
—
1,260
—
1,260
367
913
714
—
714
—
714
0.01
0.01
136,472,865
126,539,024
126,512,823
126,512,823
139,565,709
128,684,128
126,512,823
126,512,823
$
1.58
$
0.99
$
— $
—
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Balance Sheet Data
Investments in:
Excess mortgage servicing rights, at fair value
Excess mortgage servicing rights, equity method
investees, at fair value
Servicer advances, at fair value
Real estate securities, available-for-sale
Residential mortgage loans, held-for-investment
Residential mortgage loans, held-for-sale
Real estate owned
Consumer loans, equity method investees
Cash and cash equivalents
Total assets
Total debt
Total liabilities
Total New Residential stockholders’ equity
Noncontrolling interests in equity of consolidated
subsidiaries
Total equity
Supplemental Balance Sheet Data
Common shares outstanding
Book value per share of common stock
Other Data
Core earnings(A)
December 31,
2014
2013
2012
2011
$
417,733
$
324,151
$
245,036
$
43,971
330,876
3,270,839
2,463,163
47,838
1,126,439
61,933
—
212,985
8,093,690
6,062,299
6,243,765
1,596,089
352,766
2,665,551
1,973,189
33,539
—
—
215,062
271,994
5,958,658
4,109,329
4,445,583
1,265,850
—
—
289,756
—
—
—
—
—
534,876
150,922
156,520
378,356
253,836
247,225
—
1,849,925
1,513,075
378,356
141,434,905
126,598,987
—
—
—
—
—
—
—
—
43,971
—
4,163
39,808
—
39,808
$
$
11.28
219,261
$
$
10.00
129,997
$
29,054
$
1,132
(A)
We have four primary variables that impact our operating performance: (i) the current yield earned on our investments,
(ii) the interest expense incurred under the debt incurred to finance our investments, (iii) our operating expenses and
(iv) our realized and unrealized gains or losses, including any impairment and deferred tax, on our investments. “Core
earnings” is a non-GAAP measure of our operating performance excluding the fourth variable above and adjusting the
earnings from the consumer loan investment to a level yield basis. It is used by management to gauge our current
performance without taking into account: (i) realized and unrealized gains and losses, which although they represent a
part of our recurring operations, are subject to significant variability and are only a potential indicator of future economic
performance; (ii) incentive compensation paid to our Manager; and (iii) non-capitalized deal inception costs.
While incentive compensation paid to our Manager may be a material operating expense, we exclude it from core earnings
because (i) from time to time, a component of the computation of this expense will relate to items (such as gains or losses)
that are excluded from core earnings, and (ii) it is impractical to determine the portion of the expense related to core
earnings and non-core earnings, and the type of earnings (loss) that created an excess (deficit) above or below, as applicable,
the incentive compensation threshold. To illustrate why it is impractical to determine the portion of incentive compensation
expense that should be allocated to core earnings, we note that, as an example, in a given period, we may have core
earnings in excess of the incentive compensation threshold but incur losses (which are excluded from core earnings) that
reduce total earnings below the incentive compensation threshold. In such case, we would either need to (a) allocate zero
incentive compensation expense to core earnings, even though core earnings exceeded the incentive compensation
threshold, or (b) assign a “pro forma” amount of incentive compensation expense to core earnings, even though no
incentive compensation was actually incurred. We believe that neither of these allocation methodologies achieves a logical
result. Accordingly, the exclusion of incentive compensation facilitates comparability between periods and avoids the
distortion to our non-GAAP operating measure that would result from the inclusion of incentive compensation that relates
to non-core earnings.
With regard to non-capitalized deal inception costs, management does not view these costs as part of our core operations.
Non-capitalized deal inception costs are generally legal and valuation service costs, as well as other professional service
fees, incurred when we acquire certain investments. These costs are recorded as "General and administrative expenses"
in our Consolidated Statements of Income.
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In the fourth quarter of 2014, we modified our definition of core earnings to include accretion on held-for-sale loans as
if they continued to be held-for-investment. Although we intend to sell such loans, there is no guarantee that such loans
will be sold or that they will be sold within any expected timeframe. During the period prior to sale, we continue to
receive cash flows from such loans and believes that it is appropriate to record a yield thereon. This modification had no
impact on core earnings in 2014 or any prior period, but is expected to impact core earnings in periods subsequent to
loans being classified as held-for-sale.
Management believes that the adjustments to compute “core earnings” specified above allow investors and analysts to
readily identify the operating performance of the assets that form the core of our activity, assist in comparing the core
operating results between periods, and enable investors to evaluate our current performance using the same measure that
management uses to operate the business.
The primary differences between core earnings and the measure we use to calculate incentive compensation relate to (i)
realized gains and losses (including impairments) and (ii) non-capitalized deal inception costs. Both are excluded from
core earnings and included in our incentive compensation measure. Unlike core earnings, our incentive compensation
measure is intended to reflect all realized results of operations.
Core earnings does not represent cash generated from operating activities in accordance with GAAP and therefore should
not be considered an alternative to net income as an indicator of our operating performance or as an alternative to cash
flow as a measure of our liquidity and is not necessarily indicative of cash available to fund cash needs. For a further
description of the difference between cash flow provided by operations and net income, see “Management’s Discussion
and Analysis of Financial Consolidation and Results of Operations—Liquidity and Capital Resources.” Our calculation
of core earnings may be different from the calculation used by other companies and, therefore, comparability may be
limited. Set forth below is a reconciliation of core earnings to the most directly comparable GAAP financial measure (in
thousands):
Net income (loss) attributable to common stockholders
Impairment
Other Income adjustments:
Other Income
Other Income attributable to non-controlling interests
Deferred taxes attributable to Other Income, net of non-controlling
interests
Total Other Income Adjustments
Incentive compensation to affiliate
Non-capitalized deal inception costs
Core earnings of equity method investees:
Excess mortgage servicing rights
Consumer loans
Core Earnings
Year Ended December 31,
$
2014
352,877
11,282
$
2013
265,949
5,454
$
(375,088)
45,578
(241,008)
—
15,804
(313,706)
—
(241,008)
54,334
10,281
16,847
5,698
December 8
through
December 31,
2012
2011
$
41,247
—
(17,423)
—
—
(17,423)
—
5,230
714
—
(367)
—
—
(367)
—
785
33,799
70,394
219,261
$
23,361
53,696
129,997
$
$
—
—
29,054
$
—
—
1,132
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations is intended to help the reader understand
the results of operations and financial condition of New Residential. The following should be read in conjunction with the
consolidated financial statements and notes thereto included herein, and with Part I, Item 1A, “Risk Factors.”
GENERAL
New Residential is a publicly traded REIT primarily focused on opportunistically investing in, and actively managing, investments
related to residential real estate. We are externally managed by an affiliate of Fortress. Our goal is to drive strong risk-adjusted
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returns primarily through investments in (i) Excess MSRs, (ii) RMBS and non-agency RMBS call rights, as well as (iii) other
related opportunistic investments. New Residential’s investment guidelines are purposefully broad to enable us to make investments
in a wide array of assets in diverse markets, including non-real estate related assets such as consumer loans. We generally target
assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We aim to generate
attractive returns for our stockholders without the excessive use of financial leverage.
Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments. Our asset
allocation and target assets may change over time, depending on our Manager’s investment decisions in light of prevailing market
conditions. The assets in our portfolio are described in more detail below under “—Our Portfolio.”
On May 15, 2013, Newcastle completed the distribution of shares of New Residential to Newcastle stockholders of record as of
May 6, 2013. Following the distribution, New Residential is an independent, publicly-traded REIT (NYSE: NRZ).
New Residential completed a one-for-two reverse stock split in October 2014. The impact of this reverse stock split has been
retroactively applied to all periods presented herein.
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MARKET CONSIDERATIONS
Various market factors, which are outside of our control, affect our results of operations and financial condition. One such factor
is developments in the U.S. residential housing market. The residential mortgage industry continues to undergo major structural
changes that are transforming the way mortgages are originated, owned and serviced. Historically, the majority of the approximately
$10 trillion mortgage market has been serviced by large banks, which generally focus on conventional mortgages with low
delinquency rates. This has allowed for low-cost routine payment processing and required minimal borrower interaction. Following
the credit crisis, the need for “high-touch” specialty servicers, such as Nationstar, increased as loan performance declined,
delinquencies rose and servicing complexities broadened. Specialty servicers have proven more willing and better equipped to
perform the operationally intensive activities (e.g., collections, foreclosure avoidance and loan workouts) required to service credit-
sensitive loans.
Since 2010, banks have sold or committed to sell MSRs totaling more than $2 trillion. An MSR provides a mortgage servicer with
the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This
amount typically ranges from 25 to 50 bps multiplied by the UPB of the mortgages. Approximately 74% of MSRs were owned
by banks as of the third quarter of 2014, according to Inside Mortgage Finance. We expect this number to decline as banks face
pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny
and a more challenging servicing environment, among other reasons. As a result, we believe the volume of MSR sales is likely to
be elevated for some period of time.
We estimate that MSRs covering up to $150 billion of mortgages are currently for sale, which would require a capital investment
of approximately $1 to 1.5 billion based on current pricing dynamics. We believe that non-bank servicers who are constrained by
capital limitations will continue to sell a portion of the Excess MSRs or other servicing assets, such as advances. In addition,
approximately $1 trillion of new loans are expected to be created annually, according to the Mortgage Bankers Association. We
believe this creates an opportunity to enter into “flow arrangements,” whereby loan originators agree to sell Excess MSRs on
newly originated loans on a recurring basis (often monthly or quarterly). Given this combined dynamic, we believe $1 -2 trillion
of MSRs could be sold or available over the next few years. We believe that MSRs are being sold at a discount to historical pricing
levels, although increased competition for these assets has driven prices higher recently. There can be no assurance that we will
make additional investments in Excess MSRs or that any future investment in Excess MSRs will generate returns similar to the
returns on our original investments in Excess MSRs.
Interest rates have been volatile. In periods of rising interest rates, the rates of prepayments and delinquencies with respect to
mortgage loans generally decline. Generally, the value of our Excess MSRs is expected to increase when interest rates rise or
delinquencies decline, and the value is expected to decrease when interest rates decline or delinquencies increase, due to the effect
of changes in interest rates on prepayment speeds and delinquencies. Prepayment speeds and delinquencies could increase in the
current interest rate environment as a result of, among other things, a general economic recovery, government programs intended
to foster refinancing activity or other reasons, which could reduce the value of our investments. Moreover, the value of our Excess
MSRs is subject to a variety of factors, as described under “Risk Factors.” In the fourth quarter of 2014, the fair value of our
investments in Excess MSRs (directly and through equity method investees) increased by approximately $0.5 million and the
weighted average discount rate of the portfolio was reduced from 10.0% to 9.6%.
The timing, size and potential returns of future investments in Excess MSRs may be less attractive than our prior investments in
this sector due to a number of factors, most of which are beyond our control. In addition to changes in interest rates, such factors
include, but are not limited to, recent increased competition for Excess MSRs, which we believe is causing a related increase in
the price for these assets. In addition, regulatory and GSE approval processes have been more extensive and taken longer than the
process and timelines we experienced in prior periods, which has increased the amount of time and effort required to complete
transactions.
Beginning in April 2012, we began to invest in RMBS as a complement to our Excess MSR portfolio. As of the third quarter of
2014, approximately $7 trillion of the $10 trillion of residential mortgages outstanding had been securitized, according to Inside
Mortgage Finance. Approximately $6 trillion were Agency RMBS according to Inside Mortgage Finance, which are securities
issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The
balance has been securitized by either public trusts or PLS, and are referred to as Non-Agency RMBS.
The onset of the financial crisis in 2007 led to significant volatility in the prices for Non-Agency RMBS. The crisis resulted in a
widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling
by institutional investors (often in response to rating agency downgrades). While the prices of these assets have recovered from
their lows, from time to time there may be opportunities to acquire Non-Agency RMBS at attractive risk-adjusted yields, with the
potential for upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing Non-Agency
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RMBS may also rise if the number of buyers returns to pre-2007 levels. Furthermore, we believe that in many Non-Agency RMBS
vehicles there is a discrepancy between the value of the Non-Agency RMBS and the recovery value of the underlying collateral.
We intend to pursue opportunities to structure transactions that would enable us to realize this difference, particularly through the
exercise of call rights. We actively monitor the market for Non-Agency RMBS and our portfolio to determine when to strategically
purchase and sell Non-Agency RMBS from time to time. We currently expect that the size of our Non-Agency portfolio will
fluctuate depending primarily on our Manager’s assessment of expected yields and alternative investment opportunities. The
primary causes of mark-to-market changes in our RMBS portfolio are changes in interest rates, collateral performance and credit
spreads.
We do not expect changes in interest rates to have a meaningful impact on the net interest spread of our Agency and Non-Agency
portfolios. Our RMBS are primarily floating rate or hybrid (i.e., fixed to floating rate) securities, which we generally finance with
floating rate debt. Therefore, while rising interest rates will generally result in a higher cost of financing, they will also result in
a higher coupon payable on the securities. The net interest spread on our Agency RMBS portfolio as of December 31, 2014 was
1.87%, compared to 1.56% as of September 30, 2014. The net interest spread on our Non-Agency RMBS portfolio as of
December 31, 2014 was 1.85%, compared to 3.84% as of September 30, 2014.
We hold call rights on Non-Agency residential mortgage securitizations which become exercisable once the current collateral
balance reduces below a certain threshold of the original balance. We believe a call right is profitable when aggregate loan value
is greater than the sum of par on the loans minus any discount from acquired bonds, plus expenses related to such exercise. Profit
with respect to our call rights is generated by selectively retaining loans that meet our return thresholds or re-securitizing or selling
performing loans for a gain and, prior to exercise, purchasing certain underlying tranches at a discount to par. Upon exercise, we
are able to realize any remaining accretion to par. As interest rates increase, the value of our call rights could decrease.
In November 2013, we made our first investment in non-performing loans. During 2014, we continued to invest in the non-
performing loan sector, while also opportunistically selling assets. The scope of our involvement will fluctuate depending on our
Manager's assessment of relative value compared with alternative investment opportunities.
Credit performance also affects the value of our portfolio. Higher rates of delinquency and/or defaults can reduce the value of our
Excess MSRs, Non-Agency RMBS, Agency RMBS and loan portfolios. For our Excess MSRs on Agency portfolios and our
Agency RMBS, delinquency and default rates have an effect similar to prepayment rates. Our Excess MSRs on Non-Agency
portfolios are not affected by delinquency rates because the servicer continues to advance principal and interest until a default
occurs on the applicable loan; defaults have an effect similar to prepayments. For our Non-Agency RMBS and loans, higher default
rates could lead to greater loss of principal.
Credit spreads were relatively unchanged for the fourth quarter of 2014, having a minor impact on our portfolio. Credit spreads
measure the yield relative to a specified benchmark that the market demands on securities and loans based on such assets’ credit
risk. For a discussion of the way in which interest rates, credit spreads and other market factors affect us, see “Quantitative and
Qualitative Disclosures About Market Risk.”
The cash flow from our consumer loan portfolio is influenced by, among other factors, the U.S. macroeconomic environment, and
unemployment rates in particular. We believe that losses are highly correlated to unemployment; therefore, we expect that an
improvement in unemployment rates would improve the value of our investment, while deterioration in unemployment rates would
result in a decline in its value.
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OUR PORTFOLIO
Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments, as described
in more detail below. Our asset allocation and target assets may change over time, depending on our Manager’s investment decisions
in light of prevailing market conditions. The assets in our portfolio are described in more detail below (dollars in thousands).
Investments in:
Excess MSRs(C)
Servicer Advances(C)
Agency RMBS
Non-Agency RMBS
Residential Mortgage Loans
Real Estate Owned
Consumer Loans(C)
Total / Weighted Average
Reconciliation to GAAP total assets:
Cash and restricted cash
Derivative assets
Other assets
GAAP total assets
Outstanding
Face Amount
Amortized
Cost Basis(A)
$ 248,739,579
3,102,492
1,646,361
1,896,150
1,433,797
N/A
2,589,748
$ 259,408,127
$
$
589,551
3,186,622
1,724,329
710,515
1,174,277
61,933
N/A
7,447,227
Percentage of
Total
Amortized
Cost Basis
Carrying Value
Weighted
Average Life
(years)(B)
6.0
4.0
5.0
6.4
4.0
N/A
3.6
4.6
7.9% $
42.8
23.2
9.5
15.8
0.8
N/A
100.0% $
$
748,609
3,270,839
1,740,163
723,000
1,174,277
61,933
—
7,718,821
242,403
32,597
99,869
8,093,690
(A)
(B)
(C)
Net of impairment.
Weighted average life is based on the timing of expected principal reduction on the asset.
The outstanding face amount of Excess MSRs, servicer advances, and consumer loans is based on 100% of the face
amount of the underlying residential mortgage loans, currently outstanding advances, and consumer loans respectively.
Servicing Related Assets
Excess MSRs
As of December 31, 2014, we had approximately $748.6 million estimated carrying value of Excess MSRs (held directly and
through joint ventures). As of December 31, 2014, our completed investments represent an effective 32.5% to 80.0% interest in
the Excess MSRs (held either directly or through joint ventures) on pools of mortgage loans with an aggregate UPB of approximately
$248.7 billion. Nationstar is the servicer of $245.7 billion UPB of the loans underlying our investments in Excess MSRs to date,
and our servicers earn a basic fee in exchange for providing all servicing functions. In addition, when Nationstar sells Excess
MSRs to us, it generally retains a 20% to 35% interest in the Excess MSRs and all ancillary income associated with the portfolios.
In our capacity as owner of the Excess MSRs, we do not have any servicing duties, liabilities or obligations associated with the
servicing of the portfolios underlying any of our Excess MSRs. However, we, through co-investments made by our subsidiaries,
may separately agree to do so and have separately purchased the servicer advances, including the right to receive the basic fee
component of related MSRs, on the Non-Agency portfolios underlying our Excess MSR investments. See “—Servicer Advances”
below.
In December 2014, we agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs, all of the servicer advances and related
basic fee portion of the MSR (the “Advance Fee”), and a portion of the call rights related to an underlying pool of residential
mortgage loans with a UPB of approximately $3.0 billion which is serviced by Specialized Loan Servicing LLC (“SLS”). Fortress-
managed funds acquired the other 50% of the Excess MSRs. The aggregate purchase price was approximately $229.7 million.
The par amount of the total advance commitments for the SLS transaction are $219.2 million (with related financing of $195.5
million). As of December 31, 2014, the closed portion of the purchase of $93.8 million included $8.4 million for 50% of the Excess
MSRs, $83.8 million for servicer advances and Advance Fee (of which $74.3 million was financed as of December 31, 2014),
and $1.6 million to fund a portion of the call rights on 57 of the 99 underlying securitization trusts. The remaining portion of the
purchase price of $135.9 million included servicer advances and Advance Fee unfunded commitments of approximately $133.8
million that were funded in January 2015 (with approximately $121.2 million of related financing) and $2.1 million to fund the
remaining portion of the call rights on 57 of the 99 underlying securitization trusts. SLS will continue to service the loans in
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exchange for a servicing fee of 10.75 bps and an incentive fee (the “Incentive Fee”) which is based on the ratio of the outstanding
servicer advances to the UPB of the underlying loans.
Each of our Excess MSR investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements,
we are 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. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan
resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar
of a previously recaptured loan.
The tables below summarize the terms of our investments in Excess MSRs completed as of December 31, 2014.
Summary of Direct Excess MSR Investments as of December 31, 2014
MSR Component(A)
Excess MSR
Initial
UPB (bn)
Current
UPB (bn)(B)
Weighted
Average
MSR (bps)
Weighted
Average
Excess MSR
(bps)
Interest in
Excess
MSR (%)
Purchase
Price (mm)
Carrying
Value
(mm)
$
61.4
$
—
61.4
$
73.3
$
—
73.3
48.2
—
48.2
54.3
—
54.3
29 bps
22 bps
32.5%-66.7% $
206.2
$
188.7
28
29
32.5%-66.7%
21
22
—
206.2
28.8
217.5
35 bps
15 bps
33.3%-80.0% $
213.4
$
189.8
26
34
33.3%-80.0%
20
15
—
213.4
10.4
200.2
$
134.7
$
102.5
32 bps
18 bps
$
419.6
$
417.7
Agency
Original and Recaptured
Pools
Recapture
Agreements
Non-Agency(C)
Original and Recaptured
Pools
Recapture
Agreements
Total/Weighted
Average
(A)
(B)
(C)
The MSR is a weighted average as of December 31, 2014, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant). The average is weighted by the amortized cost
basis of the mortgage loan portfolio.
As of December 31, 2014.
Excess MSR investments in which we also invested in related servicer advances, including the basic fee component of
the related MSR as of December 31, 2014 (Note 6 to our Consolidated Financial Statements included herein).
Summary of Excess MSR Investments Through Equity Method Investees as of December 31, 2014
MSR Component(A)
Initial
UPB
(bn)
Current
UPB (bn)(B)
Weighted
Average
MSR
(bps)
Weighted
Average
Excess
MSR
(bps)
NRZ
Interest in
Investee
(%)
Investee
Interest in
Excess MSR
(%)
NRZ Effective
Ownership
(%)
Investee
Carrying
Value (mm)
Agency
Original and Recaptured Pools
$
125.2
$
Recapture Agreements
Non-Agency(C)
—
125.2
Original and Recaptured Pools
$
75.6
$
Recapture Agreements
—
75.6
87.6
—
87.6
58.7
—
58.7
32 bps
19 bps
32
32
23
19
50.0%
50.0%
66.7 %
66.7 %
33.3% $
33.3%
35 bps
12 bps
50.0% 66.7%-77.0%
33.3-38.5% $
26
35
20
12
50.0% 66.7%-77.0%
33.3-38.5%
Total/Weighted Average
$
200.8
$
146.3
33 bps
17 bps
$
370.0
86.8
456.8
181.4
15.1
196.5
653.3
(A)
The MSR is a weighted average as of December 31, 2014, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant).
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(B)
(C)
As of December 31, 2014.
Excess MSR investments in which we also invested in related servicer advances, including the basic fee component of
the related MSR as of December 31, 2014 (Note 6 to our consolidated financial statements included herein).
The tables below summarize the terms of our investments in Excess MSRs that were not yet completed as of December 31, 2014 .
Summary of Pending Excess MSR Investments (Committed but Not Closed)
Agency
Total/Weighted Average
Commitment
Date
May-14
Initial
UPB
(bn)
$
$
2.1
2.1
Current
UPB (bn)(B)
2.1
$
$
2.1
MSR Component(A)
MSR
(bps)
Excess
MSR
(bps)
Direct
Interest in
Excess
MSR (%)
NRZ Excess
MSR Initial
Investment
(mm)(C)
33 bps
33 bps
23 bps
23 bps
33.3% $
$
4.6
4.6
(A)
(B)
(C)
The MSR is a weighted average as of the commitment date, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant).
As of commitment date.
The actual amount invested will be based on the UPB at the time of close.
In addition, in January 2015, we committed to purchase $30.0 billion UPB of legacy Agency Excess MSRs, subject to the completion
of definitive documentation between Nationstar and the applicable seller of the related MSR and definitive documentation between
us and with Nationstar.
The following table summarizes our Excess MSR investments closed subsequent to December 31, 2014:
Summary of Excess MSR Investments closed subsequent to December 31, 2014
MSR Component(A)
Commitment
Date
Initial UPB
(bn)
Current UPB
(bn)(B)
MSR
(bps)
Excess
MSR
(bps)
Direct
Interest in
Excess
MSR (%)
NRZ Excess
MSR Initial
Investment
(mm)(C)
Agency
Nov-14
Total/Weighted Average
$
$
8.4
8.4
$
$
8.4
8.4
27 bps
19 bps
33.3% $
$
23.8
23.8
(A)
(B)
(C)
The MSR is a weighted average as of the date the transaction closed and the Excess MSR represents the difference
between the weighted average MSR and the basic fee (which fee remains constant).
As of the date the transaction closed.
Amounts invested based on the UPB at the time of close. We have additional commitments to invest $2.6 million in this
pool.
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The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of
December 31, 2014 (dollars in thousands):
Current
Carrying
Amount
Original
Principal
Balance
Current
Principal
Balance
Number
of Loans
WA
FICO
Score(A)
WA
Coupon
WA
Maturity
(months)
Average
Loan Age
(months)
Adjustable
Rate
Mortgage
%(B)
One
Month
CPR(C)
One
Month
CRR(D)
One
Month
CDR(E)
One Month
Recapture
Rate
Collateral Characteristics
Agency
Original Pools
$ 159,846
$ 61,378,618
$ 42,762,765
224,417
Recaptured
Loans
Recapture
Agreement
28,887
28,786
—
—
5,455,136
30,984
—
—
$ 217,519
$ 61,378,618
$ 48,217,901
255,401
Non-Agency(F)
Original Pools
187,983
73,264,901
53,928,009
259,338
1,829
10,402
—
—
335,848
1,546
—
—
$ 200,214
$ 73,264,901
$ 54,263,857
260,884
Recaptured
Loans
Recapture
Agreement
Total/
Weighted
Average
716
669
—
710
667
750
—
667
4.1%
4.5%
—%
4.1%
4.4%
4.3%
—%
4.4%
273
309
—
277
272
302
—
272
$ 417,733
$ 134,643,519
$102,481,758
516,285
688
4.3%
275
68
14
—
62
108
15
—
108
86
17.3%
14.2%
12.3%
2.1%
26.6%
0.2%
3.6%
3.4%
0.2%
—%
—%
—%
15.3%
13.0%
11.3%
—%
1.9%
9.0%
—%
24.6%
47.1%
12.3%
7.6%
5.1%
10.3%
5.6%
3.2%
3.2%
—%
44%
—%
—%
46.8%
12.2%
—%
7.6%
—%
5.1%
—%
10.5%
32.0%
12.6%
9.3%
3.6%
17.1%
Uncollected
Payments(G)
Delinquency
30 Days(G)
Delinquency
60 Days(G)
Delinquency
90+ Days(G)
Loans in
Foreclosure
Real
Estate
Owned
Loans in
Bankruptcy
Collateral Characteristics
6.9%
1.7%
—%
6.3%
20.2%
0.5%
—%
20.1%
13.6%
3.2%
1.9%
—%
3.1%
9.8%
0.5%
—%
9.7%
6.6%
1.0%
0.2%
—%
0.9%
2.3%
—%
—%
2.3%
1.7%
0.8%
0.2%
—%
0.7%
3.1%
—%
—%
3.1%
2.0%
3.3%
0.3%
—%
2.9%
11.6%
—%
—%
11.6%
1.0%
0.1%
—%
0.9%
2.0%
—%
—%
2.0%
7.5%
1.4%
2.2%
0.2%
—%
1.9%
4.7%
—%
—%
4.7%
3.4%
Agency
Original Pools
Recaptured Loans
Recapture
Agreement
Non-Agency(F)
Original Pools
Recaptured Loans
Recapture
Agreement
Total/Weighted
Average
(A)
(B)
(C)
(D)
(E)
(F)
(G)
The WA FICO score is based on the weighted average of information provided by the loan servicer on a monthly basis.
The loan servicer generally updates the FICO score on a monthly basis. Weighted averages exclude collateral information
for which collateral data was not available as of the report date.
Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to
adjustable rate mortgages.
One Month CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the month
as a percentage of the total principal balance of the pool.
One Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during
the month as a percentage of the total principal balance of the pool.
One Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments
(defaults) during the month as a percentage of the total principal balance of the pool.
Excess MSR investments in which we also invested in related servicer advances, including the basic fee component of
the related MSR as of December 31, 2014 (Note 6 to our consolidated financial statements included herein).
Uncollected Payments represents the percentage of the total principal balance of the pool that corresponds to loans for
which the most recent payment was not made. Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days
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represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30–59
days, 60–89 days or 90 or more days, respectively.
The following table summarizes the collateral characteristics as of December 31, 2014 of the loans underlying Excess MSR
investments made through joint ventures accounted for as equity method investees (dollars in thousands). For each of these pools,
we own a 50% interest in an entity that invested in a 67% to 77% interest in the Excess MSRs.
Current
Carrying
Amount
Original
Principal
Balance
Current
Principal
Balance
NRZ
Effective
Ownership
(%)
Number
of Loans
WA
FICO
Score(A)
WA
Coupon
WA
Maturity
(months)
Average
Loan
Age
(months)
Adjustable
Rate
Mortgage
%(B)
One
Month
CPR(C)
One
Month
CRR(D)
One
Month
CDR(E)
One
Month
Recapture
Rate
Collateral Characteristics
Agency
Original
Pools
Recaptured
Loans
Recapture
Agreement
Non-
Agency(F)
Original
Pools
Recaptured
Loans
Recapture
Agreement
Total/
Weighted
Average
$ 313,559
$125,191,420
$ 78,375,820
33.3 %
593,538
56,500
86,756
—
—
9,208,857
33.3 %
57,544
—
33.3 %
—
$ 456,815
$125,191,420
$ 87,584,677
651,082
178,944
75,574,361
58,273,172
33.3%-38.5%
315,817
2,424
15,110
—
—
399,972
33.3%-38.5%
1,760
— 33.3%-38.5%
—
$ 196,478
$ 75,574,361
$ 58,673,144
317,577
672
688
—
674
660
742
—
661
5.0 %
4.5 %
— %
4.9 %
4.7 %
4.3 %
— %
4.7 %
288
311
—
290
257
285
—
258
81
19
—
74
108
12
—
108
10.3%
18.5%
14.9%
4.1%
23.4%
0.6%
6.5%
4.2%
2.3%
16.9%
—%
9.3%
—%
—%
17.2%
13.8%
—%
3.9%
—%
22.7%
47.9%
14.5%
8.9%
6.0%
10.8%
5.0%
3.0%
3.0%
—%
—%
—%
47.6%
14.4%
—%
8.9%
—%
6.0%
—%
—%
10.7%
$ 653,293
$200,765,781
$ 146,257,821
968,659
669
4.8 %
277
88
24.7%
16.1%
11.8%
4.7%
17.9%
Uncollected
Payments(G)
Delinquency
30 Days(G)
Delinquency
60 Days(G)
Delinquency
90+ Days(G)
Loans in
Foreclosure
Real
Estate
Owned
Loans in
Bankruptcy
Collateral Characteristics
10.2%
3.6%
—%
9.5%
25.7%
0.8%
—%
25.5%
15.9%
6.4%
3.4%
—%
6.0%
4.3%
0.6%
—%
4.3%
5.3%
1.6%
0.9%
—%
1.5%
1.6%
0.1%
—%
1.6%
1.6%
1.2%
0.8%
—%
1.1%
3.6%
—%
—%
3.6%
2.1%
4.4%
0.5%
—%
4.0%
16.2%
—%
—%
16.1%
1.3%
—%
—%
1.2%
1.9%
—%
—%
1.9%
8.8%
1.5%
2.5%
0.7%
—%
2.3%
4.5%
0.2%
—%
4.5%
3.1%
Agency
Original Pools
Recaptured Loans
Recapture
Agreement
Non-Agency(F)
Original Pools
Recaptured Loans
Recapture
Agreement
Total/Weighted
Average
(A)
(B)
(C)
(D)
(E)
The WA FICO score is based on the weighted average of information provided by the loan servicer on a monthly basis.
The loan servicer generally updates the FICO score on a monthly basis.
Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to
adjustable rate mortgages.
One Month CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the month
as a percentage of the total principal balance of the pool.
One Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during
the month as a percentage of the total principal balance of the pool.
One Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments
(defaults) during the month as a percentage of the total principal balance of the pool.
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(F)
(G)
Excess MSR investments in which we also invested in related servicer advances, including the basic fee component of
the related MSR as of December 31, 2014 (Note 6 to our consolidated financial statements included herein).
Uncollected Payments represents the percentage of the total principal balance of the pool that corresponds to loans for
which the most recent payment was not made. Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days
represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59
days, 60-89 days or 90 or more days, respectively.
Servicer Advances
In December 2013, we made our first investment in servicer advances, referred to as Transaction 1. We made the investment
through the Buyer, a joint venture entity capitalized by us and certain third-party co-investors.
In Transaction 1, the Buyer acquired from Nationstar Mortgage LLC (“Nationstar”) approximately $3.2 billion of outstanding
servicer advances (including deferred servicing fees) and the basic fee component of the related MSRs on Non-Agency mortgage
loans with an aggregate UPB of approximately $54.6 billion. In exchange, the Buyer (i) paid approximately $3.2 billion (the
“Initial Purchase Price”), and (ii) agreed to purchase future servicer advances related to the loans at par. The Initial Purchase Price
is equal to the value of the discounted cash flows from the outstanding and future advances and from the basic fee. We previously
acquired an interest in the Excess MSRs related to these loans. See above “—Our Portfolio—Servicing Related Assets—Excess
MSRs.” The Buyer funded the Initial Purchase Price with approximately $2.8 billion of debt and $0.4 billion of equity, excluding
working capital. As of December 31, 2014, the Buyer had settled approximately $3.2 billion of servicer advances related to
Transaction 1, which represents substantially all of Transaction 1.
See “–SA Call Right” below for a discussion of Transaction 2.
Nationstar remains the named servicer under the related servicing agreements and continues to perform all servicing duties for
the underlying loans. The Buyer has the right, but not the obligation, to become the named servicer, subject to obtaining consents
and ratings agency letters required for a formal change of the named servicer. In exchange for Nationstar’s performance of servicing
duties, the Buyer pays Nationstar a servicing fee ("the Servicing Fee") and, in the event that the aggregate cash flows from the
advances and the basic fee generate a 14% return ("the Targeted Return") on the Buyer’s invested equity, a performance fee ("the
Performance Fee"). Nationstar is majority owned by private equity funds managed by an affiliate of our manager. For more
information about the fee structure, see below.
In December 2014, we completed the SLS Transaction, as described under "—Excess MSRs" above.
The following is a summary of our investments in servicer advances, including the right to the basic fee component of the related
MSRs (dollars in thousands):
Amortized
Cost Basis
Carrying
Value(A)
Weighted
Average
Discount
Rate
Weighted
Average Life
(Years)(B)
Change in Fair
Value Recorded in
Other Income for
Year then Ended
December 31, 2014
Servicer advances
$
3,186,622
$
3,270,839
5.4%
4.0
$
84,217
(A)
(B)
Carrying value represents the fair value of the investment in servicer advances, including the basic fee component of the
related MSRs.
Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this
investment.
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The following is additional information regarding our servicer advances, and related financing, as of December 31, 2014 (dollars
in thousands):
Loan-to-Value Cost of Funds(B)
UPB of
Underlying
Residential
Mortgage
Loans
Outstanding
Servicer
Advances
Servicer
Advances to
UPB of
Underlying
Residential
Mortgage
Loans
Carrying
Value of
Notes
Payable
Gross Net(A)
Gross
Net
December 31, 2014
Servicer advances(C)
$ 96,547,773
$
3,102,492
3.2% $ 2,890,230
91.4% 90.4%
3.0%
2.3%
(A)
(B)
(C)
Ratio of face amount of borrowings to value of servicer advance collateral, net of any interest reserve.
Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and
facility fees. Net Cost of Funds excludes facility fees.
The following types of advances comprise the investment in servicer advances:
Principal and interest advances
Escrow advances (taxes and insurance advances)
Foreclosure advances
Total
$
$
729,713
1,600,713
772,066
3,102,492
December 31, 2014
The following table sets forth information specifically regarding the Buyer (and excludes the SLS Transaction) (dollars in
thousands):
Advances Purchased
Activity Since Purchase
Ending Advance Balance
Net Debt(A)
Total Equity Invested(B)
Distributions Since Purchase
Net Equity Invested(B)
New Residential’s Equity % in Buyer(C)
Co-investors’ Equity % in Buyer(C)
(A)
(B)
(C)
Outstanding debt net of restricted cash.
Includes working capital.
Based on cash basis equity.
$
$
$
$
$
$
As of 12/31/2014
5,184,860
(2,165,673)
3,019,187
2,787,273
702,359
403,672
298,687
44.5%
55.5%
Subsequent to December 31, 2014 and prior to February 28, 2015, we funded a total of $458.0 million of servicer advances and
recovered $571.1 million of existing servicer advances. Notes payable outstanding decreased by $100.4 million and restricted
cash decreased approximately $1.1 million in relation to these fundings. Additionally, we paid $8.1 million of contractual incentive
fees.
SA Call Right
In Transaction 1, the Buyer also acquired the right, but not the obligation (the “SA Call Right”), to purchase additional servicer
advances from Nationstar, including the basic fee component of the related MSRs, on terms substantially similar to the terms of
Transaction 1. As in Transaction 1, (i) the purchase price for the servicer advances, including the basic fee, was the outstanding
balance of the advances at the time of purchase and (ii) the Buyer will be obligated to purchase future servicer advances on the
related loans. We previously acquired an interest in the Excess MSRs related to these loans. See above “—Our Portfolio—Servicing
Related Assets—Excess MSRs.”
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The Buyer exercised the SA Call Right, in part, in Transaction 2. The outstanding balance of the servicer advances subject to the
portion of the SA Call Right that was exercised was approximately $1.1 billion in the first quarter of 2014. An additional $921.3
million of the remaining portion of the outstanding balance of the servicer advances subject to the SA Call Right was exercised
in the second quarter. As of June 30, 2014, the Buyer had settled $2.0 billion of advances related to Transaction 2, which was
financed with approximately $1.8 billion of debt. The SA Call Right expired on June 30, 2014. At the time of expiration,
approximately $0.4 billion of advances remained related to Transaction 2.
The Buyer
We, through a wholly owned subsidiary, are the managing member of the Buyer. As of December 31, 2014, we owned approximately
44.5% of the Buyer, which corresponds to a $134.7 million equity investment (net of distributions).
In the event that any member does not fund its capital contribution, each other member has the right, but not the obligation, to
make pro rata capital contributions in excess of its stated commitment, provided that any member’s decision not to fund any such
capital contribution will result in a reduction of its membership percentage.
Servicing Fee
Nationstar and SLS remain the named servicers under the applicable servicing agreements and will continue to perform all servicing
duties for the related mortgage loans. The Buyer has the right, but not the obligation, to become the named servicer with respect
to its investments, subject to obtaining consents and ratings agency letters required for a formal change of the named servicer. In
exchange for their services, we pay Nationstar and SLS a monthly servicing fee representing a portion of the amounts from the
purchased basic fee.
The Nationstar Servicing Fee is equal to a fixed percentage (the “Servicing Fee Percentage”) of the amounts from the purchased
basic fee. The Servicing Fee Percentage as of December 31, 2014 is equal to approximately 9.2%, which is equal to (i) 2 basis
points divided by (ii) the basic fee, which is 21.6 basis points on a weighted average basis as of December 31, 2014. The SLS
servicing fee is equal to 10.75 bps, based on the servicing fee collections of the underlying loans.
Targeted Return/Incentive Fee
The Targeted Return and the Performance Fee, with respect to Transaction 1 and Transaction 2, are designed to achieve three
objectives: (i) provide a reasonable risk-adjusted return to the Buyer based on the expected amount and timing of estimated cash
flows from the purchased basic fee and advances, with both upside and downside based on the performance of the investment,
(ii) provide Nationstar with a sufficient fee to compensate it for acting as servicer, and (iii) provide Nationstar with an incentive
to effectively service the underlying loans. The Targeted Return implements these objectives by allocating payments in respect of
the purchased basic fee between the Buyer and Nationstar. The Incentive Fee functions in the same fashion with respect to the
SLS Transaction.
The amount available to satisfy the Targeted Return is equal to: (i) the amounts from the purchased basic fee, minus (ii) the
Servicing Fee (“Net Collections”). The Buyer will retain the amount of Net Collections necessary to achieve the Targeted Return.
Amounts in excess of the Targeted Return will be used to pay the Performance Fee.
The Targeted Return, which is payable monthly, is generally equal to (i) 14% multiplied by (ii) the Buyer’s total invested capital.
Total invested capital is generally equal to the sum of the Buyer’s (i) equity in advances as of the beginning of the prior month,
plus (ii) working capital (equal to a percentage of the equity as of the beginning of the prior month), plus (iii) equity and working
capital contributed during the course of the prior month.
The Targeted Return is calculated after giving effect to (i) interest expense on the advance financing, (ii) other expenses and fees
of the Buyer and its subsidiaries related to financing facilities, (iii) write-offs on account of any non-recoverable servicer advances,
and (iv) any shortfall with respect to a prior month in the satisfaction of the Targeted Return.
The Performance Fee is calculated as follows. Pursuant to a Master Servicing Rights Purchase Agreement and related Sale
Supplements, Net Collections is divided into two subsets: the “Retained Amount” and the “Surplus Amount.” If the amount
necessary to achieve the Targeted Return is equal to or less than the Retained Amount, then 50% of the excess Retained Amount
(if any) and 100% of the Surplus Amount is paid to Nationstar as the Performance Fee. If the amount necessary to achieve the
Targeted Return is greater than the Retained Amount but less than Net Collections, then 100% of the excess Surplus Amount is
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paid to Nationstar as a Performance Fee. Performance Fee payments were made to Nationstar in the amount of $25.3 million
during the year ended December 31, 2014.
The Incentive Fee, with respect to the SLS Transaction, is equal to up to 4.0 bps on the UPB of the underlying loans, depending
on the ratio of the outstanding servicer advances to the UPB of the underlying loans.
Residential Securities and Loans
Real Estate Securities
As of December 31, 2014, we had approximately $3.5 billion face amount of real estate securities, including $1.6 billion of Agency
RMBS and $1.9 billion of Non-Agency RMBS. These investments were financed with repurchase agreements with an aggregate
face amount of approximately $1.7 billion for Agency RMBS and approximately $539.0 million for Non-Agency RMBS. As of
December 31, 2014, a total face amount of $1.7 billion of our Non-Agency portfolio and approximately $92.9 million of our
Agency portfolio was serviced or master serviced by Nationstar. The total UPB of the loans underlying these Nationstar serviced
Non-Agency RMBS was approximately $7.5 billion as of December 31, 2014. We hold a limited right to cleanup call options with
respect to certain securitization trusts master serviced or serviced by Nationstar with an aggregate UPB of underlying mortgage
loans of approximately $93.4 billion, whereby, when the outstanding balance falls below a pre-determined threshold, we can
effectively purchase the underlying mortgage loans by repaying all of the outstanding securitization financing at par, in exchange
for a fee paid to Nationstar. We similarly hold a limited right to cleanup call options with respect to certain securitization trusts
master serviced by SLS with an aggregate UPB of underlying mortgage loans of approximately $1.9 billion.
On May 27, 2014, we exercised our call rights related to sixteen Non-Agency RMBS trusts and purchased performing and non-
performing residential mortgage loans contained in such trusts prior to their termination. We owned $17.4 million face amount of
securities issued by these trusts and received par on these securities, which had an amortized cost basis of $12.0 million prior to
the repayment. Refer to Note 8 in our consolidated financial statements for further details on this transaction.
On August 25, 2014, we exercised our call rights related to nineteen Non-Agency RMBS trusts and purchased performing and
non-performing residential mortgage loans contained in such trusts prior to their termination. We owned $15.4 million face amount
of securities issued by these trusts and received par on these securities, which had an amortized cost basis of $13.1 million prior
to the repayment. Refer to Note 8 in our consolidated financial statements for further details on this transaction.
In December 2014, we purchased $186.7 million face amount of Non-Agency RMBS for approximately $114.3 million. The
investment was financed with an $84.6 million repurchase agreement with the same counterparty from which we purchased the
securities. This purchase was accounted for as a linked transaction (Note 10 to our Consolidated Financial Statements included
herein).
On December 26, 2014, we exercised our call rights related to twenty-five Non-Agency RMBS trusts and purchased performing
and non-performing residential mortgage loans contained in such trusts prior to their termination. We owned $27.9 million face
amount of securities issued by these trusts and received par on these securities, which had an amortized cost basis of $24.0 million
prior to the repayment. Refer to Note 8 in our consolidated financial statements for further details on this transaction.
Subsequent to December 31, 2014, we acquired Non-Agency RMBS with an aggregate face amount of approximately $40.7
million for approximately $26.1 million, financed with repurchase agreements. We acquired Agency RMBS with an aggregate
face amount of approximately $980.7 million for approximately $1.0 billion, financed with repurchase agreements. We sold Non-
Agency RMBS with a face amount of $245.3 million and an amortized cost basis of approximately $222.2 million for approximately
$223.9 million and recorded a gain of approximately $1.8 million. We sold Agency RMBS with a face amount of $1.0 billion and
an amortized cost basis of approximately $1.0 billion for approximately $1.1 billion and recorded a gain of approximately $20.4
million.
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Agency RMBS
The following table summarizes our Agency RMBS portfolio as of December 31, 2014 (dollars in thousands):
Asset Type
Agency ARM RMBS
Agency Specified Pools
Agency RMBS
Gross Unrealized
Outstanding
Face Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value(A)
Outstanding
Repurchase
Agreements
$
$
622,354
$
662,830
$
4,233
$ (2,738) $
664,325
$
656,379
1,024,007
1,061,499
14,339
1,646,361
$ 1,724,329
$ 18,572
— 1,075,838
$ (2,738) $ 1,740,163
1,051,223
$ 1,707,602
(A)
Fair value, which is equal to carrying value for all securities.
The following table summarizes the reset dates of our Agency ARM RMBS portfolio as of December 31, 2014 (dollars in thousands):
Weighted Average
Periodic Cap
Months to Next Reset(A)
Number of
Securities
Outstanding
Face Amount
Amortized
Cost Basis
Percentage of
Total
Amortized
Cost Basis
Carrying
Value
Coupon Margin
1st Coupon
Adjustment(B)
Subsequent
Coupon
Adjustment(C)
Lifetime
Cap(D)
Months to
Reset(E)
1 - 12
(A)
(B)
(C)
(D)
(E)
88
$
622,354
$
662,830
100.0% $
664,325
2.7%
1.8%
5.0%
2.0%
9.6%
5
Of these investments, 84.4% reset based on 12 month LIBOR index, 4.5% reset based on 6 month LIBOR Index, 0.8%
reset based on 1 month LIBOR, and 10.3% reset based on the 1 year Treasury Constant Maturity Rate. After the initial
fixed period, 94.7% of these securities will reset annually and 5.3% will reset semi-annually.
Represents the maximum change in the coupon at the end of the fixed rate period for 24 securities (36.2% of the current
face of this category). The remaining 64 securities (63.8% of the current face of this category) are not applicable, as they
are past the first coupon adjustment.
Represents the maximum change in the coupon at each reset date subsequent to the first coupon adjustment.
Represents the maximum coupon on the underlying security over its life.
Represents recurrent weighted average months to the next interest rate reset.
The following table summarizes the characteristics of our Agency RMBS portfolio and of the collateral underlying our Agency
RMBS as of December 31, 2014 (dollars in thousands):
Agency RMBS Characteristics
Collateral
Characteristics
Vintage(A)
Number of
Securities
Outstanding
Face Amount
Amortized
Cost Basis
Percentage
of Total
Amortized
Cost Basis
Carrying
Value
Weighted
Average
Life (Years)
3 Month CPR(B)
Pre-2006
2006
2007
2008
2009
2010
2011
2012 and later
Total/Weighted
Average
$
24
5
16
7
8
16
5
23
$
106,498
16,488
70,356
33,841
59,067
156,616
112,539
17,475
74,748
36,011
63,377
167,767
6.5% $
1.0%
4.3%
2.1%
3.7%
9.7%
114,155
17,543
75,169
36,242
63,100
166,985
48,605
1,154,890
51,064
1,201,348
51,745
3.0%
69.7% 1,215,224
104
$ 1,646,361
$ 1,724,329
100.0% $ 1,740,163
5.2
5.3
5.1
5.1
4.6
4.3
4.7
5.1
5.0
11.2%
0.5%
9.8%
6.9%
21.1%
23.9%
5.9%
5.5%
8.4%
(A)
(B)
The year in which the securities were issued.
Three month average constant prepayment rate.
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The following table summarizes the net interest spread of our Agency RMBS portfolio as of December 31, 2014:
Net Interest Spread(A)
Weighted Average Asset Yield
Weighted Average Funding Cost
Net Interest Spread
2.22%
0.35%
1.87%
(A)
The Agency RMBS portfolio consists of 38.4% floating rate securities and 61.6% fixed rate securities. See table above
for details on rate resets of the floating rate securities.
Non-Agency RMBS
The following table summarizes our Non-Agency RMBS portfolio as of December 31, 2014 (dollars in thousands):
Asset Type
Non-Agency RMBS
Outstanding
Face
Amount
Amortized
Cost Basis
Gross Unrealized
Gains
Losses
Carrying
Value(A)
Outstanding
Repurchase
Agreements
$ 1,896,150
$ 710,515
$ 15,327
$ (2,842) $ 723,000
$
539,049
(A)
Fair value, which is equal to carrying value for all securities.
The following tables summarize the characteristics of our Non-Agency RMBS portfolio and of the collateral underlying our
Non-Agency RMBS as of December 31, 2014 (dollars in thousands):
Non- Agency RMBS Characteristics
Average
Minimum
Rating(B)
Number
of
Securities
Outstanding
Face
Amount
Amortized
Cost Basis
Percentage
of Total
Amortized
Cost Basis
Carrying
Value
Principal
Subordination(C)
Excess
Spread(D)
CCC+
CCC+
CCC-
CCC+
73
27
23
19
$
95,411
$ 70,364
9.9% $
70,680
142,742
234,974
1,423,023
96,080
196,934
347,137
13.5%
27.7%
48.9%
104,317
197,739
350,264
19.5%
18.5%
18.0%
3.7%
1.8%
2.4%
2.5%
1.2%
CCC
142
$ 1,896,150
$ 710,515
100.0% $ 723,000
17.3%
2.3%
Weighted
Average
Life
(Years)
Weighted
Average
Coupon
5.2
7.8
6.4
6.3
6.4
2.1%
1.1%
2.4%
2.0%
2.0%
Vintage(A)
Pre 2004
2004
2005
2006 and later
Total/Weighted
Average
Vintage(A)
Pre 2004
2004
2005
2006 and later
Total/Weighted Average
Collateral Characteristics(E)
Average
Loan Age
(years)
Collateral
Factor(F)
3 month
CPR(G)
12.5
10.7
10.7
9.3
10.2
0.05
0.08
0.16
0.36
0.24
10.2%
12.4%
9.9%
12.5%
11.5%
Delinquency(H)
15.3%
20.1%
16.3%
18.8%
18.0%
Cumulative
Losses to
Date
4.2%
3.8%
9.7%
10.4%
8.7%
(A)
(B)
(C)
(D)
The year in which the securities were issued.
Ratings provided above were determined by third party rating agencies, represent the most recent credit ratings available
as of the reporting date and may not be current. This excludes the ratings of the collateral underlying five bonds for which
we were unable to obtain rating information. We had no assets that were on negative watch for possible downgrade by
at least one rating agency as of December 31, 2014.
The percentage of the outstanding face amount of securities and residual interests that is subordinate to our investments.
This excludes interest-only bonds.
The current amount of interest received on the underlying loans in excess of the interest paid on the securities, as a
percentage of the outstanding collateral balance for the quarter ended December 31, 2014.
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(E)
(F)
(G)
(H)
The weighted average loan size of the underlying collateral is $209.2 thousand. This excludes the collateral underlying
one bond, due to unavailable information.
The ratio of original UPB of loans still outstanding.
Three month average constant prepayment rate and default rates.
The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered REO.
The following table sets forth the geographic diversification of the loans underlying our Non-Agency RMBS as of December 31,
2014 (dollars in thousands):
Geographic Location
Western U.S.
Southeastern U.S.
Northeastern U.S.
Midwestern U.S.
Southwestern U.S.
Other(A)
Outstanding Face
Amount
$
$
779,930
409,755
344,716
190,480
170,829
440
1,896,150
Percentage of
Total Outstanding
41.1%
21.6%
18.2%
10.0%
9.0%
0.1%
100.0%
(A)
Represents collateral for which we were unable to obtain geographical information.
The following table summarizes the net interest spread of our Non-Agency RMBS portfolio as of December 31, 2014:
Net Interest Spread(A)
Weighted Average Asset Yield
Weighted Average Funding Cost
Net Interest Spread
3.37%
1.52%
1.85%
(A)
The Non-Agency RMBS portfolio consists of 85.0% floating rate securities and 15.0% fixed rate securities.
Residential Mortgage Loans
Certain of our investments in residential mortgage loans were acquired through the exercise of call rights:
• On May 27, 2014, we exercised call rights related to sixteen Non-Agency RMBS trusts and purchased performing and
non-performing residential mortgage loans with a UPB of approximately $282.2 million at a price of approximately
$289.4 million, contained in such trusts prior to their termination. We securitized approximately $233.8 million in UPB
of performing loans, which was recorded as a sale for accounting purposes, and recognized a gain on settlement of
investments of approximately $3.5 million. We retained performing and non-performing loans with a UPB of
approximately $48.4 million at a price of $40.1 million. Additionally, we acquired $1.3 million of real estate owned.
• On August 25, 2014, we exercised our call rights related to nineteen Non-Agency RMBS trusts and purchased performing
and non-performing residential mortgage loans with a UPB of approximately $530.1 million at a price of approximately
$536.3 million, contained in such trusts prior to their termination. Additionally, we acquired $3.0 million of real estate
owned. We identified approximately $463.0 million UPB in performing loans for future securitization and classified as
Held-for-Sale. On October 3, 2014, we securitized these loans Held-for-Sale, which was recorded as a sale for accounting
purposes, recognized a gain on settlement of investments of approximately $7.0 million, and paid approximately $25.8
million to acquire interest-only notes representing a beneficial interest in the securitization.
• On December 26, 2014, we exercised our call rights related to twenty-five Non-Agency RMBS trusts and purchased
performing and non-performing loans with a UPB of approximately $597.1 million at a price of approximately $623.7
million, contained in such trusts prior to their termination. We securitized approximately $516.1 million in UPB of
performing loans, which was recorded as a sale for accounting purposes, recognized a gain on settlement of investments
of approximately $0.7 million, and paid approximately $28.9 million to acquire interest only notes representing a beneficial
interest in the securitization. We retained performing and non-performing loans with a UPB of approximately $81.0
million at a price of $71.7 million. Additionally, we acquired $4.3 million of real estate owned.
Certain of our investments in residential mortgage loans have historically been accounted for as linked transactions (see "—Linked
Transactions"). We sold the majority of these investments in October 2014.
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Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of
acquisition. We account for loans based on the following categories:
• Reverse Mortgage Loans
Performing Loans
•
•
Purchased Credit Impaired (“PCI”) Loans
• Loans Held-for-Sale ("HFS")
• Real Estate Owned ("REO")
• Linked Transactions (treated as derivatives, Note 10 to our Consolidated Financial Statements included herein)
The following table presents the total residential mortgage loans outstanding by loan type, excluding linked transactions, at
December 31, 2014 (dollars in thousands).
Outstanding
Face Amount
Carrying
Value(A)
Loan
Count
Weighted
Average
Yield
Weighted
Average Life
(Years)(B)
Floating
Rate Loans
as a % of
Face
Amount
Loan to
Value Ratio
("LTV")(C)
Weighted Avg.
Delinquency(D)
Weighted
Average
FICO(E)
December 31, 2014
Loan Type
Reverse Mortgage Loans(F)(G)
Performing Loans(H)
Total Residential Mortgage Loans, held-for-
investment
Performing Loans, held-for-sale(H)
Purchased Credit Impaired ("PCI") Loans,
held-for-sale(I)
$
$
$
45,182
$
24,965
24,399
22,873
69,581
$
47,838
198
731
929
403,992
$ 388,485
5,809
960,224
737,954
5,025
Residential Mortgage Loans, held- for-sale
$
1,364,216
$ 1,126,439
10,834
10.2 %
7.9 %
9.4 %
5.6 %
5.9 %
5.8 %
3.9
5.9
4.6
7.2
2.6
4.0
21.4%
17.4%
108.2%
72.0%
82.6%
—%
20.0%
95.5%
53.6%
23.0%
85.0%
5.0%
3.7%
9.4%
104.0%
98.4%
90.0%
64.8%
N/A
628
628
626
571
587
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
Includes residential mortgage loans with a United States federal income tax basis of $1,159.1 million and $33.9 million
as of December 31, 2014 and 2013, respectively.
The weighted average life is based on the expected timing of the receipt of cash flows.
LTV refers to the ratio comparing the loan’s unpaid principal balance to the value of the collateral property.
Represents the percentage of the total principal balance that are 60+ days delinquent, $2.3 million of which are on non-
accrual status as of December 31, 2014.
The weighted average FICO score is based on the weighted average of information updated and provided by the loan
servicer on a monthly basis.
Represents a 70% interest we hold in reverse mortgage loans. The average loan balance outstanding based on total UPB
is $0.3 million and $0.2 million at December 31, 2014 and December 31, 2013, respectively, and 77% and 82% of these
loans outstanding at each respective date have reached a termination event. As a result, the borrower can no longer make
draws on these loans. Each loan matures upon the occurrence of a termination event.
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
Includes loans that are current or less than 30 days past due at acquisition where we expect to collect all contractually
required principal and interest payments. Presented net of unamortized discounts and premiums of $15.2 million.
Includes loans with evidence of credit deterioration since origination where it is probable that we will not collect all
contractually required principal and interest payments.
We consider the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as our credit quality
indicators.
Subsequent to December 31, 2014, we obtained financing for $34.3 million of real estate owned and $28.2 million of non-
performing residential mortgage loans, respectively, with a $30.6 million repurchase facility and used the proceeds to fully pay
down another outstanding repurchase facility. Borrowings on this facility bear an interest equal to the sum of (i) a floating rate
index rate equal to one-month LIBOR and (ii) a margin of 2.75% and has an expected repayment date of May 28, 2016. This
facility contains customary covenants, event of default provisions, and is subject to required monthly principal payments.
As a result of ASU No. 2014-11 (Note 2), we have determined that, as of January 1, 2015, our linked transactions will be accounted
for as secured borrowings. As a result, $32.4 million carrying amount of derivatives will be removed from the balance sheet and
replaced with $116.7 million carrying amount of Non-Agency RMBS, $1.6 million carrying amount of Residential Mortgage
Loans, Held-for-Investment and $85.9 million of Repurchase Agreements.
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Subsequent to December 31, 2014 and prior to February 28, 2015, New Residential sold non-performing residential mortgage
loans with a UPB of $135.2 million for proceeds of $102.8 million.
Subsequent to December 31, 2014 and prior to February 28, 2015, New Residential committed to sell re-performing and non-
performing residential mortgage loans with a UPB of approximately $699.9 million.
Other
Consumer Loans
On April 1, 2013, we completed, through newly formed limited liability companies (together, the “Consumer Loan Companies”),
a co-investment in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31, 2012. The portfolio
included over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries of HSBC Finance
Corporation. The Consumer Loan Companies acquired the portfolio from HSBC Finance Corporation and its affiliates. We invested
approximately $250 million for 30% membership interests in each of the Consumer Loan Companies. Of the remaining 70% of
the membership interests, Springleaf, which is majority-owned by Fortress funds managed by our Manager, acquired 47% and an
affiliate of Blackstone Tactical Opportunities Advisors LLC acquired 23%. Springleaf acts as the managing member of the
Consumer Loan Companies. After a servicing transition period, Springleaf became the servicer of the loans and provides all
servicing and advancing functions for the portfolio. The Consumer Loan Companies initially financed $2.2 billion of the
approximately $3.0 billion purchase price with asset-backed notes that had a maturity of April 2021, and paid a coupon of 3.75%.
In September 2013, the Consumer Loan Companies issued and sold an additional $0.4 billion of asset-backed notes for 96% of
par. These notes were subordinate to the debt issued in April 2013, had a maturity of December 2024, and paid a coupon of 4%.
On October 3, 2014, the Consumer Loan Companies refinanced the outstanding asset-backed notes with an asset-backed
securitization for approximately $2.6 billion. The proceeds in excess of the refinanced debt were distributed to the co-investors.
We received approximately $337.8 million which reduced our basis in the consumer loans investment to $0.0 million and resulted
in a gain of approximately $80.1 million. We used the proceeds to pay down a $125.0 million repurchase agreement that was
scheduled to mature in January 2015. Subsequent to this refinancing, we have discontinued recording our share of the underlying
earnings of the Consumer Loan Companies until such time as their cumulative earnings exceed their cumulative cash distributions.
As a result, cash distributions of $11.9 million were recorded as additional gain in the fourth quarter of 2014.
The table below summarizes the collateral characteristics of the consumer loans as of December 31, 2014 (dollars in thousands):
UPB(A)
Personal
Unsecured
Loans %
Personal
Homeowner
Loans %
Number
of
Loans
Collateral Characteristics
Weighted
Average
Original
FICO
Score(B)
Weighted
Average
Coupon
Adjustable
Rate Loan %
Average
Loan Age
(months)
Average
Expected
Life
(Years)
Delinquency
30 Days(C)
Delinquency
60 Days(C)
Delinquency
90+ Days(C)
CRR(D)
CDR(E)
$ 2,589,748
62.8%
30.3% 281,683
635
18.1%
10.6%
115
3.6
3.3%
1.8%
3.0%
15.1%
7.8%
As of November 30, 2014.
Weighted average original FICO score represents the FICO score at the time the loan was originated.
Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal
balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively.
3 Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the
three months as a percentage of the total principal balance of the pool.
3 Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults)
during the three months as a percentage of the total principal balance of the pool.
Consumer
Loans
(A)
(B)
(C)
(D)
(E)
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APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP
requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates.
Management believes that the estimates and assumptions utilized in the preparation of the consolidated financial statements are
prudent and reasonable. Actual results historically have been in line with management’s estimates and judgments used in applying
each of the accounting policies described below, as modified periodically to reflect current market conditions. The following is a
summary of our accounting policies that are most affected by judgments, estimates and assumptions.
Excess MSRs
Upon acquisition, we elected to record each investment in Excess MSRs at fair value. We elected to record our investments in
Excess MSRs at fair value 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.
Our Excess MSRs are categorized as Level 3 under the GAAP fair value hierarchy, as described in Note 12 to our consolidated
financial statements. The inputs used in the valuation of Excess MSRs include prepayment speed, delinquency rate, recapture rate,
excess mortgage servicing amount and discount rate. The determination of estimated cash flows used in pricing models is inherently
subjective and imprecise. The methods used to estimate fair value may not result in an amount that is indicative of net realizable
value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used
to determine fair value, could result in a significant increase or decrease in fair value. Management validates significant inputs
and outputs of our models by comparing them to available independent third party market parameters and models for reasonableness.
We believe the assumptions we use are within the range that a market participant would use, and factor in the liquidity conditions
in the markets. Any changes to the valuation methodology will be reviewed by management to ensure the changes are appropriate.
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 pools. 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 values generated by its internal models. To date, we have not made any significant valuation adjustments as a result
of these fairness opinions.
Investments in Excess MSRs are aggregated into pools as applicable; each pool of Excess MSRs is accounted for in the aggregate.
Interest income for Excess MSRs is accreted using an effective yield or “interest” method, based upon the expected income from
the Excess MSRs through the expected life of the underlying mortgages. The inputs used in estimating cash flows are generally
the same as those used in estimating fair value, and are subject to the same judgments and uncertainties. Changes to expected cash
flows result in a cumulative retrospective adjustment, which will be recorded in the period in which the change in expected cash
flows occurs. Under the retrospective method, the interest income recognized for a reporting period would be measured as the
difference between the amortized cost basis at the end of the period and the amortized cost basis at the beginning of the period,
plus any cash received during the period. The amortized cost basis is calculated as the present value of estimated future cash flows
using an effective yield, which is the yield that equates all past actual and current estimated future cash flows to the initial investment.
In addition, our policy is to recognize interest income only on Excess MSRs in existing eligible underlying mortgages.
Under the fair value election, the difference between the fair value of Excess MSRs and their amortized cost basis is recorded as
“Change in fair value of investments in excess mortgage servicing rights,” as applicable. Fair value is generally determined by
discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific
to the Excess MSRs, and therefore may differ from their effective yields.
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The following table summarizes the estimated change in fair value of our interests in the Excess MSRs owned directly as of
December 31, 2014 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars
in thousands):
Fair value at December 31, 2014
$
417,733
Discount rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
Prepayment rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
Delinquency rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
Recapture rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
$
$
$
$
$
$
$
$
-20%
451,505
33,772
8.1 %
-20%
453,949
36,216
8.7 %
-20%
421,786
4,053
1.0 %
-20%
409,637
(8,096)
(1.9)%
$
$
$
$
$
$
$
$
-10%
434,022
16,289
3.9 %
-10%
435,319
17,586
4.2 %
-10%
419,842
2,109
0.5 %
-10%
413,739
(3,994)
(1.0)%
$
$
$
$
$
$
$
$
10%
402,989
(14,744)
(3.5)%
10%
401,587
(16,146)
(3.9)%
10%
415,957
(1,776)
(0.4)%
10%
422,112
4,379
1.0 %
$
$
$
$
$
$
$
$
20%
389,171
(28,562)
(6.8)%
20%
386,299
(31,434)
(7.5)%
20%
414,012
(3,721)
(0.9)%
20%
426,391
8,658
2.1 %
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The following table summarizes the estimated change in fair value of our interests in the Excess MSRs owned through equity
method investees as of December 31, 2014 given several parallel shifts in the discount rate, prepayment rate, delinquency rate
and recapture rate (dollars in thousands):
Fair value at December 31, 2014
$
330,876
Discount rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
Prepayment rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
Delinquency rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
Recapture rate shift in %
Estimated fair value
Change in estimated fair value:
Amount
%
$
$
$
$
$
$
$
$
-20%
358,313
27,437
8.3 %
-20%
359,953
29,077
8.8 %
-20%
336,266
5,390
1.6 %
-20%
320,179
(10,697)
(3.2)%
$
$
$
$
$
$
$
$
-10%
344,020
13,144
4.0 %
-10%
344,947
14,071
4.3 %
-10%
333,571
2,695
0.8 %
-10%
325,494
(5,382)
(1.6)%
$
$
$
$
$
$
$
$
10%
318,757
(12,119)
(3.7)%
10%
317,676
(13,200)
(4.0)%
10%
328,182
(2,694)
(0.8)%
10%
336,328
5,452
1.6 %
$
$
$
$
$
$
$
$
20%
307,558
(23,318)
(7.0)%
20%
305,282
(25,594)
(7.7)%
20%
325,487
(5,389)
(1.6)%
20%
341,850
10,974
3.3 %
The sensitivity analysis is hypothetical and should be used with caution. In particular, the results are calculated by stressing a
particular economic assumption independent of changes in any other assumption; in practice, changes in one factor may result in
changes in another, which might counteract or amplify the sensitivities. Also, changes in the fair value based on a 10% variation
in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair
value may not be linear.
Servicer Advances
We account for investments in servicer advances, which include the basic fee component of the related MSR (the “servicer advance
investments”), as financial instruments, since we are not a licensed mortgage servicer.
We have elected to account for the servicer advance investments at fair value. Accordingly, we estimate the fair value of the servicer
advance investments at each reporting date and reflect changes in the fair value of the servicer advance investments as gains or
losses.
We recognize interest income from our servicer advance investments using the interest method, with adjustments to the yield
applied based upon changes in actual or expected cash flows under the retrospective method. The servicer advances are not interest-
bearing, but we accrete the effective rate of interest applied to the aggregate cash flows from the servicer advances and the basic
fee component of the related MSR.
We categorize servicer advance investments under Level 3 of the GAAP hierarchy, since we use 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. 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 servicer advances investment. The
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independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with
this range.
Our 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 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 declines,
which we estimate is approximately $500.0 million per year on average over the weighted average life of the investment held as
of December 31, 2014, (ii) the duration of outstanding servicer advances, which we estimate is approximately nine months on
average for an advance balance at a given point in time (not taking into account new advances made with respect to the pool), and
(iii) the UPB of the underlying loans with respect to which we have the obligation to make advances and own the basic fee
component.
As described above, we recognize income from servicer advance investments in the form of (i) interest income, which we reflect
as a component of net interest income and (ii) changes in the fair value of the servicer advances, which we reflect as a component
of other income.
We remit to Nationstar a portion of the basic fee component of the MSR related to our servicer advance investments as compensation
for acting as servicer, as described in more detail under “—Our Portfolio—Servicing Related Assets—Servicer Advances.” Our
interest income is recorded net of the servicing fee owed to Nationstar.
Real Estate Securities (RMBS)
Our Non-Agency RMBS and Agency RMBS are classified as available-for-sale. As such, they are carried at fair value, with net
unrealized gains or losses reported as a component of accumulated other comprehensive income, to the extent impairment losses
are considered temporary, as described below.
We expect that any RMBS we acquire will be categorized under Level 2 or Level 3 of the GAAP hierarchy, depending on the
observability of the inputs. Fair value may be based upon broker quotations, counterparty quotations, pricing service quotations
or internal pricing models. The significant inputs used in the valuation of our securities include the discount rate, prepayment
speeds, default rates and loss severities, as well as other variables.
The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. The methods used to
estimate fair value may not be indicative of net realizable value or reflective of future fair values. Changes in market conditions,
as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease
in fair value. Management validates significant inputs and outputs of our models by comparing them to available independent
third party market parameters and models for reasonableness. We believe the assumptions we use are within the range that a market
participant would use, and factor in the liquidity conditions in the markets. Any changes to the valuation methodology will be
reviewed by management to ensure the changes are appropriate.
We must also assess whether unrealized losses on securities, if any, reflect a decline in value that is other-than-temporary and, if
so, record an other-than-temporary impairment through earnings. A decline in value is deemed to be other-than-temporary if (i) it
is probable that we will be unable to collect all amounts due according to the contractual terms of a security that was not impaired
at acquisition (there is an expected credit loss), or (ii) if we have the intent to sell a security in an unrealized loss position or it is
more likely than not that we will be required to sell a security in an unrealized loss position prior to its anticipated recovery (if
any). For the purposes of performing this analysis, we will assume the anticipated recovery period is until the expected maturity
of the applicable security. Also, for securities that represent beneficial interests in securitized financial assets within the scope of
ASC 325-40, whenever there is a probable adverse change in the timing or amounts of estimated cash flows of a security from
the cash flows previously projected, an other-than-temporary impairment will be deemed to have occurred. Our Non-Agency
RMBS acquired with evidence of deteriorated credit quality for which it was probable, at acquisition, that we would be unable to
collect all contractually required payments receivable, fall within the scope of ASC 310-30, as opposed to ASC 325-40. All of our
other Non-Agency RMBS, those not acquired with evidence of deteriorated credit quality, fall within the scope of ASC 325-40.
Income on these securities is recognized using a level yield methodology based upon a number of cash flow assumptions that are
subject to uncertainties and contingencies. Such assumptions include the rate and timing of principal and interest receipts (which
may be subject to prepayments and defaults). These assumptions are updated on at least a quarterly basis to reflect changes related
to a particular security, actual historical data, and market changes. These uncertainties and contingencies are difficult to predict
and are subject to future events, and economic and market conditions, which may alter the assumptions. For securities acquired
at a discount for credit losses, we recognize the excess of all cash flows expected over our investment in the securities as Interest
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Income on a “loss adjusted yield” basis. The loss-adjusted yield is determined based on an evaluation of the credit status of
securities, as described in connection with the analysis of impairment above.
Impairment of Performing Loans
To the extent that they are classified as held-for-investment, we must periodically evaluate each of these loans or loan pools for
possible impairment. Impairment is indicated when it is deemed probable that we will be unable to collect all amounts due according
to the contractual terms of the loan, or for loans acquired at a discount for credit losses, when it is deemed probable that we will
be unable to collect as anticipated. Upon determination of impairment, we would establish a specific valuation allowance with a
corresponding charge to earnings. We continually evaluate our loans receivable for impairment.
Our residential mortgage loans are aggregated into pools for evaluation based on like characteristics, such as loan type and
acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of
borrowers, loan to value ratios, the estimated value of the underlying collateral, the key terms of the loans and historical and
anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to
estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining
impairment and in estimating the resulting loss allowance. Furthermore, we must assess our intent and ability to hold our loan
investments on a periodic basis. If we do not have the intent to hold a loan for the foreseeable future or until its expected payoff,
the loan must be classified as “held-for-sale” and recorded at the lower of cost or estimated value.
A loan is determined to be past due when a monthly payment is due and unpaid for 30 days or more. Loans, other than PCI loans
(described below), are placed on nonaccrual status and considered non-performing when full payment of principal and interest is
in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and
in the process of collection. A loan may be returned to accrual status when repayment is reasonably assured and there has been
demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan.
Loans, other than PCI loans, are generally charged off or charged down to the net realizable value of the underlying collateral
(i.e., fair value less costs to sell), with an offset to the allowance for loan losses, when available information indicates that loans
are uncollectible.
Determinations of whether a loan is collectible are inherently uncertain and subject to significant judgment.
Purchased Credit Impaired (PCI) Loans
We evaluate the credit quality of our loans, as of the acquisition date, for evidence of credit quality deterioration. Loans with
evidence of credit deterioration since their origination and where it is probable that we will not collect all contractually required
principal and interest payments are PCI loans. Recognition of income and accrual status on PCI loans is dependent on having a
reasonable expectation about the timing and amount of cash flows to be collected. At acquisition, we aggregate PCI loans into
pools based on common risk characteristics and loans aggregated into pools are accounted for as if each pool were a single loan
with a single composite interest rate and an aggregate expectation of cash flows.
The excess of the total cash flows (both principal and interest) expected to be collected over the carrying value of the PCI loans
is referred to as the accretable yield. This amount is not reported on our Consolidated Balance Sheets but is accreted into interest
income at a level rate of return over the remaining estimated life of the pool of loans.
On a quarterly basis, we estimate the total cash flows expected to be collected over the remaining life of each pool. Probable
decreases in expected cash flows trigger the recognition of impairment. Impairments are recognized through the valuation provision
for loans and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows would first
reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield
adjustment over the remaining estimated lives of the underlying loans.
The excess of the total contractual cash flows over the cash flows expected to be collected is referred to as the nonaccretable
difference. This amount is not reported on our Consolidated Balance Sheets and represents an estimate of the amount of principal
and interest that will not be collected.
The estimation of future cash flows for PCI loans is subject to significant judgment and uncertainty. Actual cash flows could be
materially different than management's estimates.
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The liquidation of PCI loans, which may include sales of loans, receipt of payment in full by the borrower, or foreclosure, results
in removal of the loans from the underlying PCI pool. When the amount of the liquidation proceeds (e.g., cash, real estate), if any,
is less than the unpaid principal balance of the loan, the difference is first applied against the PCI pool’s nonaccretable difference.
When the nonaccretable difference for a particular loan pool has been fully depleted, any excess of the unpaid principal balance
of the loan over the liquidation proceeds is written off against the PCI pool’s allowance for loan losses.
Real Estate Owned (REO)
REO assets are those individual properties where we receive the property in satisfaction of a debt (e.g., by taking legal title or
physical possession). We recognize REO assets at the completion of the foreclosure process or upon execution of a deed in lieu
of foreclosure with the borrower. We measure REO assets at the lower of cost or fair value, with valuation changes recorded in
other income. REO is illiquid in nature and its valuation is subject to significant uncertainty and judgment and is greatly impacted
by local market conditions.
Derivatives
We financed certain investments with the same counterparty from which we purchased those investments, and we accounted for
the contemporaneous purchase of the investments and the associated financings as linked transactions. Accordingly, we recorded
a non-hedge derivative instrument on a net basis. We also enter into various economic hedges, particularly TBAs and interest rate
swaps and caps. Changes in market value of non-hedge derivative instruments and economic hedges are recorded as “Other
Income” in the Consolidated Statements of Income. The assets underlying linked transactions include loans and securities, whose
valuation is subject to significant judgment and uncertainty as described above.
Investment Consolidation
The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered
are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely
related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary
beneficiary in entities in which we have a variable interest. These analyses involve estimates, based on the assumptions of
management, as well as judgments regarding significance and the design of entities.
Variable interest entities (“VIEs”) are defined as entities in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary
beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its
economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially
be significant to the VIE.
Our investments and certain other interests in Non-Agency RMBS are variable interests. We monitor these investments and analyze
the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements.
These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary
of a VIE since they involve subjective determinations of significance, with respect to both power and economics. The result could
be the consolidation of an entity that otherwise would not have been consolidated or the de-consolidation of an entity that otherwise
would have been consolidated.
We have not consolidated the securitization entities that issued our Non-Agency RMBS. This determination is based, in part, on
our assessment that we do not have the power to direct the activities that most significantly impact the economic performance of
these entities, such as if we owned a majority of the currently controlling class. In addition, we are not obligated to provide, and
have not provided, any financial support to these entities.
We have not consolidated the entities in which we hold a 50% interest that made an investment in Excess MSRs. We have determined
that the decisions that most significantly impact the economic performance of these entities will be made collectively by us and
the other investor in the entities. In addition, these entities have sufficient equity to permit the entities to finance their activities
without additional subordinated financial support. Based on our analysis, these entities do not meet any of the VIE criteria.
We have invested in servicer advances, including the basic fee component of the related MSRs, primarily through the Buyer, of
which we are the managing member. The Buyer was formed through cash contributions by us and third-parties in exchange for
membership interests. As of December 31, 2014, we owned an approximately 44.5% interest in the Buyer, and the third-party
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investors owned the remaining membership interests. Through our managing member interest, we direct substantially all of the
day-to-day activities of the Buyer. The third-party investors do not possess substantive participating rights or the power to direct
the day-to-day activities that most directly affect the operations of the Buyer. In addition, no single third-party investor, or group
of third-party investors, possesses the substantive ability to remove us as the managing member of the Buyer. We have determined
that the Buyer is a voting interest entity. As a result of our managing member interest, which represents a controlling financial
interest, we consolidate the Buyer and its wholly owned subsidiaries and reflect membership interests in the Buyer held by third
parties as noncontrolling interests.
Investments in Equity Method Investees
We account for our investment in the Consumer Loan Companies pursuant to the equity method of accounting because we can
exercise significant influence over the Consumer Loan Companies, but the requirements for consolidation are not met. Our share
of earnings and losses in these equity method investees is included in “Earnings from investments in consumer loans, equity
method investees” on the Consolidated Statements of Income. Equity method investments are included in “Investments in consumer
loans, equity method investees” on the Consolidated Balance Sheets.
The Consumer Loan Companies classify their investments in consumer loans as held-for-investment, as they have the intent and
ability to hold for the foreseeable future, or until maturity or payoff. The Consumer Loan Companies record the consumer loans
at cost net of any unamortized discount or loss allowance. The Consumer Loan Companies determined at acquisition that these
loans would be aggregated into pools based on common risk characteristics (credit quality, loan type, and date of origination or
acquisition); the loans aggregated into pools are accounted for as if each pool were a single loan.
We account for our investments in equity method investees that are invested in Excess MSRs pursuant to the equity method of
accounting because we can exercise significant influence over the investees, but the requirements for consolidation are not met.
We have elected to measure our investments in equity method investees which are invested in Excess MSRs at fair value. The
equity method investees have also elected to measure their investments in Excess MSRs at fair value.
Income Taxes
We intend to operate in a manner that allows us to qualify for taxation as a REIT. As a result of our expected REIT qualification,
we do not generally expect to pay U.S. federal or state and local corporate level taxes. Many of the REIT requirements, however,
are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject to U.S. federal, state
and local income and franchise taxes, and we would face a variety of adverse consequences. See “Risk Factors – Risks Related
to Our Taxation as a REIT.” We have made certain investments, particularly our investments in servicer advances, through TRSs
and are subject to regular corporate income taxes on these investments.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure. The standard clarifies the timing of when a creditor is considered to have taken physical possession of
residential real estate collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate
owned. A creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure,
or (2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal agreement.
The standard also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the
recorded investment in residential real estate mortgage loans that are in process of foreclosure. The ASU is effective for New
Residential in the first quarter of 2015. Early adoption is permitted. New Residential has adopted the new guidance and has
determined there is no impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09 Revenues from Contracts with Customers (Topic 606). The standard’s core principle
is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will
need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. The ASU is effective for New Residential in the first quarter of 2017.
Early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the
guidance in the ASU. New Residential is currently evaluating the new guidance to determine the impact it may have on its
consolidated financial statements.
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In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.
The standard changes the accounting for repurchase-to-maturity transactions and linked repurchase financing transactions to
secured borrowing accounting. The ASU also expands disclosure requirements related to certain transfers of financial assets that
are accounted for as sales and certain transfers accounted for as secured borrowings. The ASU is effective for New Residential in
the first quarter of 2015. Early adoption is not permitted. Disclosures are not required for comparative periods presented before
the effective date. New Residential has determined that, as of January 1, 2015, its linked transactions will be accounted for as
secured borrowings as further described in Note 18 to our consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard provides guidance on
management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern
by requiring management to assess an entity’s ability to continue as a going concern by incorporating and expanding on certain
principles that are currently in U.S. auditing standards. The ASU is effective for New Residential for the annual period ending
on December 31, 2016. Early adoption is permitted. New Residential is currently evaluating the new guidance to determine the
impact that it may have on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues
Task Force). The standard provides guidance on how to classify and measure certain government-guaranteed mortgage loans upon
foreclosure. A mortgage loan is to be derecognized and a separate other receivable is to be recognized upon foreclosure in the
amount of the loan balance (principal and interest) expected to be recovered from the guarantor if (1) the loan has a government
guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey
the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that
claim, and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate
is fixed. The ASU is effective in the first quarter of 2015 and early adoption is permitted.
New Residential adopted ASU No. 2014-14 as of September 30, 2014, as it relates to the reverse mortgage portfolio. This portfolio
is comprised primarily of U.S. Department of Housing and Urban Development (HUD)-guaranteed reverse mortgage loans. Upon
foreclosure of a reverse mortgage loan, New Residential receives the real estate property in satisfaction of the loan and intends to
dispose of the property for the best possible economic value. To the extent the liquidation proceeds are less than the unpaid principal
balance (UPB) of the loan, New Residential submits a claim to HUD for the lesser of the remaining UPB or the pre-determined
HUD claim amount. New Residential’s exposure to market risk while the foreclosed property is in its possession is limited to the
extent the HUD claim amount is unlikely to cover any shortfall in property disposal proceeds. After the adoption of ASU No.
2014-14, upon foreclosure of a guaranteed reverse mortgage loan, New Residential records a “receivable from government agency”
for the expected liquidation proceeds, comprised of both the property disposal proceeds and the maximum HUD claim amount.
New Residential used the modified retrospective transition method of adoption which resulted in no cumulative-effect adjustment
as of the beginning of the current fiscal year.
In February 2015, the FASB issued ASU 2015-02, Consolidation. The standard amends the consolidation considerations when
evaluating certain limited partnerships, variable interest entities and investment funds. The ASU is effective for New Residential
in the first quarter of 2016. Early adoption is permitted. New Residential does not expect the adoption of this new guidance to
have an impact on its consolidated financial statements.
The FASB has recently issued or discussed a number of proposed standards on such topics as financial statement presentation,
financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on our reporting.
We have not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are
finalized.
RESULTS OF OPERATIONS
We have a limited operating history and we acquired our first portfolio of Excess MSRs in December 2011 and as a result, a
comparison of the year ended December 31, 2012 against the one month ended December 31, 2011 would not be meaningful.
Because we were not operating as a separate, stand-alone entity during the period from our formation to the date of our separation
from Newcastle, our results of operations for this period are not necessarily indicative of our future performance.
The following tables summarize the changes in our results of operations from year-to-year (dollars in thousands):
Comparison of Results of Operations for the years ended December 31, 2014 and 2013
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Interest income
Interest expense
Net Interest Income
Impairment
Other-than-temporary impairment (“OTTI”) on securities
Valuation allowance on loans and real estate owned
Net interest income after impairment
Other Income
Change in fair value of investments in excess mortgage
servicing rights
Change in fair value of investments in excess mortgage
servicing rights, equity method investees
Change in fair value of investments in servicer advances
Earnings from investments in consumer loans, equity
method investees
Gain on consumer loans investment
Gain on settlement of investments, net
Other income
Operating Expenses
General and administrative expenses
Management fee allocated by Newcastle
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
Income (Loss) Before Income Taxes
Income tax expense
Net Income (Loss)
Noncontrolling Interests in Income (Loss) of Consolidated
Subsidiaries
Net Income (Loss) Attributable to Common Stockholders
$
$
$
$
Year Ended December 31,
$
2014
346,857
140,708
206,149
1,391
9,891
11,282
194,867
$
2013
87,567
15,024
72,543
4,993
461
5,454
67,089
Amount
Increase (Decrease)
%
296.1 %
836.6 %
184.2 %
259,290
125,684
133,606
(3,602)
9,430
5,828
127,778
(72.1)%
2,045.6 %
106.9 %
190.5 %
41,615
53,332
(11,717)
(22.0)%
57,280
84,217
53,840
92,020
35,487
10,629
375,088
27,001
—
19,651
54,334
3,913
104,899
465,056
22,957
442,099
89,222
352,877
$
$
$
50,343
—
82,856
—
52,657
1,820
241,008
9,975
4,134
11,209
16,847
309
42,474
265,623
—
265,623
$
6,937
84,217
(29,016)
92,020
(17,170)
8,809
134,080
17,026
(4,134)
8,442
37,487
3,604
62,425
199,433
22,957
176,476
(326) $
$
265,949
89,548
86,928
13.8 %
N.M.
(35.0)%
N.M.
(32.6)%
484.0 %
55.6 %
170.7 %
(100.0)%
75.3 %
222.5 %
1,166.3 %
147.0 %
75.1 %
N.M.
66.4 %
N.M.
32.7 %
Interest Income
Interest income increased by $259.3 million primarily attributable to incremental interest income of (i) $185.8 million from
servicer advances that we acquired subsequent to December 16, 2013; (ii) $44.6 million from real estate loans, in which we made
substantial new investments including those acquired through our exercise of call rights with respect to certain securitization trusts
master serviced, or serviced, by Nationstar subsequent to December 31, 2013; (iii) $8.3 million from our acquisitions of Excess
MSR investments during and after the year ended December 31, 2013, and (iv) an increase of $20.7 million from real estate
securities during the year ended December 31, 2014.
Interest Expense
Interest expense increased by $125.7 million primarily attributable to incremental interest expense of (i) $107.1 million from notes
payable for servicer advances that we acquired subsequent to December 16, 2013; (ii) $11.1 million from repurchase agreements
and notes payable on real estate loans, in which we made substantial new investments including those acquired through our exercise
of call rights with respect to certain securitization trusts master serviced, or serviced, by Nationstar subsequent to December 31,
2013; (iii) $4.2 million from interest on a repurchase agreement secured by our consumer loan investment that we entered into in
January 2014 and paid in full in October 2014; (iv) an increase of $1.8 million from repurchase agreements on real estate securities
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during the year ended December 31, 2014, and (v) $1.5 million from interest on a secured corporate loan, which we entered into
at the end of the year ended December 31, 2013, paid off in full in June 2014.
Other than Temporary Impairment (“OTTI”) on Securities
The other-than-temporary impairment on securities decreased by $3.6 million primarily due to the recognition of impairment of
$3.8 million on our real estate securities in connection with the spin-off on May 15, 2013 and subsequent impairment of $1.2
million during the year ended December 31, 2013, partially offset by $1.4 million of impairment recognized on our real estate
securities during the year ended December 31, 2014.
Valuation Allowance on Loans and Real Estate Owned
The valuation allowance on loans increased by $9.4 million primarily due to our substantial new investments in real estate loans
and related $7.3 million lower of cost or market adjustments on loans held-for-sale and REO and a $2.1 million increased allowance
for loan losses on our residential mortgage loans held-for-investment primarily driven by the expected extended timing of future
cash flows.
Change in Fair Value of Investments in Excess Mortgage Servicing Rights
The change in fair value of investments in excess mortgage servicing rights decreased $11.7 million during the year ended December
31, 2014 compared to the year ended December 31, 2013. This decrease primarily relates to higher mark-to-market fair value
adjustments of $53.3 million during the year ended December 31, 2013 compared to adjustments of $41.6 million during the year
ended December 31, 2014 experienced by the portion of our excess mortgage servicing portfolio held during both periods.
Change in Fair Value of Investments in Excess Mortgage Servicing Rights, Equity Method Investees
The change in fair value of investments in excess mortgage servicing rights, equity method investees increased $6.9 million during
the year ended December 31, 2014 compared to the year ended December 31, 2013. This increase primarily relates to improved
performance during the year ended December 31, 2014 reflected in higher mark-to-market fair value adjustments of $57.3 million
during the year ended December 31, 2014 compared to adjustments of $50.3 million during the year ended December 31, 2013
Change in Fair Value of Investments in Servicer Advances
The change in fair value of investments in servicer advances increased $84.2 million due to the acquisition of servicer advances
in December 2013 and subsequent increases in value.
Earnings from Investments in Consumer Loans, Equity Method Investees
Earnings from investments in consumer loans, equity method investees decreased $29.0 million. We purchased our interest in the
Consumer Loan Companies in April 2013, recording nine months of income on the investment in 2013. On October 3, 2014 we
discontinued recording our share of the underlying earnings of the Consumer Loan Companies subsequent to the refinancing of
the outstanding debt on October 3, 2014 that resulted in a distribution to us in excess of our investment basis. Therefore nine
months of income on the investment was also recorded in 2014. The decrease in earnings year over year is primarily attributable
to a decrease in net interest income of $17.8 million, an increase in the provision for finance receivable losses of $6.5 million, an
increase in the fair value of debt of $4.4 million, a decrease in other income of $1.7 million, a decrease in operating expenses of
$7.7 million and a loss on extinguishment of debt of $6.3 million that was incurred in association with the October 3, 2014
refinancing.
Gain on Consumer Loans Investment
The gain on consumer loans investment increased $92.0 million due to cash distributions in excess of our GAAP basis, of which
(i) $80.1 million relates to a one-time cash distribution on October 3, 2014 primarily resulting from the Consumer Loan Companies'
refinancing asset-backed notes with an asset-backed securitization and (ii) $11.9 million of recurring cash distributions to us after
October 3, 2014.
Gain on Settlement of Investments, net
Gain on settlement of investments, net decreased by $17.2 million primarily related to (i) net losses of $36.2 million on the sale
of derivatives and (ii) realized loss of $3.7 million on the sale of REO partially offset by (i) an increase of $13.0 million of
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incremental net gains recognized from the sale of real estate securities sold during the year ended December 31, 2014 compared
to those sold during the year ended December 31, 2013; (ii) a gain of $3.6 million related to residential loans held-for-investment
that were sold, and (iii) a net gain of $6.3 million related to the securitizations of real estate loans.
Other Income
Other income increased by $8.8 million primarily attributable to a breakup fee of $5.0 million earned on a deal termination during
the year ended December 31, 2014 and a net gain on transfer of loans to real estate owned of $17.5 million, partially offset by an
increased unrealized loss on derivatives of $13.0 million during the year ended December 31, 2014.
General and Administrative Expenses
General and administrative expenses increased by $17.0 million primarily due to an increase of (i) $2.9 million from deal costs
associated with the securitization of loans acquired through our exercise of call rights with respect to certain securitization trusts
master serviced, or serviced by, Nationstar; (ii) $1.1 million of expenses related to our REO assets primarily acquired during the
year ended December 31, 2014; (iii) $1.9 million from other tax expense; (iv) $6.5 million from professional fees primarily from
increased deal activity, and (v) $4.6 million due to an increase in operating expenses as a result of our becoming an independent,
publicly-traded REIT following the spin-off from Newcastle on May 15, 2013 as well as the expansion of our asset portfolio.
Management Fee Allocated by Newcastle
There were no management fees allocated by Newcastle during the year ended December 31, 2014 due to the management
agreement becoming effective on May 15, 2013 and no management fees being allocated subsequent to that date. Prior to May
15, 2013, we were allocated $4.1 million of management fees by Newcastle for the year ended December 31, 2013.
Management Fee to Affiliate
Management fee to affiliate increased $8.4 million as a result of the management agreement becoming effective on May 15, 2013
and subsequent increases in our gross equity.
Incentive Compensation to Affiliate
Incentive compensation to affiliate increased $37.5 million primarily due to an increase in eligible earnings above our hurdle rate
and increased gains on settlement of investments.
Loan Servicing Expense
Loan servicing expense increased by $3.6 million in fees to service residential mortgage loans that we purchased and acquired
through our exercise of call rights with respect to certain securitization trusts master serviced, or serviced, by Nationstar subsequent
to December 31, 2013.
Income Tax Expense
Income tax expense increased by $23.0 million due to the acquisition of servicer advances held in a taxable REIT subsidiary in
December 2013 and subsequent taxable income recognized.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Noncontrolling interests in income (loss) of consolidated subsidiaries increased $89.5 million due to the acquisition of investments
in servicer advances held by a less than wholly owned subsidiary at the end of the fourth quarter of the year ended December 31,
2013 and subsequent income recognized.
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Comparison of Results of Operations for the years ended December 31, 2013 and 2012
Year Ended December 31,
2013
2012
Interest income
Interest expense
Net Interest Income
Impairment
Other-than-temporary impairment (“OTTI”) on securities
Valuation allowance on loans
Net interest income after impairment
Other Income
Change in fair value of investments in excess mortgage
servicing rights
Change in fair value of investments in excess mortgage
servicing rights, equity method investees
Earnings from investments in consumer loans, equity
method investees
Gain on settlement of investments, net
Other income
Operating Expenses
General and administrative expenses
Management fee allocated by Newcastle
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
Income (Loss) Before Income Taxes
Income tax expense
Net Income (Loss)
Noncontrolling Interests in Income (Loss) of Consolidated
Subsidiaries
Net Income (Loss) Attributable to Common Stockholders
Interest Income
$
$
$
$
87,567
15,024
72,543
4,993
461
5,454
67,089
53,332
50,343
82,856
52,657
1,820
241,008
9,975
4,134
11,209
16,847
309
42,474
265,623
—
265,623
$
$
Amount
Increase (Decrease)
%
159.4 %
2,034.1 %
119.5 %
53,808
14,320
39,488
4,993
461
5,454
34,034
N.M.
N.M.
N.M.
103.0 %
$
33,759
704
33,055
—
—
—
33,055
9,023
44,309
491.1 %
—
50,343
N.M.
—
—
8,400
17,423
5,878
3,353
—
—
—
9,231
41,247
—
41,247
$
82,856
52,657
(6,580)
223,585
4,097
781
11,209
16,847
309
33,243
224,376
—
224,376
N.M.
N.M.
(78.3)%
1,283.3 %
69.7 %
23.3 %
N.M.
N.M.
N.M.
N.M.
544.0 %
N.M.
544.0 %
N.M.
544.8 %
(326) $
$
265,949
— $
$
41,247
(326)
224,702
Interest income increased by $53.8 million primarily as a result of new investments in real estate securities and excess mortgage
servicing rights.
Interest Expense
Interest expense increased by $14.3 million primarily due to repurchase agreement financing entered into since September 2012
on our Agency ARM RMBS and Non-Agency RMBS.
Other than Temporary Impairment (“OTTI”) on Securities
The other-than-temporary impairment on securities increased by $5.0 million due to the recognition of impairment on certain of
our Agency ARM RMBS and Non-Agency RMBS securities during the year ended December 31, 2013.
Valuation Allowance on Loans
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The valuation allowance on loans increased by $0.5 million due to the recognition of loan losses on our residential mortgage loans
during the year ended December 31, 2013.
Change in Fair Value of Investments in Excess Mortgage Servicing Rights
The change in fair value of investments in excess mortgage servicing rights increased $44.3 million due to the acquisition of
investments since the third quarter of 2012 and subsequent net increases in value.
Change in Fair Value of Investments in Excess Mortgage Servicing Rights, Equity Method Investees
The change in fair value of investments in excess mortgage servicing rights, equity method investees increased $50.3 million due
to the acquisition of these investments during the year ended December 31, 2013 and subsequent net increases in value.
Earnings from Investments in Consumer Loans, Equity Method Investees
Earnings from investments in consumer loans, equity method investees increased $82.9 million due to the acquisition of these
investments during the second quarter of the year ended December 31, 2013 and subsequent income recognized by the investees.
Gain on Settlement of Investments, net
Gain on settlement of investments, net increased by $52.7 million due to the sale of Non-Agency RMBS during the year ended
December 31, 2013.
Other Income
Other income decreased by $6.6 million as the income recognized during the year ended December 31, 2012 represented a non-
recurring breakup fee of $8.4 million due to a proposed investment that was not completed partially offset by a $1.8 million
unrealized gain on linked transactions accounted for as derivatives during the year ended December 31, 2013.
General and Administrative Expenses
General and administrative expenses increased by $4.1 million primarily due to an increase in operating expenses as a result of
our becoming an independent, publicly-traded REIT following the spin-off from Newcastle on May 15, 2013.
Management Fee Allocated by Newcastle
Management fee allocated by Newcastle increased by $0.8 million due to an increase in our equity, as a result of capital contributions
from Newcastle subsequent to the first quarter of 2012.
Management Fee to Affiliate
Management fee to affiliate increased $11.2 million as a result of the management agreement becoming effective on May 15,
2013.
Incentive Compensation to Affiliate
Incentive compensation to affiliate increased $16.8 million as a result of the management agreement becoming effective on May
15, 2013 and subsequent performance.
Loan Servicing Expense
Loan servicing expense increased by $0.3 million due to our acquisition of residential mortgage loans during the year ended
December 31, 2013.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Noncontrolling interests in income (loss) of consolidated subsidiaries decreased $0.3 million due to the acquisition of investments
in servicer advances during the fourth quarter of the year ended December 31, 2013 and subsequent loss recognized.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings,
fund and maintain investments, and other general business needs. Additionally, to maintain our status as a REIT under the Internal
Revenue Code, we must distribute annually at least 90% of our REIT taxable income. We note that a portion of this requirement
may be able to be met in future years through stock dividends, rather than cash, subject to limitations based on the value of our
stock.
Our primary sources of funds for liquidity generally consist of cash provided by operating activities (primarily income from our
investments in Excess MSRs, servicer advances, RMBS and loans), sales of and repayments from our investments, potential debt
financing sources, including securitizations, and the issuance of equity securities, when feasible and appropriate. Our primary uses
of funds are the payment of interest, management fees, incentive compensation, outstanding commitments (including margin) and
other operating expenses, and the repayment of borrowings and hedge obligations, as well as dividends.
Our primary sources of financing currently are notes payable and repurchase agreements, although we may also pursue other
sources of financing such as securitizations and other secured and unsecured forms of borrowing. As of December 31, 2014, we
had outstanding repurchase agreements with an aggregate face amount of approximately $867.3 million to finance $1,388.6 million
UPB of residential mortgage loans, approximately $35.1 million to finance our investments in real estate owned, approximately
$539.0 million to finance $1.8 billion face amount of Non-Agency RMBS and approximately $1.7 billion to finance $1.6 billion
face amount of Agency RMBS. The financing of our entire RMBS portfolio, which generally has 30 to 90 day terms, is subject
to margin calls. Under repurchase agreements, we sell a security to a counterparty and concurrently agree to repurchase the same
security at a later date for a higher specified price. The sale price represents financing proceeds and the difference between the
sale and repurchase prices represents interest on the financing. (The price at which the security is sold generally represents the
market value of the security less a discount or “haircut,” which can range broadly, for example from 3%-4% for Agency RMBS,
15%-45% for Non-Agency RMBS, and 23%-30% for residential mortgage loans.) During the term of the repurchase agreement, the
counterparty holds the security as collateral. If the agreement is subject to margin calls, the counterparty monitors and calculates
what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis
threshold, the counterparty could require us to post additional collateral (or “margin”) in order to maintain the initial haircut on
the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we may, from
time to time, be a party to derivative agreements or financing arrangements that may be subject to margin calls based on the value
of such instruments. We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls
resulting from decreases in value related to a reasonably possible (in the opinion of management) change in interest rates.
Our ability to obtain borrowings and to raise future equity capital is dependent on our ability to access borrowings and the capital
markets on attractive terms. Our Manager’s senior management team has extensive long-term relationships with investment banks,
brokerage firms and commercial banks, which we believe will enhance our ability to source and finance asset acquisitions on
attractive terms and access borrowings and the capital markets at attractive levels.
With respect to the next twelve months, we expect that our cash on hand combined with our cash flow provided by operations and
our ability to roll our repurchase agreements will be sufficient to satisfy our anticipated liquidity needs with respect to our current
investment portfolio, including related financings, potential margin calls and operating expenses. While it is inherently more
difficult to forecast beyond the next twelve months, we currently expect to meet our long-term liquidity requirements through our
cash on hand and, if needed, additional borrowings, proceeds received from repurchase agreements and other financings, proceeds
from equity offerings and the liquidation or refinancing of our assets.
These short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions,
including those described under “—Market Considerations” as well as “Risk Factors.” If our assumptions about our liquidity prove
to be incorrect, we could be subject to a shortfall in liquidity in the future, and this shortfall may occur rapidly and with little or
no notice, which could limit our ability to address the shortfall on a timely basis and could have a material adverse effect on our
business.
Our cash flow provided by operations differs from our net income due to these primary factors: (i) accretion of discount or premium
on our residential securities and loans, (ii) the difference between (a) accretion and unrealized gains and losses recorded with
respect to our Excess MSR (direct and indirect) and servicer advance investments and (b) cash received therefrom, (iii) unrealized
gains and losses on our derivatives and other-than-temporary impairment, if any, and (iv) deferred taxes. In addition, cash received
by our consumer loan joint ventures was, until recently, required to be used to repay the related debt and was therefore not available
to fund other cash needs.
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In addition to the information referenced above, the following factors could affect our liquidity, access to capital resources and
our capital obligations. As such, if their outcomes do not fall within our expectations, changes in these factors could negatively
affect our liquidity.
• Access to Financing from Counterparties – Decisions by investors, counterparties and lenders to enter into transactions
with us will depend upon a number of factors, such as our historical and projected financial performance, compliance
with the terms of our current credit arrangements, industry and market trends, the availability of capital and our investors’,
counterparties’ and lenders’ policies and rates applicable thereto, and the relative attractiveness of alternative investment
or lending opportunities. Our business strategy is dependent upon our ability to finance certain of our investments at rates
that provide a positive net spread.
•
Impact of Expected Repayment or Forecasted Sale on Cash Flows – The timing of and proceeds from the repayment or
sale of certain investments may be different than expected or may not occur as expected. Proceeds from sales of assets
are unpredictable and may vary materially from their estimated fair value and their carrying value. Further, the availability
of investments that provide similar returns to those repaid or sold investments is unpredictable and returns on new
investments may vary materially from those on existing investments.
Debt Obligations
The following table presents certain information regarding our debt obligations (dollars in thousands):
Debt Obligations/
Collateral
Month
Issued
Outstanding
Face
Amount
Carrying
Value
Final
Stated
Maturity
Weighted
Average
Funding
Cost
Weighted
Average
Life
(Years)
Outstanding
Face
Amortized
Cost Basis
Carrying
Value
Weighted
Average
Life
(Years)
Carrying Value
December 31, 2014(A)
December 31,
2013
Collateral
Repurchase
Agreements(B)
Agency RMBS(C)
Various
$
1,707,602
$1,707,602
Non-Agency
RMBS(D)
Residential
Mortgage Loans(E)
Various
539,049
539,049
Various
867,334
867,334
Real Estate Owned(F)
Various
35,105
35,105
Jan-15 to
Feb-15
Jan-15 to
Mar-15
Jan-15 to
Aug-16
Jan-15 to
Aug-16
3,149,090
3,149,090
0.35%
1.52%
2.84%
1.19%
Total Repurchase
Agreements
Notes Payable
Secured Corporate
Loan
N/A
—
—
—
—%
Servicer Advances(G)
Various
2,890,230
2,890,230
Mar-15
to
Mar-17
Residential
Mortgage Loans(H)
Dec-13
22,194
22,194
Oct-15
Real Estate Owned(H)
Dec-13
785
785
Oct-15
Total Notes Payable
2,913,209
2,913,209
Total/Weighted
Average
$
6,062,299
$6,062,299
3.04%
3.33%
3.33%
3.04%
2.08%
0.1
$
1,646,361
$ 1,724,329
$1,740,163
5.0
$
1,332,954
0.1
1,798,586
690,507
702,572
2.56%
1.2
1,388,615
1,145,122
1,145,122
N/A
N/A
54,124
N/A
—
—
—
3,102,492
3,186,622
3,270,839
45,182
26,483
24,965
—
4.0
3.9
N/A
N/A
883
N/A
0.7
0.4
—
1.5
0.8
0.8
1.5
0.9
6.3
4.0
287,757
—
—
1,620,711
75,000
2,390,778
22,840
—
2,488,618
$
4,109,329
(A)
(B)
(C)
(D)
(E)
Excludes debt related to linked transactions (Note 10 to the consolidated financial statements).
These repurchase agreements had approximately $2.4 million of associated accrued interest payable as of December 31,
2014.
The counterparties of these repurchase agreements are Bank of America N.A. ($407.3 million), Daiwa ($347.8 million),
Jefferies ($341.0 million), Mizuho ($293.6 million), Barclays ($240.8 million), and Morgan Stanley ($77.2 million) and
were subject to customary margin call provisions. All of the Agency RMBS repurchase agreements have a fixed rate.
The counterparties of these repurchase agreements are Credit Suisse ($134.5 million), UBS ($165.6 million), Bank of
America N.A. ($105.1 million), Goldman Sachs ($72.1 million), Royal Bank of Canada ($55.7 million), and Barclays
($6.0 million) and were subject to customary margin call provisions. All of the Non-Agency RMBS repurchase agreements
have LIBOR-based floating interest rates.
The counterparties on these repurchase agreements are Credit Suisse ($345.7 million maturing in November 2015),
Nomura ($299.5 million maturing in May 2016), Bank of America N.A. ($198.5 million maturing in August 2016),
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Citibank ($19.4 million maturing in May 2015) and Royal Bank of Scotland ($4.2 million). All of these repurchase
agreements have LIBOR-based floating interest rates.
The counterparties of these repurchase agreements are Royal Bank of Scotland ($17.1 million), Nomura ($13.7 million),
Bank of America, N.A. ($2.6 million) and Credit Suisse ($1.7 million). All of these repurchase agreements have LIBOR-
based floating interest rates.
$1.1 billion face amount of the notes have a fixed rate while the remaining notes bear interest equal to the sum of (i) a
floating rate index rate equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from
1.5% to 2.1%.
The note is payable to Nationstar and bears interest equal to one-month LIBOR plus 2.875%.
(F)
(G)
(H)
In October 2014, we paid off the outstanding Consumer loan repurchase agreement with Credit Suisse for approximately $125.0
million.
Certain of the debt obligations included above are obligations of our consolidated subsidiaries, which own the related collateral.
In some cases, including servicer advances, such collateral is not available to other creditors of ours.
The following table provides additional information regarding our short-term borrowings (dollars in thousands).
Repurchase Agreements
Agency RMBS
Non-Agency RMBS
Residential Mortgage Loans
Real Estate Owned
Notes Payable
Servicer Advances
Residential Mortgage Loans
Real Estate Owned
Total/Weighted Average
Year Ended December 31, 2014(A)
Outstanding
Balance at
December 31,
2014
Average Daily
Amount
Outstanding(B)
Maximum
Amount
Outstanding
Weighted
Average Daily
Interest Rate
$
$
1,707,602
539,049
369,357
18,844
384,894
22,194
785
3,042,725
$
$
1,342,608
413,713
39,388
13,440
1,592,403
21,339
729
3,423,620
$
$
1,719,621
885,639
869,283
18,844
3,386,396
23,914
785
6,904,482
0.34%
1.86%
2.90%
2.90%
2.09%
3.33%
3.33%
1.18%
(A)
(B)
Note this excludes debt related to linked transactions. See Note 10 to the Consolidated Financial Statements included in
this report for additional information on linked transactions.
Represents the average for the period the debt was outstanding.
Repurchase Agreements
New Residential has outstanding repurchase agreements with terms that generally conform to the terms of the standard master
repurchase agreement published by the Securities Industry and Financial Markets Association (“SIFMA”) as to repayment, margin
requirements and segregation of all securities sold under any repurchase transactions. In addition, each counterparty typically
requires additional terms and conditions to the standard master repurchase agreement, including changes to the margin maintenance
requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the
repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions may differ by
counterparty and are not determined until New Residential engages in a specific repurchase transaction.
Servicer Advance Notes Payable issued by the Buyer (the "Notes")
Following their revolving period, principal will be paid on the Notes to the extent of available funds and in accordance with the
priorities of payments set forth in the related transaction documents. The revolving periods for $1.3 billion of the Notes have
ended. The revolving period for $310.6 million of the Notes ends on the earlier of March 2015 and the occurrence of an early
amortization event or a target amortization event. The revolving period for $809.8 million of the Notes ends on the earlier of May
2016 and the occurrence of an early amortization event or a target amortization event. The revolving period for $1.0 billion of the
Notes ends on the earlier of July 2016 and the occurrence of an early amortization event or a target amortization event. The
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revolving periods for $179.9 million of the Notes ends on the earlier of September 2016 and the occurrence of an early amortization
event or a target amortization event. The revolving period for $509.4 million of the Notes ends on the earlier of March 2017 and
the occurrence of an early amortization event or a target amortization event. Upon the occurrence of an early amortization event
or a target amortization event, there is either an interest rate increase on the Notes, a rapid amortization of the Notes or an acceleration
of principal repayment, or all of the foregoing.
The early amortization and target amortization events under the Notes include: (i) the occurrence of an event of default under the
transaction documents, (ii) failure to satisfy an interest coverage test, (iii) the occurrence of any servicer default or termination
event for pooling and servicing agreements representing 15% or more (by mortgage loan balance as of the date of termination)
of all the pooling and servicing agreements related to the purchased basic fee subject to certain exceptions; (iv) failure to satisfy
a collateral performance test measuring the ratio of collected advance reimbursements to the balance of advances; (v) for certain
Notes, failure to satisfy minimum tangible net worth requirements for the Buyer; (vi) for certain Notes, failure to satisfy minimum
liquidity requirements for Nationstar and the Buyer, (vii) for certain Notes, failure to satisfy leverage tests for the Buyer; (viii) for
certain Notes, a change of control of the Buyer; (ix) for certain Notes, certain judgments against the Buyer or certain subsidiaries
in excess of certain thresholds; (x) for certain Notes, payment default under, or an acceleration of, other debt of the Buyer; (xi) failure
to deliver certain reports; and (xii) material breaches of any of the transaction documents.
The definitive documents related to the Notes contain customary representations and warranties, as well as affirmative and negative
covenants. Affirmative covenants include, among others, reporting requirements, provision of notices of material events,
maintenance of existence, maintenance of books and records, compliance with laws, compliance with covenants under the
designated servicing agreements and maintaining certain servicing standards with respect to the advances and the related mortgage
loans. Negative covenants include, among others, limitations on amendments to the designated servicing agreements and limitations
on amendments to the procedures and methodology for repaying the advances or determining that advances have become non-
recoverable.
The definitive documents related to the Notes also contain customary events of default, including, among others, (i) non-payment
of principal, interest or other amounts when due, (ii) insolvency of Nationstar, the Buyer, or certain subsidiaries; (iii) the applicable
issuer becoming subject to registration as an “investment company” within the meaning of the 1940 Act; (iv) Nationstar or the
Buyer fails to comply with the deposit and remittance requirements set forth in any pooling and servicing agreement or such
definitive documents; and (v) Nationstar’s failure to make an indemnity payment after giving effect to any applicable grace period.
Upon the occurrence and during the continuance of an event of default under any facility, the requisite percentage of the related
noteholders may declare the Notes and all other obligations of the applicable issuer immediately due and payable and may terminate
the commitments. A bankruptcy event of default causes such obligations automatically to become immediately due and payable
and the commitments automatically to terminate.
Certain of the Notes accrue interest based on a floating rate of interest. Servicer advances and deferred servicing fees are non-
interest bearing assets. The interest obligations in respect of the Notes are not supported by any interest rate hedging instrument
or arrangement. If the applicable index rate for purposes of determining the interest rates on the Notes rises, there may not be
sufficient collections on the servicer advances and deferred servicing fees and a target amortization event or an event of default
could occur in respect of certain Notes. This could result in a partial or total loss on our investment.
Subsequent Events
Subsequent to December 31, 2014, we paid off $1.0 billion of Agency RMBS financing within various repurchase facilities as a
result of sales. In addition, we rolled $40.1 million within various repurchase facilities to mature between March 2015 and May
2015.
Subsequent to December 31, 2014, we paid off $175.3 million of Non-Agency RMBS financing within various repurchase facilities
as a result of sales. In addition, we rolled $11.4 million within various repurchase facilities to mature between March 2015 and
May 2015.
Subsequent to December 31, 2014, we obtained financing for $34.3 million of real estate owned and $28.2 million of non-
performing residential mortgage loans, respectively, with a $30.6 million repurchase facility and used the proceeds to fully pay
down another outstanding repurchase facility. Borrowings on this facility bear interest equal to the sum of (i) a floating rate index
rate equal to one-month LIBOR and (ii) a margin of 2.75% and have an expected repayment date of May 28, 2016. This facility
contains customary covenants, event of default provisions, and is subject to required monthly principal payments.
Subsequent to December 31, 2014, we entered into a $100.0 million secured corporate loan with Credit Suisse First Boston
Mortgage Capital, LLC, an affiliate of Credit Suisse Securities (USA) LLC. The loan bears interest equal to the sum of (i) a floating
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rate index rate equal to one-month LIBOR and (ii) a margin of 3.75%. The loan contains customary covenants and event of default
provisions.
Subsequent to December 31, 2014, the Buyer entered into agreements to increase financing pursuant to one servicer advance
facility and one of the notes, which will settle in March 2015. The facility will increase capacity from $500.0 million to $1.0
billion, and the note will increase from $650.0 million to $800.0 million and will have a fixed interest rate equal to 2.50% with
an expected repayment date of March 2017.
As a result of ASU No. 2014-11 (Note 2), we have determined that, as of January 1, 2015, our linked transactions will be accounted
for as secured borrowings. As a result, $32.4 million carrying amount of derivatives will be removed from the balance sheet and
replaced with $116.7 million carrying amount of Non-Agency RMBS, $1.6 million carrying amount of Residential Mortgage
Loans, Held-for-Investment, and $85.9 million of Repurchase Agreements.
Maturities
Our debt obligations as of December 31, 2014, as summarized in Note 11 to our Consolidated Financial Statements, had contractual
maturities as follows (in thousands):
Year
2015
2016
2017
Nonrecourse
Recourse(A)
Total
$
$
631,604
2,309,062
509,400
3,450,066
$
$
2,411,121
201,112
—
2,612,233
$
$
3,042,725
2,510,174
509,400
6,062,299
(A)
Excludes recourse debt related to linked transactions. Refer to Note 10 to our Consolidated Financial Statements included
herein.
The repurchase agreements with full recourse to us include the financing of $1,466.8 million face amount of Agency RMBS,
$533.1 million face amount of the Non-Agency RMBS, $567.9 million face amount of the Residential Mortgage Loans, and $21.4
million of Real Estate Owned, while the financing of $6.0 million face amount of the Non-Agency RMBS, $240.8 million face
amount of the Agency RMBS, $299.5 million face amount of the Residential Mortgage Loans repurchase agreements and $13.7
million of Real Estate Owned is non-recourse debt. The weighted average differences between the fair value of the assets and the
face amount of available financing for the Agency RMBS repurchase agreements and Non-Agency RMBS repurchase agreements
were 1.9% and 25.4%, respectively, and for residential mortgage loans was 25.1% during the year ended December 31, 2014. The
notes payable with full recourse to us include the financing of $22.2 million face amount of Residential Mortgage Loans, and $0.8
million of Real Estate Owned, while $2,890.2 million face amount of Servicer Advances notes payable are non-recourse debt.
Borrowing Capacity
The following table represents our borrowing capacity as of December 31, 2014 (in thousands):
Debt Obligations/ Collateral
Collateral Type
Repurchase Agreements
Residential Mortgage Loans(A)
Real Estate Loans
Notes Payable
Servicer Advances(B)
Servicer Advances
Borrowing
Capacity
Balance
Outstanding
Available
Financing
$
$
2,074,991
$
903,747
$
1,171,244
4,300,900
6,375,891
$
2,890,230
3,793,977
$
1,410,670
2,581,914
(A)
(B)
Includes $25.0 million of borrowing capacity and $1.3 million of balance outstanding related to one of our linked
transactions (Note 10 to our Consolidated Financial Statements).
Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other
borrowing conditions as set forth in the applicable agreements, including any applicable advance rate. We pay a 0.2%
fee on the unused borrowing capacity.
Covenants
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Certain of the debt obligations are subject to customary loan covenants and event of default provisions, including event of default
provisions triggered by a 50% equity decline over any 12 month period or a 35% decline over any 3 month period and a 4:1
indebtedness to tangible net worth provision. We were in compliance with all of our debt covenants as of December 31, 2014.
Stockholders’ Equity
Common Stock
Our certificate of incorporation authorizes 2,000,000,000 shares of common stock, par value $0.01 per share, and 100,000,000
shares of preferred stock, par value $0.01 per share. At the time of the completion of the spin-off, there were 126,512,823 outstanding
shares of common stock which was based on the number of Newcastle’s shares of common stock outstanding on May 6, 2013 and
a distribution ratio of one share of our common stock for each share of Newcastle common stock (adjusted for the reverse split
described below).
Prior to the spin-off, Newcastle had issued options to the Manager in connection with capital raising activities. In connection with
the spin-off, the 10.7 million options that were held by FIG LLC (the Manager), or by the directors, officers or employees, of the
Manager, were converted into an adjusted Newcastle option and a new New Residential option. The exercise price of each adjusted
Newcastle option and New Residential option was set to collectively maintain the intrinsic value of the Newcastle option
immediately prior to the spin-off and to maintain the ratio of the exercise price of the adjusted Newcastle option and the New
Residential option, respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the
five day average closing price subsequent to the spin-off date.
Our Board of Directors authorized a one-for-two reverse stock split on August 5, 2014, subject to stockholder approval. In a
special meeting on October 15, 2014, our stockholders approved the reverse split. On October 17, 2014, we effected the one-for-
two reverse stock split of our common stock. As a result of the reverse stock split, every two shares of our common stock were
converted into one share of common stock, reducing the number of issued and outstanding shares of our common stock from
approximately 282.8 million to approximately 141.4 million. The impact of this reverse stock split has been retroactively applied
to all periods presented.
Approximately 2.4 million shares of our common stock were held by Fortress, through its affiliates, and its principals as of
December 31, 2014.
In April 2014, we issued 13,875,000 shares of our common stock in a public offering at a price to the public of $12.20 per share
for net proceeds of approximately $163.8 million. One of our executive officers participated in this offering and purchased an
additional 500,000 shares at the public offering price for net proceeds of approximately $6.1 million. For the purpose of
compensating the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options
to the Manager to purchase 1,437,500 shares of our common stock at a price of $12.20, which had a fair value of approximately
$1.4 million as of the grant date. The assumptions used in valuing the options were: a 2.87% risk-free rate, a 12.584% dividend
yield, 25.66% volatility and a 10 year term.
As of December 31, 2014, our outstanding options corresponding to Newcastle options issued prior to 2011 had a weighted average
strike price of $31.52 and our outstanding options corresponding to Newcastle options issued in 2011, 2012 and 2013 (as well as
options issued by us in 2013 and 2014) had a weighted average strike price of $9.04. Our outstanding options as of December 31,
2014 were summarized as follows:
Held by the Manager
Issued to the Manager and subsequently transferred to certain of the
Manager’s employees
Issued to the independent directors
Total
December 31, 2014
Issued Prior to
2011
Issued in
2011 - 2014
Total
473,377
8,432,597
8,905,974
125,622
1,000
1,700,497
1,826,119
4,000
5,000
599,999
10,137,094
10,737,093
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Accumulated Other Comprehensive Income (Loss)
During the year ended December 31, 2014, our accumulated other comprehensive income (loss) changed due to the following
factors (in thousands):
Accumulated other comprehensive income, December 31, 2013
Net unrealized gain (loss) on securities
Reclassification of net realized (gain) loss on securities into earnings
Accumulated other comprehensive income, December 31, 2014
Total Accumulated
Other Comprehensive
Income
$
$
3,214
89,415
(64,310)
28,319
Our GAAP equity changes as our real estate securities portfolio is marked to market each quarter, among other factors. The primary
causes of mark to market changes are changes in interest rates and credit spreads. During the year ended December 31, 2014, we
recorded unrealized gains on our real estate securities primarily caused by a net tightening of credit spreads. We recorded OTTI
charges of $1.4 million with respect to real estate securities and realized gains of $65.7 million on sales of real estate securities.
See “— Market Considerations” above for a further discussion of recent trends and events affecting our unrealized gains and losses
as well as our liquidity.
Common Dividends
We are organized and intend to conduct our operations to qualify as a REIT for U.S. federal income tax purposes. We intend to
make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT
distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net
capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable
income. We intend to make regular quarterly distributions of our taxable income to holders of our common stock out of assets
legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether
for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our
repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be
required to sell assets or raise capital to make cash distributions or we may make a portion of the required distribution in the form
of a taxable stock distribution or distribution of debt securities.
We make distributions based on a number of factors, including an estimate of taxable earnings per common share. Dividends
distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium
amortization and discount accretion, and non-deductible general and administrative expenses. Our quarterly dividend per share
may be substantially different than our quarterly taxable earnings and GAAP earnings per share.
Common Dividends Declared for the Period Ended
June 30, 2013
September 30, 2013
December 31, 2013
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
Paid
July 31, 2013
October 31, 2013
January 31, 2014
April 30, 2014
July 31, 2014
October 31, 2014
January 30, 2015
Amount Per Share
0.14
$
0.35
$
0.50
$
0.35
$
0.50
$
0.35
$
0.38
$
(A)
(A)
(A)
Includes a $0.15 special cash dividend made in connection with REIT distribution requirements.
Cash Flow
We did not have any cash balance during periods prior to April 5, 2013, which is the first date Newcastle contributed cash to us.
All of our cash activity occurred in Newcastle’s accounts prior to April 5, 2013.
Operating Activities
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2014 vs. 2013
Net cash flow provided by operating activities increased approximately $2.4 million for the year ended December 31, 2014 as
compared to the year ended December 31, 2013. Operating cash flows of $153.8 million for the year ended December 31, 2014
primarily consisted of net interest income received of $101.8 million, distributions of earnings from equity method investees of
$107.3 million, a fee of $5.0 million earned on a terminated deal, and decreased restricted cash of $3.9 million. These amounts
were partially offset by incentive compensation and management fees paid to the Manager of $36.3 million, income taxes paid of
$14.1 million, and other outflows of approximately $13.7 million that primarily consisted of general and administrative costs.
2013 vs. 2012
Net cash flow provided by operating activities increased approximately $152.9 million for the year ended December 31, 2013 as
compared to the year ended December 31, 2012. Operating cash flows increased $132.9 million as a result of an increase in net
interest income received of $51.3 million and an increase in distributions of earnings from equity method investees of $127.3
million. These increases were partially offset by an increase in general and administrative expenses paid of $42.9 million and an
increase in restricted cash of $2.8 million. Cash proceeds from investments, in excess of interest income, decreased by $1.7 million
primarily due to proceeds received from Excess MSRs and real estate securities prior to the spin-off, which was driven by our
additional acquisitions in the first quarter of 2013. Net cash proceeds deemed as capital distributions to Newcastle decreased $21.7
million primarily due to a decrease in cash proceeds from investments, in excess of interest income, of $1.7 million and the increase
in operating cash flow deemed as capital distributions prior to the contribution of cash by Newcastle to us.
Investing Activities
Cash flows used in investing activities were $2.0 billion and $993.5 million for the year ended December 31, 2014 and December
31, 2013, respectively. No cash flow from investing activities was recorded prior to the date of contribution of cash by Newcastle
to New Residential. Investing activities after this date consisted primarily of the acquisition of excess mortgage servicing rights,
servicer advances and real estate securities and loans, net of principal repayments from servicer advances, Agency RMBS and
Non-Agency RMBS as well as proceeds from the sale of real estate securities and loans, return of capital from our consumer loans
investment and derivative cash flows.
Financing Activities
Cash flows provided by financing activities were approximately $1.8 billion and $1.1 billion during the years ended December
31, 2014 and December 31, 2013, respectively. No cash flow from financing activities was recorded prior to the date of contribution
of cash by Newcastle to New Residential. Financing activities after this date consisted primarily of borrowings net of repayments
under debt obligations, capital contributions by Newcastle (prior to spin-off), capital contributions net of distributions from
noncontrolling interests in the equity of a consolidated subsidiary, net proceeds from the issuance of common stock, and dividends.
INTEREST RATE, CREDIT AND SPREAD RISK
We are subject to interest rate, credit and spread risk with respect to our investments. These risks are further described in Part II,
Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”
OFF-BALANCE SHEET ARRANGEMENTS
On April 1, 2013, we completed, through the Consumer Loan Companies, a co-investment in a portfolio of consumer loans. The
Consumer Loan Companies initially financed $2.2 billion of the approximately $3.0 billion purchase price with asset-backed
notes. In September 2013, the Consumer Loan Companies issued and sold an additional $0.4 billion of asset-backed notes. These
notes were subordinate to the $2.2 billion of debt issued in April 2013. We have 30% membership interests in each of the Consumer
Loan Companies and do not consolidate them. On October 3, 2014, the Consumer Loan Companies refinanced the outstanding
asset-backed notes with an asset-backed securitization for approximately $2.6 billion which bears a weighted average interest of
approximately 3.8%. The excess proceeds were distributed to the co-investors. We received approximately $337.8 million which
reduced our basis in the consumer loans investment to $0.0 million and resulted in a gain of approximately $80.1 million.
We also had approximately $85.9 million of repurchase agreements as of December 31, 2014 in transactions accounted for as
“linked transactions.” See Note 10 to our consolidated financial statements included in this report.
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We had material off-balance sheet arrangements related to our non-consolidated securitizations of mortgage loans treated as sales
in which we retained certain interests. We believe that these off-balance sheet structures presented the most efficient and least
expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted
method for financing such assets. Our exposure to credit and repurchase losses related to these non-recourse, off-balance sheet
financings is limited to $51.6 million. As of December 31, 2014, there was $949.3 million in total outstanding unpaid principal
balance of mortgage loans underlying such securitization trusts that represent off-balance sheet financings.
We did not have any other off-balance sheet arrangements as of December 31, 2014. We did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special
purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited
purposes, other than the joint venture entities. Further, we have not guaranteed any obligations of unconsolidated entities or entered
into any commitment and do not intend to provide additional funding to any such entities.
CONTRACTUAL OBLIGATIONS
As of December 31, 2014, we had the following material contractual obligations (payments in thousands):
Contract
Debt Obligations
Terms
Repurchase Agreements
Described under Note 11 to our consolidated financial statements.
Notes Payable:
Servicer Advance Financing
Described under Note 11 to our consolidated financial statements.
Residential Mortgage Loan Financing
Described under Note 11 to our consolidated financial statements.
Other Contractual Obligations
Management Agreement
Servicer Advances
MSR Investments
Interest Rate Swaps
For its services, our Manager is entitled to management fees, incentive fees,
and reimbursement for certain expenses, as defined in, and in accordance
with the terms of, the Management Agreement. Such terms are described in
Note 15 to our consolidated financial statements.
Investment commitments not yet funded as of December 31, 2014.
Investment commitments not yet funded as of December 31, 2014.
Described under Note 10 to our consolidated financial statements.
Contract
Debt Obligations
Repurchase Agreements(A)
Servicer Advance Financing(B)
Residential Mortgage Loan Financing(A)
Real Estate Owned Financing(A)
Other Contractual Obligations
Management Agreement(C)
Servicer Advances(D)
MSR Investments(D)
Interest rate swaps(E)
Total
2015
Fixed and Determinable Payments Due by Period
Thereafter
2018-2019
2016-2017
Total
$ 2,246,651
384,894
391,551
19,629
$
— $
2,505,336
497,977
16,261
— $
—
—
—
— $ 2,246,651
2,890,230
—
889,528
—
35,890
—
75,348
135,932
7,200
—
$ 3,261,205
42,028
—
—
3,697
$ 3,065,299
$
42,028
—
—
2,122
44,150
$
525,351
—
—
3,416
528,767
684,755
135,932
7,200
9,235
$ 6,899,421
(A)
(B)
Repurchase and other agreements, which have not been term financed, and mature within one year of our financial
statement date, are included in this table assuming no interest. Excludes financings accounted for as linked transactions
(refer to Note 10 to our consolidated financial statements included herein).
The servicer advance financing is comprised of notes payable. As this balance fluctuates based on future events and
assumptions, it is included in this table assuming no interest.
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(C)
(D)
(E)
Amounts reflect management fees and full expense reimbursements for the next 30 years, assuming no change in gross
equity. Incentive fee is included for the amount currently outstanding as of December 31, 2014.
Amounts represent the equity components of investment commitments that were not yet funded as of December 31, 2014.
The amounts reflected assume that these agreements are terminated at their December 31, 2014 fair value and paid at the
contractual maturity of the related interest rate swap agreements.
See Notes 14 and 18 to our consolidated financial statements included in this report for information regarding commitments and
contracts entered into subsequent to December 31, 2014.
INFLATION
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance
more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates.
Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board
of directors primarily based on our taxable income, and, in each case, our activities and balance sheet are measured with reference
to historical cost and/or fair market value without considering inflation. See “Quantitative and Qualitative Disclosures About
Market Risk—Interest Rate Risk” below.
CORE EARNINGS
We have four primary variables that impact our operating performance: (i) the current yield earned on our investments, (ii) the
interest expense incurred under the debt incurred to finance our investments, (iii) our operating expenses and (iv) our realized and
unrealized gain or losses, including any impairment and deferred tax, on our investments. “Core earnings” is a non-GAAP measure
of our operating performance excluding the fourth variable above and adjusting the earnings from the consumer loan investment
to a level yield basis. It is used by management to gauge our current performance without taking into account: (i) realized and
unrealized gains and losses, which although they represent a part of our recurring operations, are subject to significant variability
and are only a potential indicator of future economic performance; (ii) incentive compensation paid to our Manager; and (iii) non-
capitalized deal inception costs.
While incentive compensation paid to our Manager may be a material operating expense, we exclude it from core earnings because
(i) from time to time, a component of the computation of this expense will relate to items (such as gains or losses) that are excluded
from core earnings, and (ii) it is impractical to determine the portion of the expense related to core earnings and non-core earnings,
and the type of earnings (loss) that created an excess (deficit) above or below, as applicable, the incentive compensation threshold.
To illustrate why it is impractical to determine the portion of incentive compensation expense that should be allocated to core
earnings, we note that, as an example, in a given period, we may have core earnings in excess of the incentive compensation
threshold but incur losses (which are excluded from core earnings) that reduce total earnings below the incentive compensation
threshold. In such case, we would either need to (a) allocate zero incentive compensation expense to core earnings, even though
core earnings exceeded the incentive compensation threshold, or (b) assign a “pro forma” amount of incentive compensation
expense to core earnings, even though no incentive compensation was actually incurred. We believe that neither of these allocation
methodologies achieves a logical result. Accordingly, the exclusion of incentive compensation facilitates comparability between
periods and avoids the distortion to our non-GAAP operating measure that would result from the inclusion of incentive compensation
that relates to non-core earnings.
With regard to non-capitalized deal inception costs, management does not view these costs as part of our core operations. Non-
capitalized deal inception costs are generally legal and valuation service costs, as well as other professional service fees, incurred
when we acquire certain investments. These costs are recorded as "General and administrative expenses" in our Consolidated
Statements of Income.
In the fourth quarter of 2014, we modified our definition of core earnings to include accretion on held-for-sale loans as if they
continued to be held-for-investment. Although we intend to sell such loans, there is no guarantee that such loans will be sold or
that they will be sold within any expected timeframe. During the period prior to sale, we continue to receive cash flows from such
loans and believes that it is appropriate to record a yield thereon. This modification had no impact on core earnings in 2014 or
any prior period, but is expected to impact core earnings in periods subsequent to loans being classified as held-for-sale.
Management believes that the adjustments to compute “core earnings” specified above allow investors and analysts to readily
identify the operating performance of the assets that form the core of our activity, assist in comparing the core operating results
between periods, and enable investors to evaluate our current performance using the same measure that management uses to operate
the business.
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The primary differences between core earnings and the measure we use to calculate incentive compensation relate to (i) realized
gains and losses (including impairments) and (ii) non-capitalized deal inception costs. Both are excluded from core earnings and
included in our incentive compensation measure. Unlike core earnings, our incentive compensation measure is intended to reflect
all realized results of operations.
Core earnings does not represent cash generated from operating activities in accordance with GAAP and therefore should not be
considered an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure
of our liquidity and is not necessarily indicative of cash available to fund cash needs. For a further description of the difference
between cash flow provided by operations and net income, see “—Liquidity and Capital Resources” above. Our calculation of
core earnings may be different from the calculation used by other companies and, therefore, comparability may be limited. Set
forth below is a reconciliation of core earnings to the most directly comparable GAAP financial measure (dollars in thousands):
Net income (loss) attributable to common stockholders
$
352,877
$
265,949
$
41,247
Year Ended December 31,
2013
2012
2014
Impairment
Other Income adjustments:
Other Income
Other Income attributable to non-controlling interests
Deferred taxes attributable to Other Income, net of non-controlling
interests
Total Other Income Adjustments
Incentive compensation to affiliate
Non-capitalized deal inception costs
Core earnings of equity method investees:
Excess mortgage servicing rights
Consumer loans
Core Earnings
11,282
5,454
—
(375,088)
45,578
15,804
(313,706)
54,334
10,281
(241,008)
—
—
(241,008)
16,847
5,698
33,799
70,394
219,261
$
23,361
53,696
129,997
$
$
(17,423)
—
—
(17,423)
—
5,230
—
—
29,054
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates,
commodity prices, equity prices and other market based risks. The primary market risks that we are exposed to are interest rate
risk, prepayment speed risk, credit spread risk and credit risk. These risks are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond
our control. All of our market risk sensitive assets, liabilities and derivative positions are for non-trading purposes only. For a
further understanding of how market risk may affect our financial position or results of operations, please refer to “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies.”
Interest Rate Risk
Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our investments in two distinct
ways, each of which is discussed below.
First, changes in interest rates affect our net interest income, which is the difference between the interest income earned on assets
and the interest expense incurred in connection with our debt obligations and hedges.
We may use match funded structures, when appropriate and available. This means that we seek to match the maturities of our debt
obligations with the maturities of our assets to reduce the risk that we have to refinance our liabilities prior to the maturities of
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our assets, and to reduce the impact of changing interest rates on our earnings. In addition, we seek to match fund interest rates
on our assets with like-kind debt (i.e., fixed rate assets are financed with fixed rate debt and floating rate assets are financed with
floating rate debt), directly or through the use of interest rate swaps, caps or other financial instruments (see below), or through a
combination of these strategies, which we believe allows us to reduce the impact of changing interest rates on our earnings.
However, increases or decreases in interest rates can nonetheless reduce our net interest income to the extent that we are not
completely match funded. Furthermore, a period of changing interest rates can negatively impact our return on certain floating
rate investments. Although these investments may be financed with floating rate debt, the interest rate on the debt may reset prior
or subsequent to, and in some cases more or less frequently than, the interest rate on the assets, causing a decrease in return on
equity during a period of changing interest rates. See further disclosure regarding our Agency RMBS under “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Our Portfolio – Real Estate Securities – Agency
RMBS” for information about the reset terms and “Management’s Discussion and Analysis of Financial Conditions as Results of
Operations – Liquidity and Capital Resources – Debt Obligations” for information about related debt.
As of December 31, 2014, an immediate 100 basis point increase in short term interest rates, based on a shift in the yield curve,
would decrease our cash flows by approximately $14.8 million in 2015, and a 100 basis point decrease in short term interest rates
would increase our cash flows by approximately $20.3 million in 2015, based solely on our current net floating rate exposure
assuming a static portfolio of investments (including fixed rate repurchase agreements that mature within 60 days of December
31, 2014 and assuming a LIBOR floor of 0.0%). This does not include any potential impact on loan investments which were sold
subsequent to December 31, 2014.
As of December 31, 2014, an immediate 100 basis point increase in short term interest rates, based on a shift in the yield curve,
would increase our net book value by approximately $138.3 million, and a 100 basis point decrease in short term interest rates
would decrease our net book value by approximately $116.8 million, based on the present value of estimated cash flows on a static
portfolio of investments. This does not include changes in our book value resulting from potential related changes in discount
rates; refer to “—Credit Spread Risk” below. This also does not include any potential impact on loan investments which were sold
subsequent to December 31, 2014.
Second, changes in the level of interest rates also affect the yields required by the marketplace on interest rate instruments. Increasing
interest rates would decrease the value of the fixed rate assets we hold at the time because higher required yields at the same spread
result in lower prices on existing fixed rate assets in order to adjust their yield upward to meet the market.
Changes in unrealized gains or losses resulting from changes in market interest rates do not directly affect our cash flows, or our
ability to pay a dividend, to the extent the related assets are expected to be held, as their fair value is not relevant to their underlying
cash flows. As long as these fixed rate assets continue to perform as expected, our cash flows from these assets would not be
affected by increasing interest rates. Changes in unrealized gains or losses would impact our ability to realize gains on existing
investments if they were sold. Furthermore, with respect to changes in unrealized gains or losses on investments which are carried
at fair value, changes in unrealized gains or losses would impact our net book value and, in certain cases, our net income.
Our Excess MSRs, servicer advances (including the basic fee component of the related MSRs, and the related financing) and loans,
including consumer loans, are subject to interest rate risk. Generally, in a declining interest rate environment, prepayment speeds
increase which in turn would cause the value of Excess MSRs and basic fees to decrease and the value of loans to increase.
Conversely, in an increasing interest rate environment, prepayment speeds decrease which in turn would cause the value of Excess
MSRs and basic fees to increase and the value of loans to decrease. To the extent we do not hedge against changes in interest rates,
our balance sheet, results of operations and cash flows would be susceptible to significant volatility due to changes in the fair
value of, or cash flows from, Excess MSRs, basic fees and loans as interest rates change. However, rising interest rates could result
from more robust market conditions, which could reduce the credit risk associated with our investments. The effects of such a
decrease in values on our financial position, results of operations and liquidity are discussed below under "—Prepayment Speed
Exposure."
Changes in the value of our assets could affect our ability to borrow and access capital. Also, if the value of our assets subject to
short term financing were to decline, it could cause us to fund margin and affect our ability to refinance such assets upon the
maturity of the related financings, adversely impacting our rate of return on such securities.
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic
and political considerations, as well as other factors beyond our control.
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A further discussion of the sensitivity of our book value to changes in the yields required by the marketplace on interest rate
instruments is included below under "—Credit Spread Risk."
We are subject to margin calls on our repurchase agreements. Furthermore, we may, from time to time, be a party to derivative
agreements or financing arrangements that are subject to margin calls based on the value of such instruments. We seek to maintain
adequate cash reserves and other sources of available liquidity to meet any margin calls resulting from decreases in value related
to a reasonably possible (in the opinion of management) change in interest rates but there can be no assurance that our cash reserves
will be sufficient.
Prepayment Speed Exposure
Prepayment speeds significantly affect the value of Excess MSRs, basic fees and loans, including consumer loans. Prepayment
speed is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought
current, modified, liquidated or charged off. The price we pay to acquire certain investments will be based on, among other things,
our projection of the cash flows from the related pool of loans. Our expectation of prepayment speeds is a significant assumption
underlying those cash flow projections. If the fair value of Excess MSRs decreases, we would be required to record a non-cash
charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment speeds
could materially reduce the ultimate cash flows we receive from Excess MSRs or basic fees, and we could ultimately receive
substantially less than what we paid for such assets. Conversely, a significant decrease in prepayment speeds with respect to our
loans could delay our expected cash flows and reduce the yield on these investments.
We seek to reduce our exposure to prepayment through the structuring of our investments. For example, in our Excess MSR
investments, we seek to enter into “Recapture Agreements” whereby we will receive a new Excess MSR with respect to a loan
that was originated by the servicer and used to repay a loan underlying an Excess MSR that we previously acquired from that
same servicer. In lieu of receiving an Excess MSR with respect to the loan used to repay a prior loan, the servicer may supply a
similar Excess MSR. We seek to enter into such Recapture Agreements in order to protect our returns in the event of a rise in
voluntary prepayment rates.
Please refer to the table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Application
of Critical Accounting Policies — Excess MSRs” for an analysis of the sensitivity of these investments to changes in certain
market factors.
Credit Spread Risk
Credit spreads measure the yield demanded on financial instruments by the market based on their credit relative to U.S. Treasuries,
for fixed rate credit, or LIBOR, for floating rate credit. Excessive supply of such securities combined with reduced demand will
generally cause the market to require a higher yield on such securities, resulting in the use of a higher (or “wider”) spread over
the benchmark rate to value them.
Widening credit spreads would result in higher yields being required by the marketplace on financial instruments. This widening
would reduce the value of the financial instruments we hold at the time because higher required yields result in lower prices on
existing financial instruments in order to adjust their yield upward to meet the market. The effects of such a decrease in values on
our financial position, results of operations and liquidity are discussed above under “—Interest Rate Risk.”
As of December 31, 2014, a 25 basis point increase in credit spreads would decrease our net book value by approximately $42.5
million, and a 25 basis point decrease in credit spreads would increase our net book value by approximately $46.0 million, based
on a static portfolio of investments, but would not directly affect our earnings or cash flow. This does not include any potential
impact on loan investments which were sold subsequent to December 31, 2014.
In an environment where spreads are tightening, if spreads tighten on the assets we purchase to a greater degree than they tighten
the liabilities we issue, our net spread will be reduced.
Credit Risk
We are subject to varying degrees of credit risk in connection with our assets. Credit risk refers to the ability of each individual
borrower underlying our investments in Excess MSRs, servicer advances, securities and loans to make required interest and
principal payments on the scheduled due dates. If delinquencies increase, then the amount of servicer advances we are required
to make will also increase. We may also invest in loans and Non-Agency RMBS which represent “first loss” pieces; in other words,
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they do not benefit from credit support although we believe they predominantly benefit from underlying collateral value in excess
of their carrying amounts. Although we do not expect to encounter credit risk in our Agency RMBS, we do anticipate credit risk
related to Non-Agency RMBS, residential mortgage loans and consumer loans.
We seek to reduce credit risk through prudent asset selection, actively monitoring our asset portfolio and the underlying credit
quality of our holdings and, where appropriate and achievable, repositioning our investments to upgrade their credit quality. Our
pre-acquisition due diligence and processes for monitoring performance include the evaluation of, among other things, credit and
risk ratings, principal subordination, prepayment rates, delinquency and default rates, and vintage of collateral.
Liquidity Risk
The assets that comprise our asset portfolio are generally not publicly traded. A portion of these assets may be subject to legal and
other restrictions on resale or otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it
difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.
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Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements:
Report of Independent Registered Public Accounting Firm
Report on Internal Control Over Financial Reporting of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013
Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
Notes to Consolidated Financial Statements
All schedules have been omitted because either the required information is included in our consolidated financial statements and
notes thereto or it is not applicable
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of New Residential Investment Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheets of New Residential Investment Corp. and Subsidiaries (the
“Company”) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income,
stockholders’ equity and cash flows for the years ended December 31, 2014, 2013 and 2012. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the combined financial statements of SpringCastle Finance, LLC, SpringCastle Credit, LLC,
SpringCastle America, LLC and SpringCastle Acquisition, LLC (the “Limited Liability Companies”), limited liability companies
for the year ended December 31, 2013 in which the Company has a 30% interest. In the consolidated financial statements, the
Company’s investment in the Limited Liability Companies is stated at $215,062,000 as of December 31, 2013 and the Company’s
equity in the net income of the Limited Liability Companies is stated at $82,856,000 for the year ended December 31, 2013. Those
statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts
included for the Limited Liability Companies, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors for the year ended December 31, 2013, the financial statements
referred to above present fairly, in all material respects, the consolidated financial position of New Residential Investment Corp.
and Subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for the years
ended December 31, 2014, 2013 and 2012, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), New
Residential Investment Corp.’s internal control over financial reporting as of December 31, 2014, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992
framework) and our report dated March 2, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 2, 2015
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of New Residential Investment Corp. and Subsidiaries
We have audited New Residential Investment Corp. and Subsidiaries’ internal control over financial reporting as of December 31,
2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (1992 framework) (the COSO criteria). New Residential Investment Corp. and Subsidiaries’
management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, New Residential Investment Corp. and Subsidiaries maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2014 based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of New Residential Investment Corp. and Subsidiaries as of December 31, 2014 and 2013, and the
related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years
ended December 31, 2014, 2013 and 2012 of New Residential Investment Corp. and Subsidiaries and our report dated March 2,
2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
March 2, 2015
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
2014
2013
Assets
Investments in:
Excess mortgage servicing rights, at fair value
$
417,733
$
Excess mortgage servicing rights, equity method investees, at fair value
Servicer advances, at fair value
Real estate securities, available-for-sale
Residential mortgage loans, held-for-investment
Residential mortgage loans, held-for-sale
Real estate owned
Consumer loans, equity method investees
Cash and cash equivalents
Restricted cash
Derivative assets
Other assets
Liabilities and Equity
Liabilities
Repurchase agreements
Notes payable
Trades payable
Due to affiliates
Dividends payable
Deferred tax liability
Accrued expenses and other liabilities
Commitments and Contingencies
Equity
330,876
3,270,839
2,463,163
47,838
1,126,439
61,933
—
212,985
29,418
32,597
99,869
324,151
352,766
2,665,551
1,973,189
33,539
—
—
215,062
271,994
33,338
35,926
53,142
$
$
8,093,690
$
5,958,658
3,149,090
$
2,913,209
2,678
57,424
53,745
15,114
52,505
1,620,711
2,488,618
246,931
19,169
63,297
—
6,857
6,243,765
4,445,583
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 141,434,905 and
126,598,987 issued and outstanding at December 31, 2014 and December 31, 2013,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income, net of tax
Total New Residential stockholders’ equity
Noncontrolling interests in equity of consolidated subsidiaries
Total Equity
1,414
1,328,587
237,769
28,319
1,596,089
253,836
1,849,925
$
8,093,690
$
1,266
1,158,384
102,986
3,214
1,265,850
247,225
1,513,075
5,958,658
See notes to consolidated financial statements.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share and per share data)
Interest income
Interest expense
Net Interest Income
Impairment
Other-than-temporary impairment ("OTTI") on securities
Valuation provision on loans and real estate owned
Years Ended December 31,
2014
2013
2012
$
346,857
$
87,567
$
140,708
206,149
1,391
9,891
11,282
15,024
72,543
4,993
461
5,454
33,759
704
33,055
—
—
—
Net interest income after impairment
194,867
67,089
33,055
Other Income
Change in fair value of investments in excess mortgage servicing rights
Change in fair value of investments in excess mortgage servicing rights, equity method
investees
Change in fair value of investments in servicer advances
Earnings from investments in consumer loans, equity method investees
Gain on consumer loans investment
Gain on settlement of investments, net
Other income, net
Operating Expenses
General and administrative expenses
Management fee allocated by Newcastle
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
Income (Loss) Before Income Taxes
Income tax expense
Net Income (Loss)
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Net Income (Loss) Attributable to Common Stockholders
Net Income Per Share of Common Stock
Basic
Diluted
Weighted Average Number of Shares of Common Stock Outstanding
Basic
Diluted
Dividends Declared per Share of Common Stock
See notes to consolidated financial statements.
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41,615
57,280
84,217
53,840
92,020
35,487
10,629
375,088
27,001
—
19,651
54,334
3,913
104,899
465,056
22,957
442,099
89,222
352,877
2.59
2.53
$
$
$
$
$
53,332
50,343
—
82,856
—
52,657
1,820
241,008
9,975
4,134
11,209
16,847
309
42,474
265,623
—
265,623
$
(326) $
265,949
$
9,023
—
—
—
—
—
8,400
17,423
5,878
3,353
—
—
—
9,231
41,247
—
41,247
—
41,247
2.10
2.07
$
$
0.33
0.33
136,472,865
139,565,709
126,539,024
128,684,128
126,512,823
126,512,823
1.58
$
0.99
$
—
$
$
$
$
$
$
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
2014
December 31,
2013
2012
$
442,099
$
265,623
$
41,247
89,415
35,352
(64,310)
25,105
467,204
89,222
377,982
$
$
$
$
$
$
(47,664)
(12,312)
253,311
$
15,526
—
15,526
56,773
(326) $
—
253,637
$
56,773
Comprehensive income (loss), net of tax
Net income (loss)
Other comprehensive income (loss)
Net unrealized gain (loss) on securities
Reclassification of net realized (gain) loss on
securities into earnings
Total comprehensive income (loss)
Comprehensive income (loss) attributable to
noncontrolling interests
Comprehensive income (loss) attributable to common
stockholders
See notes to consolidated financial statements.
106
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2014, 2013 and 2012
(dollars in thousands)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total New
Residential
Stockholders’
Equity
Noncontrolling
Interests in
Equity of
Consolidated
Subsidiaries
Total
Equity
Equity - December 31, 2011
— $
— $
39,808
$
— $
— $
39,808
$
— $
39,808
Capital contributions
Contributions in-kind
Capital distributions
Comprehensive income (loss), net of tax
Net income
Net unrealized gain (loss) on securities
Total comprehensive income (loss)
Equity - December 31, 2012
Dividends declared
Capital contributions
Contributions in-kind
Capital distributions
—
—
—
—
—
—
—
—
—
—
368,294
164,142
(250,661)
41,247
—
—
—
—
—
—
—
—
—
—
15,526
368,294
164,142
(250,661)
41,247
15,526
56,773
— $
— $
362,830
$
— $
15,526
$
378,356
$
Issuance of common stock
126,512,823
1,265
(1,265)
Option exercise
Director share grant
Comprehensive income (loss), net of tax
Net income (loss)
Net unrealized gain (loss) on securities
Reclassification of net realized
(gain) loss on securities into earnings
Total comprehensive income (loss)
80,317
5,847
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
(125,317)
893,466
1,093,684
(1,228,054)
(1)
78
—
—
—
—
—
—
37,646
228,303
—
—
—
—
—
—
—
—
—
—
—
—
35,352
(47,664)
(125,317)
893,466
1,093,684
(1,228,054)
—
—
78
265,949
35,352
(47,664)
253,637
—
—
—
—
—
—
368,294
164,142
(250,661)
41,247
15,526
56,773
— $
378,356
—
(125,317)
247,551
—
—
—
—
—
(326)
—
—
(326)
1,141,017
1,093,684
(1,228,054)
—
—
78
265,623
35,352
(47,664)
253,311
Equity - December 31, 2013
126,598,987
$
1,266
$ 1,158,384
$ 102,986
$
3,214
$
1,265,850
$
247,225
$ 1,513,075
Dividends declared
Capital contributions
Capital distributions
Issuance of common stock
Option exercise
Dilution impact of distributions from
consolidated subsidiaries
Director share grant
Comprehensive income (loss), net of tax
—
—
—
14,375,000
426,102
—
34,816
Net income (loss)
Net unrealized gain (loss) on securities
Reclassification of net realized
(gain) loss on securities into earnings
—
—
—
Total comprehensive income (loss)
—
—
—
144
4
—
—
—
—
—
—
—
—
169,761
905
(916)
453
(218,094)
—
—
—
—
—
—
—
—
—
352,877
—
—
—
—
—
—
—
—
—
—
89,415
(64,310)
(218,094)
—
—
169,905
909
(916)
453
352,877
89,415
(64,310)
377,982
—
142,082
(218,094)
142,082
(225,609)
(225,609)
—
—
916
—
89,222
—
—
89,222
169,905
909
—
453
442,099
89,415
(64,310)
467,204
Equity - December 31, 2014
141,434,905
$
1,414
$ 1,328,587
$ 237,769
$
28,319
$
1,596,089
$
253,836
$ 1,849,925
See notes to consolidated financial statements.
107
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash Flows From Operating Activities
Net income (loss)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Change in fair value of investments in excess mortgage servicing rights
Change in fair value of investments in excess mortgage servicer rights, equity method
investees
Change in fair value of investments in servicer advances
Earnings from consumer loan equity method investees
Change in fair value of investments in derivative assets
Accretion and other amortization
(Gain) / loss on settlement of investments (net)
(Gain) / loss on transfer of loans to REO
(Gain) / loss on mortgage servicing rights recapture agreement
(Gain) / loss on consumer loans investment
Other-than-temporary impairment (“OTTI”)
Valuation provision on loans and real estate owned
Non-cash directors’ compensation
Deferred tax provision
Changes in:
Restricted cash
Other assets
Due to affiliates
Accrued expenses and other liabilities
Reduction of liability deemed as capital contribution by Newcastle
Other operating cash flows:
Interest received from excess mortgage servicing rights
Interest received from servicer advance investments
Interest received from residential mortgage loans, held-for-investment
Distributions of earnings from excess mortgage servicing rights, equity method investees
Distributions of earnings from consumer loan equity method investees
Cash proceeds from investments, in excess of interest income
Net cash proceeds deemed as capital distributions to Newcastle
Net cash provided by (used in) operating activities
Cash Flows From Investing Activities
Acquisition of investments in excess mortgage servicing rights
Acquisition of investments in excess mortgage servicing rights, equity method investees
Purchase of servicer advance investments
Purchase of Agency RMBS
Purchase of Non-Agency RMBS
Purchase of residential mortgage loans, held-for-investment
Purchase of residential mortgage loans, held-for-sale
Purchase of derivative assets
Purchase of real estate owned
Payment for settlement of derivatives
Return of investments in excess mortgage servicing rights
Return of investments in excess mortgage servicing rights, equity method investees
Principal repayments from servicer advance investments
Principal repayments from Agency RMBS
Principal repayments from Non-Agency RMBS
Principal repayments from residential mortgage loans, held-for-investment
Return of investments in consumer loan equity method investees
Proceeds from sale of Agency RMBS
Proceeds from sale of Non-Agency RMBS
Proceeds from settlement of derivatives
Proceeds from sale of residential mortgage loans
Proceeds from sale of real estate owned
Net cash provided by (used in) investing activities
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Year Ended December 31,
2014
2013
2012
$
442,099
$
265,623
41,247
(41,615)
(57,280)
(84,217)
(53,840)
13,037
(278,408)
(35,487)
(17,489)
(1,157)
(92,020)
1,391
9,891
453
15,114
3,920
(14,582)
38,255
31,945
—
49,880
110,247
7,969
53,427
53,840
—
—
155,373
(94,113)
—
(6,828,135)
(1,437,952)
(1,745,165)
(884,557)
(1,577,933)
(70,218)
(10,690)
(43,133)
42,603
25,743
6,389,154
271,673
110,594
42,771
306,473
796,392
1,288,980
87,645
1,299,747
16,502
(2,013,619)
(53,332)
(50,343)
—
(82,856)
(1,820)
(59,250)
(52,657)
—
—
—
4,993
461
78
—
(2,790)
(8,274)
14,033
6,360
11,515
26,391
—
2,212
44,454
82,856
41,435
(36,149)
152,940
(63,434)
(233,764)
(670,820)
(605,114)
(407,689)
—
—
(70,227)
—
—
24,735
4,018
103,394
302,920
66,495
3,809
30,359
—
521,865
—
—
—
(993,453)
(9,023)
—
—
—
—
(32,835)
—
—
—
—
—
—
—
—
—
(84)
4,978
(352)
—
—
—
—
—
—
43,113
(47,044)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
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Cash Flows From Financing Activities
Repayments of repurchase agreements
Margin deposits under repurchase agreements and derivatives
Repayments of notes payable
Payment of deferred financing fees
Common stock dividends paid
Borrowings under repurchase agreements
Return of margin deposits under repurchase agreements and derivatives
Borrowings under notes payable
Issuance of common stock
Costs related to issuance of common stock
Capital contributions
Noncontrolling interest in equity of consolidated subsidiaries - contributions
Noncontrolling interest in equity of consolidated subsidiaries - distributions
Net cash provided by (used in) financing activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents, Beginning of Period
Cash and Cash Equivalents, End of Period
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest
Cash paid during the period for income taxes
Year Ended December 31,
2014
2013
2012
(4,869,799)
(385,814)
(5,416,883)
(8,444)
(227,646)
6,412,137
366,925
5,841,474
173,507
(2,693)
—
142,082
(225,609)
1,799,237
(2,271,765)
(61,152)
(59,149)
(5,541)
(62,020)
2,634,990
21,020
423,515
—
—
245,058
247,551
—
1,112,507
(59,009)
271,994
271,994
—
212,985
$
271,994
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
127,998
$
10,212
$
14,115
—
649
—
$
$
Supplemental Schedule of Non-Cash Investing and Financing Activities Prior to Date of Cash Contribution by Newcastle
Cash proceeds from investments, in excess of interest income
$
— $
41,435
$
Acquisition of real estate securities
Acquisition of investments in excess mortgage servicing rights
Acquisition of investments in excess mortgage servicing rights, equity method investees
Deposit paid on investment in excess mortgage servicing rights
Return of deposit paid on investment in excess mortgage servicing rights
Acquisition of residential mortgage loans, held-for-investment
Acquisition of investments in consumer loan equity method investees
Borrowings under repurchase agreements
Repayments of repurchase agreements
Capital contributions by Newcastle
Contributions in-kind by Newcastle
Capital distributions to Newcastle
—
—
—
—
—
—
—
—
—
—
—
—
242,750
—
125,099
—
—
35,138
245,121
1,179,068
3,902
648,408
1,093,684
1,228,054
Supplemental Schedule of Non-Cash Investing and Financing Activities Subsequent to Date of Cash Contribution by Newcastle
Acquisition of restricted cash
Acquisition of servicer advance investments
Borrowings under notes payable--servicer advance investments
Dividends declared but not paid
Transfer from residential mortgage loans, held-for-investment to real estate owned
Transfer from residential mortgage loans, held-for-investment to residential mortgage loans, held-for-
sale
Non-cash distribution from Consumer Loan Companies
$
— $
30,548
$
—
—
53,745
21,842
846,904
609
2,093,704
2,124,252
63,297
—
—
—
See notes to consolidated financial statements.
43,113
121,262
221,832
—
25,200
25,200
—
—
153,510
2,588
368,294
164,142
250,661
—
—
—
—
—
—
—
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
1. ORGANIZATION
New Residential Investment Corp. (together with its subsidiaries, “New Residential”) is a Delaware corporation that was formed
as a limited liability company in September 2011 for the purpose of making real estate related investments and commenced
operations on December 8, 2011. On December 20, 2012, New Residential was converted to a corporation. Newcastle Investment
Corp. (“Newcastle”) was the sole stockholder of New Residential until the spin-off (Note 13), which was completed on May 15,
2013. Newcastle is listed on the New York Stock Exchange (“NYSE”) under the symbol “NCT.”
Following the spin-off, New Residential is an independent publicly traded real estate investment trust (“REIT”) primarily focused
on investing in residential mortgage related assets. New Residential is listed on the NYSE under the symbol “NRZ.”
New Residential has elected and intends to qualify to be taxed as a REIT for U.S. federal income tax purposes. As such, New
Residential will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed
to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with
various other requirements. See Note 17 regarding New Residential's taxable REIT subsidiaries.
New Residential has entered into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an
affiliate of Fortress Investment Group LLC (“Fortress”), pursuant to which the Manager provides for a management team and
other professionals who are responsible for implementing New Residential’s business strategy, subject to the supervision of New
Residential’s board of directors. For its services, the Manager is entitled to management fees and incentive compensation, both
defined in, and in accordance with the terms of, the Management Agreement. The Manager also manages Newcastle and investment
funds that own a majority of Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer, and Springleaf
Holdings, Inc. (“Springleaf”), managing member of the Consumer Loan Companies (Note 9).
As of December 31, 2014, New Residential conducted its business through the following segments: (i) investments in Excess
MSRs, (ii) investments in servicer advances, (iii) investments in real estate securities, (iv) investments in real estate loans,
(v) investments in consumer loans and (vi) corporate.
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals
as of December 31, 2014. In addition, Fortress, through its affiliates, held options to purchase approximately 8.9 million shares
of New Residential’s common stock as of December 31, 2014.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting — The accompanying consolidated financial statements are prepared in accordance with U.S. generally
accepted accounting principles (“GAAP’’). The consolidated financial statements include the accounts of New Residential and its
consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. New Residential
consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity, as well
as those entities deemed to be variable interest entities (“VIEs”) in which New Residential is determined to be the primary
beneficiary. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from
other parties. A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power
to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb
losses or the right to receive benefits from the VIE that could be potentially significant to the VIE. For entities over which New
Residential exercises significant influence, but which do not meet the requirements for consolidation, New Residential uses the
equity method of accounting whereby it records its share of the underlying income of such entities.
New Residential’s investments in Non-Agency RMBS are variable interests. New Residential monitors these investments and
analyzes the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements. New
Residential has not consolidated the securitization entities that issued its Non-Agency RMBS. This determination is based, in part,
on New Residential’s assessment that it does not have the power to direct the activities that most significantly impact the economic
performance of these entities, such as through ownership of a majority of the currently controlling class. In addition, New Residential
is not obligated to provide, and has not provided, any financial support to these entities.
110
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Noncontrolling interests represent the ownership interests in certain consolidated subsidiaries held by entities or persons other
than New Residential. These interests are related to noncontrolling interests in consolidated entities that hold New Residential’s
investment in servicer advances (Note 6).
The consolidated financial statements for periods prior to May 15, 2013 have been prepared on a spin-off basis from the consolidated
financial statements and accounting records of Newcastle and reflect New Residential’s historical results of operations, financial
position and cash flows, in accordance with U.S. GAAP. As presented in the Consolidated Statements of Cash Flows, New
Residential did not have any cash balance during periods prior to April 5, 2013, which is the first date Newcastle contributed cash
to New Residential. All of its cash activity occurred in Newcastle’s accounts during these periods. The consolidated financial
statements for periods prior to May 15, 2013 do not necessarily reflect what New Residential’s consolidated results of operations,
financial position and cash flows would have been had New Residential operated as an independent company prior to the spin-
off.
Certain expenses of Newcastle, comprised primarily of a portion of its management fee, have been allocated to New Residential
to the extent they were directly associated with New Residential for periods prior to the spin-off on May 15, 2013. The portion of
the management fee allocated to New Residential prior to the spin-off represents the product of the management fee rate payable
by Newcastle (1.5%) and New Residential’s gross equity, which management believes is a reasonable method for quantifying the
expense of the services provided by the employees of the Manager to New Residential. The incremental cost of certain legal,
accounting and other expenses related to New Residential’s operations prior to May 15, 2013 are reflected in the accompanying
consolidated financial statements. New Residential and Newcastle do not share any expenses following the spin-off.
Certain prior period amounts have been reclassified to conform to the current period's presentation. In addition, New Residential
completed a one-for-two reverse stock split in October 2014 (Note 13). The impact of this reverse stock split has been retroactively
applied to all periods presented.
Risks and Uncertainties — In the normal course of business, New Residential encounters primarily two significant types of
economic risk: credit and market. Credit risk is the risk of default on New Residential’s investments that results from a borrower’s
or counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of
investments due to changes in prepayment speeds, interest rates, spreads or other market factors, including risks that impact the
value of the collateral underlying New Residential’s investments. Management believes that the carrying values of its investments
are reasonable taking into consideration these risks along with estimated prepayments, financings, collateral values, payment
histories, and other information. Furthermore, for each of the periods presented, a significant portion of New Residential’s assets
are dependent on Nationstar’s ability to perform its obligations as the servicer of residential mortgage loans underlying New
Residential’s investments in Excess MSRs, servicer advances, Non-Agency RMBS and residential mortgage loans. If Nationstar
is terminated as the servicer, New Residential’s right to receive its portion of the cash flows related to interests in MSRs is also
terminated. New Residential is similarly dependent on Springleaf as the servicer of the loans underlying its investment in the
Consumer Loan Companies (Note 9).
Additionally, New Residential is subject to significant tax risks. If New Residential were to fail to qualify as a REIT in any taxable
year, New Residential would be subject to U.S. federal corporate income tax (including any applicable alternative minimum tax),
which could be material. Unless entitled to relief under certain statutory provisions, New Residential would also be disqualified
from treatment as a REIT for the four taxable years following the year during which qualification is lost.
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Comprehensive Income — Comprehensive income is defined as the change in equity of a business enterprise during a period
from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners.
For New Residential’s purposes, comprehensive income represents net income, as presented in the Consolidated Statements of
Income, adjusted for unrealized gains or losses on securities available for sale.
111
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
INCOME RECOGNITION
Investments in Excess Mortgage Servicing Rights (“Excess MSRs”) — Excess MSRs are aggregated into pools as applicable;
each pool of Excess MSRs is accounted for in the aggregate. Interest income for Excess MSRs is accreted into interest income on
an effective yield or “interest” method, based upon the expected excess mortgage servicing amount through the expected life of
the underlying mortgages. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded
in the period in which the change in expected cash flows occurs. Under the retrospective method, the interest income recognized
for a reporting period is measured as the difference between the amortized cost basis at the end of the period and the amortized
cost basis at the beginning of the period, plus any cash received during the period. The amortized cost basis is calculated as the
present value of estimated future cash flows using an effective yield, which is the yield that equates all past actual and current
estimated future cash flows to the initial investment. In addition, New Residential’s policy is to recognize interest income only on
its Excess MSRs in existing eligible underlying mortgages. The difference between the fair value of Excess MSRs and their
amortized cost basis is recorded as “Change in fair value of investments in excess mortgage servicing rights.” Fair value is generally
determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity
premium specific to the Excess MSRs, and therefore may differ from their effective yields.
Investments in Servicer Advances (“Servicer Advances”) — New Residential accounts for its investments in Servicer Advances
similarly to its investments in Excess MSRs. Interest income for Servicer Advances is accreted into interest income on an effective
yield or “interest” method, based upon the expected aggregate cash flows of the servicer advances, including the basic fee component
of the related MSR (but excluding any Excess MSR component) through the expected life of the underlying mortgages, net of a
portion of the basic fee component of the MSR that New Residential remits to the servicer as compensation for the servicer’s
servicing activities. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded in the
period in which the change in expected cash flows occurs. Refer to “—Investments in Excess Mortgage Servicing Rights” for a
description of the retrospective method. Fair value is generally determined by discounting the expected future cash flows using
discount rates that incorporate the market risks and liquidity premium specific to the Servicer Advances, and therefore may differ
from their effective yields.
Investments in Real Estate Securities — Discounts or premiums are accreted into interest income on an effective yield or “interest”
method, based upon a comparison of actual and expected cash flows, through the expected maturity date of the security. For
securities acquired at a discount for credit quality (i.e. where it is probable at acquisition that New Residential will not collect all
contractually required interest and principal repayments), the difference between contractual cash flows and expected cash flows
at acquisition is not accreted (non-accretable difference). For these securities, the excess of expected cash flows over the carrying
value (accretable yield) is recognized as interest income on an effective yield basis.
Depending on the nature of the investment, changes to expected cash flows may result in a prospective change to yield or a
retrospective change which would include a catch up adjustment. Deferred fees and costs, if any, are recognized as a reduction to
the interest income over the terms of the securities using the interest method. Upon settlement of securities, the specific identification
method is used to determine the excess (or deficiency) of net proceeds over the net carrying value of such security recognized as
a realized gain (or loss) in the period of settlement.
Investments in Residential Mortgage Loans and REO - New Residential evaluates the credit quality of its loans, as of the
acquisition date, for evidence of credit quality deterioration. Loans with evidence of credit deterioration since their origination,
and where it is probable that New Residential will not collect all contractually required principal and interest payments, are
Purchased Credit Impaired (“PCI “) loans. At acquisition, New Residential aggregates PCI loans into pools based on common risk
characteristics and the aggregated loans are accounted for as if each pool were a single loan with a single composite interest rate
and an aggregate expectation of cash flows. The excess of the total cash flows (both principal and interest) expected to be collected
over the carrying value of the PCI loans is referred to as the accretable yield. This amount is not reported on New Residential’s
Consolidated Balance Sheets but is accreted into interest income at a level rate of return over the remaining estimated life of the
pool of loans.
Loans where New Residential expects to collect all contractually required principal and interest payments are considered performing
loans. Interest income on performing loans is accrued and recognized as interest income at their effective yield, which includes
contractual interest and the amortization of purchase price discount or premium and deferred fees or expenses.
Loans acquired with the intent to sell and loans not acquired with the intent to sell that New Residential decides to sell are classified
as held-for-sale. Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in impairment.
112
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred discounts
or premiums are an adjustment to the basis of the loan and are included in the quarterly determination of the lower of cost or fair
value adjustments and/or the gain or loss recognized at the time of sale.
Real estate owned (“REO”) assets are those individual properties where New Residential receives the property in satisfaction of
a debt (e.g., by taking legal title or physical possession). New Residential measures REO assets at the lower of cost or fair value,
with valuation changes recorded in other income.
Impairment of Securities - Securities are considered to be impaired when it is probable that New Residential will be unable to
collect all principal or interest when due according to the contractual terms of the original agreements, or for securities purchased
at a discount for credit quality or that represent retained beneficial interests in securitizations, when New Residential determines
that it is probable that it will be unable to collect as anticipated.
The evaluation of a security’s estimated cash flows includes the following, as applicable: (i) review of the credit of the issuer or
borrower, (ii) review of the credit rating of the security, (iii) review of the key terms of the security or underlying loans, (iv) review
of the performance of the underlying loans, including debt service coverage and loan to value ratios, (v) analysis of the value of
the underlying loans, (vi) analysis of the effect of local, industry and broader economic factors, and (vii) analysis of historical and
anticipated trends in defaults, loss severities and prepayments for similar securities or underlying loans. New Residential must
record a write down if it has the intent to sell a given security in an unrealized loss position, or if it is more likely than not that it
will be required to sell such a security. Upon determination of impairment, New Residential records a direct write down for securities
based on the estimated fair value of the security or underlying collateral using a discounted cash flow analysis or based on an
observable market value. Subsequent to a determination of impairment, and a related write down, income on securities is accrued
on an effective yield method from the new carrying value to the related expected cash flows, with cash received treated as a
reduction of basis.
Impairment of Loans - To the extent that they are classified as held-for-investment, New Residential must periodically evaluate
each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that New Residential
will be unable to collect all amounts due according to the contractual terms of the loan, or for PCI loans, when it is deemed probable
that New Residential will be unable to collect as anticipated. Upon determination of impairment, New Residential establishes an
allowance for loan losses with a corresponding charge to earnings.
Performing loans are aggregated into pools for the evaluation of impairment based on like characteristics, such as loan type and
acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of
borrowers, loan to value ratios, the estimated value of the underlying collateral, the key terms of the loans and historical and
anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to
estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining
impairment and in estimating the resulting loss allowance.
For PCI loans, New Residential estimates the total cash flows expected to be collected over the remaining life of each pool. Probable
decreases in expected cash flows trigger the recognition of impairment. Impairments are recognized through the provision for
loans and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows would first reverse
any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield adjustment
over the remaining estimated lives of the underlying loans.
A loan is determined to be past due when a monthly payment is due and unpaid for 30 days or more. Loans, other than PCI loans,
are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which
generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of
collection. A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated
performance under the terms of the loan or, if applicable, the terms of the restructured loan. New Residential’s ability to recognize
interest income on nonaccrual loans as cash interest payments are received rather than as a reduction of the carrying value of the
loans is based on the recorded loan balance being deemed fully collectible.
Loans held-for-sale are subject to the nonaccrual policy described above, however, as loans held-for-sale are recognized at the
lower of cost or fair value, New Residential’s allowance for loan losses and charge-off policies do not apply to these loans.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Accretion of Discount and Other Amortization — As reflected on the consolidated statements of cash flows, this item is comprised
of the following:
Accretion of servicer advance interest income
Accretion of excess mortgage servicing rights income
Accretion of net discount on securities and loans(A)
Amortization of deferred financing costs
(A)
Includes accretion of the accretable yield on PCI loans.
Other Income — This item is comprised of the following:
Gain (loss) on derivative instruments
Gain (loss) on transfer of loans to REO
Fees earned on deal termination
Other income (loss)
Year Ended December 31,
2013
2012
2014
$
$
190,206
49,180
47,793
(8,771)
278,408
$
$
4,421
40,921
14,676
(768)
59,250
$
$
—
27,496
5,339
—
32,835
Year Ended December 31,
2013
2012
2014
$
$
(13,037) $
17,489
5,000
1,177
10,629
$
1,820
—
—
—
1,820
$
$
—
—
8,400
—
8,400
Gain on settlement of investments, net — This item is comprised of the following:
Gain on sale of real estate securities, net
Gain (loss) on sale of derivatives
Gain (loss) on liquidated residential
mortgage loans, held-for-investment
Gain (loss) on sale of REO
Other gains (losses)
EXPENSE RECOGNITION
Year Ended December 31,
2014
2013
$
65,701
(36,210)
3,645
(3,686)
6,037
52,657
—
—
—
—
35,487
$
52,657
$
$
Interest Expense — New Residential finances certain investments using floating rate repurchase agreements and loans. Interest
is expensed as incurred.
General and Administrative Expenses and Loan Servicing Expense — General and administrative expenses, including legal
fees, audit fees, insurance premiums, and other costs, as well as loan servicing expenses, and are expensed as incurred.
Management Fee and Incentive Compensation to Affiliate — These represent amounts due to the Manager pursuant to the
Management Agreement. For further information on the Management Agreement, see Note 15.
BALANCE SHEET MEASUREMENT
Investments in Servicing Related Assets — Servicing Related Assets consist of New Residential’s investments in Excess MSRs
and Servicer Advances. Upon acquisition, New Residential has elected to record each of such investments at fair value. New
Residential elected to record its investments at fair value in order to provide users of the financial statements with better information
regarding the effects of prepayment risk and other market factors on Servicing Related Assets. Under this election, New Residential
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
records a valuation adjustment on its investments in Servicing Related Assets on a quarterly basis to recognize the changes in fair
value in net income as described in “Income Recognition — Investments in Excess Mortgage Servicing Rights” and “Income
Recognition — Investments in Servicer Advances.”
Investments in Real Estate Securities — New Residential has classified its investments in real estate securities as available for
sale. Securities available for sale are carried at market value with the net unrealized gains or losses reported as a separate component
of accumulated other comprehensive income, to the extent impairment losses are considered temporary. At disposition, the net
realized gain or loss is determined on the basis of the amortized cost of the specific investments and is included in earnings.
Unrealized losses on securities are charged to earnings if they reflect a decline in value that is other-than-temporary.
Investments in Residential Mortgage Loans — Residential mortgage loans for which New Residential has the intent and ability
to hold for the foreseeable future, or until maturity or payoff, are classified as held-for-investment. Performing loans held-for-
investment are presented at the aggregate unpaid principal balance adjusted for any unamortized premium or discount, deferred
fees or expenses, an allowance for loan losses, charge-offs and write-down for impaired loans. PCI loans held-for-investment are
initially recorded at fair value at acquisition and are subsequently measured net of any allowance for loan losses. To the extent
that the loans are classified as held-for-investment, New Residential periodically evaluates such loans for possible impairment as
described in “-Impairment of Loans.”
Loans which New Residential does not have the intent or the ability to hold into the foreseeable future are considered held-for-
sale and are carried at the lower of their amortized cost basis or fair value. New Residential discontinues the accretion of discounts
or amortization of premiums on loans if they are reclassified from held-for-investment to held-for-sale.
Cash and Cash Equivalents and Restricted Cash — New Residential considers all highly liquid short-term investments with
maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts on deposit with major financial
institutions exceed insured limits. New Residential held $29.4 million of restricted cash related to the financing of the servicer
advances (Note 6) that has been pledged to the note holders for interest and fees payable.
Derivatives — 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."
Accordingly, New Residential records a non-hedge derivative instrument on a net basis, with changes in market value recorded
as “Other Income” in the Consolidated Statements of Income. In the Consolidated Statement of Cash Flows, New Residential
presents the linked transactions on a gross basis with the related asset purchased reflected as an investment activity and the related
financing as a financing activity. New Residential also entered into various economic hedges, as further described in Note 10, that
are marked to fair value on a periodic basis through "Other Income."
Income Taxes — New Residential operates so as to qualify as a REIT under the requirements of the Internal Revenue Code of
1986, as amended, or the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership
of New Residential’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets
and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders of which 85% plus any
undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise
tax. Distribution of the remaining balance may extend until timely filing of New Residential’s tax return in the subsequent taxable
year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.
Certain activities of New Residential are conducted through taxable REIT subsidiaries (“TRSs”) and therefore are subject to federal
and state income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases
upon the change in tax status. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
New Residential recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable
based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for
income taxes on the consolidated statements of operations.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Other Assets and Other Liabilities — Other assets and liabilities are comprised of the following:
Other Assets
December 31,
2014
2013
Margin receivable, net
Interest and other receivables
Deferred financing costs, net(A)
Principal paydown receivable
Receivable from government
agency
Call rights
Other assets
$
$
59,021
10,455
4,446
3,595
9,108
3,728
9,516
99,869
$
40,132
Interest payable
7,548 Accounts payable
4,773 Derivative liabilities
— Current taxes payable
— Other liabilities
—
689
53,142
$
Accrued Expenses and
Other Liabilities
December 31,
2014
2013
$
$
$
7,857
28,059
14,220
2,349
20
52,505
$
4,010
2,829
18
—
—
6,857
(A)
Deferred financing costs consist primarily of costs incurred in obtaining financing, net of accumulated amortization of
$8.8 million and $0.8 million as of December 31, 2014 and 2013, respectively, which is amortized into interest expense
over the term of the financing generally using the effective interest method.
Repurchase Agreements and Notes Payable — New Residential’s repurchase agreements and notes payable are generally short-
term debt that expire within one year. Such agreements and notes payable are carried at their contractual amounts, as specified by
each repurchase or financing agreement, and generally treated as collateralized financing transactions.
Recent Accounting Pronouncements
In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage
Loans upon Foreclosure. The standard clarifies the timing of when a creditor is considered to have taken physical possession of
residential real estate collateral for a consumer mortgage loan, resulting in the reclassification of the loan receivable to real estate
owned. A creditor has taken physical possession of the property when either (1) the creditor obtains legal title through foreclosure,
or (2) the borrower transfers all interests in the property to the creditor via a deed in lieu of foreclosure or a similar legal agreement.
The standard also requires disclosure of the amount of foreclosed residential real estate property held by the creditor and the
recorded investment in residential real estate mortgage loans that are in process of foreclosure. The ASU is effective for New
Residential in the first quarter of 2015. Early adoption is permitted. New Residential has adopted the new guidance and has
determined there is no impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers (Topic 606). The standard’s core principle
is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will
need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance
obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the
transaction price to each separate performance obligation. The ASU is effective for New Residential in the first quarter of 2017.
Early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to adopt the
guidance in the ASU. New Residential is currently evaluating the new guidance to determine the impact it may have on its
consolidated financial statements.
In June 2014, the FASB issued ASU No. 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.
The standard changes the accounting for repurchase-to-maturity transactions and linked repurchase financing transactions to
secured borrowing accounting. The ASU also expands disclosure requirements related to certain transfers of financial assets that
are accounted for as sales and certain transfers accounted for as secured borrowings. The ASU is effective for New Residential in
the first quarter of 2015. Early adoption is not permitted. Disclosures are not required for comparative periods presented before
the effective date. New Residential has determined that, as of January 1, 2015, its linked transactions (Note 10) will be accounted
for as secured borrowings as further described in Note 18.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The standard provides guidance on
management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern
by requiring management to assess an entity’s ability to continue as a going concern by incorporating and expanding on certain
principles that are currently in U.S. auditing standards. The ASU is effective for New Residential for the annual period ending on
December 31, 2016. Early adoption is permitted. New Residential is currently evaluating the new guidance to determine the impact
that it may have on its consolidated financial statements.
In August 2014, the FASB issued ASU No. 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues
Task Force). The standard provides guidance on how to classify and measure certain government-guaranteed mortgage loans upon
foreclosure. A mortgage loan is to be derecognized and a separate other receivable is to be recognized upon foreclosure in the
amount of the loan balance (principal and interest) expected to be recovered from the guarantor if (1) the loan has a government
guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey
the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that
claim, and 3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate
is fixed. The ASU is effective in the first quarter of 2015 and early adoption is permitted.
New Residential adopted ASU No. 2014-14 as of September 30, 2014, as it relates to the reverse mortgage portfolio. This portfolio
is comprised primarily of U.S. Department of Housing and Urban Development (HUD)-guaranteed reverse mortgage loans. Upon
foreclosure of a reverse mortgage loan, New Residential receives the real estate property in satisfaction of the loan and intends to
dispose of the property for the best possible economic value. To the extent the liquidation proceeds are less than the unpaid principal
balance (UPB) of the loan, New Residential submits a claim to HUD for the lesser of the remaining UPB or the pre-determined
HUD claim amount. New Residential’s exposure to market risk while the foreclosed property is in its possession is limited to the
extent the HUD claim amount is unlikely to cover any shortfall in property disposal proceeds. After the adoption of ASU No.
2014-14, upon foreclosure of a guaranteed reverse mortgage loan, New Residential records a “receivable from government agency”
for the expected liquidation proceeds, comprised of both the property disposal proceeds and the maximum HUD claim amount.
New Residential used the modified retrospective transition method of adoption, that resulted in no cumulative-effect adjustment
as of the beginning of the current fiscal year.
In February 2015, the FASB issued ASU 2015-02, Consolidation. The standard amends the consolidation considerations when
evaluating certain limited partnerships, variable interest entities and investment funds. The ASU is effective for New Residential
in the first quarter of 2016. Early adoption is permitted. New Residential does not expect the adoption of this new guidance to
have an impact on its consolidated financial statements.
The FASB has recently issued or discussed a number of proposed standards on such topics as financial statement presentation,
financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on New
Residential’s reporting. New Residential has not yet fully evaluated the potential impact of these proposals, but will make such
an evaluation as the standards are finalized.
3. SEGMENT REPORTING
New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in servicer
advances, (iii) investments in real estate securities, (iv) investments in real estate loans, (v) investments in consumer loans and
(vi) corporate. The corporate segment consists primarily of (i) general and administrative expenses, (ii) the allocation of
management fees by Newcastle until the spin-off on May 15, 2013, (iii) the management fees and incentive compensation owed
to the Manager by New Residential following the spin-off, (iv) corporate cash and related interest income and (v) the secured
corporate loan and related interest expense during the period it was outstanding.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Summary financial data on New Residential’s segments is given below, together with a reconciliation to the same data for New
Residential as a whole:
Year Ended December 31, 2014
Interest income
Interest expense
Net interest income (expense)
Impairment
Other income
Operating expenses
Income (Loss) Before Income Taxes
Income tax expense
Net Income (Loss)
Noncontrolling interests in income
(loss) of consolidated subsidiaries
Net income (loss) attributable to
common stockholders
December 31, 2014
Investments
Cash and cash equivalents
Restricted cash
Derivative assets
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total equity
Noncontrolling interests in equity of
consolidated subsidiaries
Total New Residential stockholders’
equity
$
Investments in equity method investees $
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
$
49,180
$ 190,206
$
60,208
$
47,262
$
— $
1
$ 346,857
1,294
47,886
—
100,052
713
147,225
—
110,968
79,238
—
83,828
2,183
160,883
20,806
$
$
$
147,225
$ 140,077
— $
89,222
147,225
$
50,855
$
$
$
12,689
47,519
1,391
14,589
10,012
50,705
—
11,073
36,189
9,891
30,759
12,688
44,369
2,059
4,184
(4,184)
—
145,860
917
140,759
92
500
(499)
—
—
78,386
(78,885)
—
140,708
206,149
11,282
375,088
104,899
465,056
22,957
50,705
$
42,310
$ 140,667
$ (78,885) $ 442,099
— $
— $
— $
— $
89,222
50,705
$
42,310
$ 140,667
$ (78,885) $ 352,877
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
$
748,609
$3,270,839
$2,463,163
$1,236,210
$
— $
— $7,718,821
—
—
—
—
59,383
29,418
194
14,652
43,728
—
32,091
69,980
7,757
—
312
14,159
$
$
748,609
$3,374,486
$2,608,962
$1,258,438
— $2,890,230
$2,246,651
$ 925,418
$
$
215
215
25,467
17,511
2,915,697
2,264,162
748,394
458,789
344,800
24,141
949,559
308,879
—
253,836
—
—
—
—
—
609
609
102,117
212,985
—
—
469
29,418
32,597
99,869
$ 102,586
$8,093,690
— $
— $6,062,299
195
195
414
—
113,937
181,466
113,937
6,243,765
(11,351)
1,849,925
—
253,836
748,394
$ 204,953
$ 344,800
$ 308,879
$
414
$ (11,351) $1,596,089
330,876
$
— $
— $
— $
— $
— $ 330,876
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
Year Ended December 31, 2013
Interest income
Interest expense
Net interest income (expense)
Impairment
Other income
Operating expenses
Income (Loss) Before Income Taxes
Income tax expense
Net Income (Loss)
$
40,921
$
4,421
$
39,533
$
2,650
$
— $
42
$
87,567
—
40,921
—
103,675
215
144,381
—
3,901
520
—
—
2,077
(1,557)
—
10,876
28,657
4,993
52,645
312
75,997
—
—
2,650
461
1,832
357
3,664
—
—
—
—
82,856
2,076
80,780
—
247
(205)
—
—
37,437
15,024
72,543
5,454
241,008
42,474
(37,642)
265,623
—
—
$
144,381
$
(1,557) $
75,997
$
3,664
$
80,780
$ (37,642) $ 265,623
Noncontrolling interests in income
(loss) of consolidated subsidiaries $
— $
(326) $
— $
— $
— $
— $
(326)
Net income (loss) attributable to
common stockholders
$
144,381
$
(1,231) $
75,997
$
3,664
$
80,780
$ (37,642) $ 265,949
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
December 31, 2013
Investments
Cash and restricted cash
Derivative assets
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total equity
Noncontrolling interests in equity of
consolidated subsidiaries
Total New Residential
stockholders’ equity
Investments in equity method
investees
$
676,917
$2,665,551
$1,973,189
$
33,539
$ 215,062
$
— $5,564,258
—
—
2
85,243
—
7,062
51,627
1,452
44,848
22,840
34,474
—
—
—
—
145,622
305,332
—
1,230
35,926
53,142
676,919
$2,757,856
$2,071,116
— $2,390,778
$1,620,711
80
80
4,271
215,159
2,395,049
1,835,870
676,839
362,807
235,246
$
$
90,853
$ 215,062
$ 146,852
$5,958,658
22,840
$
— $
75,000
$4,109,329
32,553
55,393
35,460
33
33
84,158
336,254
159,158
4,445,583
215,029
(12,306)
1,513,075
—
247,225
—
—
—
—
247,225
676,839
$ 115,582
$ 235,246
$
35,460
$ 215,029
$ (12,306) $1,265,850
352,766
$
— $
— $
— $ 215,062
$
— $ 567,828
$
$
$
$
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Year Ended December 31, 2012
Interest income
Interest expense
Net interest income
Impairment
Other income
Operating expenses
Income (Loss) Before Income Taxes
Income tax expenses
Net Income (Loss)
Noncontrolling interests in income of
consolidated subsidiaries
Net income (loss) attributable to
stockholders
$
$
$
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
$
27,496
$
— $
6,263
$
— $
— $
— $
33,759
—
27,496
—
17,423
5,449
39,470
—
—
—
—
—
—
—
—
704
5,559
—
—
—
5,559
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,782
(3,782)
—
704
33,055
—
17,423
9,231
41,247
—
39,470
$
— $
5,559
$
— $
— $
(3,782) $
41,247
— $
— $
— $
— $
— $
— $
—
39,470
$
— $
5,559
$
— $
— $
(3,782) $
41,247
4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
The following table presents activity related to the carrying value of New Residential's investments in Excess MSRs:
Nationstar
Servicer
SLS(A)
Total
Balance as of December 31, 2012
$
245,036
$
— $
Purchases
Purchase adjustments
Interest income
Proceeds from repayments
Change in fair value
Balance as of December 31, 2013
Purchases
Interest income
Other income
Proceeds from repayments
Change in fair value
Balance as of December 31, 2014
63,434
—
40,921
(78,572)
53,332
324,151
85,735
49,143
1,157
(92,483)
41,373
—
—
—
—
—
—
8,378
37
—
—
242
$
409,076
$
8,657
$
245,036
63,434
—
40,921
(78,572)
53,332
324,151
94,113
49,180
1,157
(92,483)
41,615
417,733
(A)
Specialized Loan Servicing LLC ("SLS"). See Note 6 for a description of the SLS Transaction.
Nationstar or SLS, as applicable, as servicer, perform all servicing and advancing functions, and retain 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” in each of the Excess MSR investments to date, including those Excess
MSR investments made through investments in joint ventures (Note 5). Under the Recapture Agreements, 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 investments in servicer advances (Note 6).
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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:
December 31, 2014
Unpaid
Principal
Balance
("UPB") of
Underlying
Mortgages
Interest in Excess MSR
New
Residential
Fortress-
managed funds
Nationstar
Weighted
Average Life
Years(A)
Amortized
Cost Basis(B)
Carrying
Value(C)
Agency
Original and Recaptured Pools
$
48,217,901
32.5%-66.7%
0.0%-33.3%
33.3%-35%
5.7
$
140,455
$
188,733
Recapture Agreements
— 32.5%-66.7%
0.0%-33.3%
33.3%-35%
48,217,901
12.3
6.1
8,887
149,342
28,786
217,519
Non-Agency(D)
Original and Recaptured Pools
$
54,263,857
33.3%-80.0%
0.0%-50.0% 0.0%-33.3%
5.0
$
152,763
$
189,812
Recapture Agreements
— 33.3%-80.0%
0.0%-50.0% 0.0%-33.3%
Total
54,263,857
$
102,481,758
11.9
5.5
5.8
11,291
164,054
10,402
200,214
$
313,396
$
417,733
December 31, 2013
Unpaid
Principal
Balance
("UPB") of
Underlying
Mortgages
Interest in Excess MSR
New
Residential
Fortress-
managed funds
Nationstar
Weighted
Average Life
Years(A)
Amortized
Cost Basis(B)
Carrying
Value(C)
Agency
Original and Recaptured Pools
$
28,134,026
65.0%-66.7%
0.0%-33.3%
33.3%-35%
5.3
$
93,099
$
120,271
Recapture Agreements
— 65.0%-66.7%
0.0%-33.3%
33.3%-35%
28,134,026
Non-Agency(D)
Original and Recaptured Pools
$
50,819,588
40.0%-80.0%
Recapture Agreements
— 40.0%-80.0%
0.0%-40.0%
0.0%-40.0%
20.0%
20.0%
50,819,588
$
78,953,614
12.2
5.8
7,648
100,747
24,389
144,660
5.2
$
149,852
$
173,007
13.3
5.8
5.8
10,830
160,682
6,484
179,491
$
261,429
$
324,151
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this
investment.
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.
Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.
Excess MSR investments in which New Residential also invested in related servicer advances, including the basic fee
component of the related MSR, as of December 31, 2014 (Note 6).
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Total
(A)
(B)
(C)
(D)
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Changes in fair value recorded in other income is comprised of the following:
Original and Recaptured Pools
Recapture Agreements
Year Ended December 31,
2014
2013
2012
$
$
35,000
6,615
41,615
$
$
37,692
15,640
53,332
$
$
12,467
(3,444)
9,023
As of December 31, 2014 and 2013, weighted average discount rates of 9.6% and 12.5%, respectively, were used to value New
Residential's investments in Excess MSRs (directly and through equity method investees).
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in
Excess MSRs:
State Concentration
California
Florida
New York
Texas
Maryland
Washington
Virginia
Arizona
Illinois
New Jersey
Other U.S.
Percentage of Total Outstanding Unpaid Principal Amount
December 31, 2014
December 31, 2013
31.5%
7.7%
4.3%
4.2%
4.0%
3.6%
3.3%
3.2%
3.2%
3.2%
31.8%
100.0%
31.5%
9.8%
4.9%
4.0%
3.5%
3.9%
3.1%
3.5%
2.7%
3.3%
29.8%
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.
5. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS, 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:
Excess MSR assets
Other assets
Other liabilities
Equity
New Residential's investment
New Residential's ownership
December 31, 2014
653,293
8,472
(13)
661,752
330,876
$
$
$
December 31, 2013
703,681
5,534
(3,683)
705,532
352,766
$
$
$
50.0%
50.0%
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Interest income
Other income
Expenses
Net income
Year Ended December 31,
2013
2014
2012
$
$
67,698
46,961
(99)
114,560
$
$
50,306
53,964
(3,585)
100,685
$
$
—
—
—
—
New Residential’s investments in equity method investees changed during the years ended December 31, 2014 and 2013 as follows:
Balance at beginning of period
Contributions to equity method investees
Distributions of earnings from equity method investees
Distributions of capital from equity method investees
Change in fair value of investments in equity method investees
Balance at end of period
2014
2013
352,766
—
(53,427)
(25,743)
57,280
330,876
$
$
—
358,864
(33,189)
(23,252)
50,343
352,766
$
$
The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
December 31, 2014
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
$
87,584,677
Recapture Agreements
Non-Agency(E)
—
87,584,677
66.7%
66.7%
Original and Recaptured Pools
58,673,144
66.7%-77.0%
Recapture Agreements
—
66.7%-77.0%
58,673,144
$
146,257,821
50.0%
50.0%
50.0%
50.0%
$
299,065
$
370,059
67,136
366,201
86,756
456,815
173,784
12,325
186,109
181,368
15,110
196,478
$
552,310
$
653,293
5.6
11.7
6.7
5.1
12.4
5.6
6.3
December 31, 2013
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)
Original and Recaptured Pools
$ 104,728,969
Recapture Agreements
Non-Agency(E)
—
104,728,969
66.7%
66.7%
Original and Recaptured Pools
68,890,509
66.7-77.0%
Recapture Agreements
—
66.7-77.0%
Total
68,890,509
$ 173,619,478
50.0%
50.0%
50.0%
50.0%
$
341,006
$
384,183
88,997
430,003
104,278
488,461
205,975
13,739
219,714
208,055
7,165
215,220
$
649,717
$
703,681
5.1
11.8
6.5
5.4
13.4
5.9
6.3
(A)
The remaining interests are held by Nationstar.
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Agency
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
(B)
(C)
(D)
(E)
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.
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.
The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.
Excess MSR investments in which New Residential also invested in related servicer advances, including the basic fee
component of the related MSR as of December 31, 2014 (Note 6).
As of December 31, 2014 and 2013, weighted average discount rates of 9.6% and 12.5%, respectively, were used to value New
Residential's investments in Excess MSRs (directly and through equity method investees).
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments
made through equity method investees:
State Concentration
California
Florida
New York
Texas
Georgia
New Jersey
Illinois
Maryland
Virginia
Washington
Other U.S.
Percentage of Total Outstanding Unpaid Principal Amount
December 31, 2014
December 31, 2013
23.5%
8.9%
5.6%
4.8%
4.1%
3.9%
3.5%
3.3%
3.2%
2.8%
36.4%
100.0%
23.5%
9.2%
5.3%
4.9%
4.0%
3.7%
3.5%
3.1%
3.1%
2.8%
36.9%
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.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
6. INVESTMENTS IN SERVICER ADVANCES
On December 17, 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC,
the “Buyer”) consolidated by New Residential, agreed to purchase $3.2 billion of outstanding servicer advances on a portfolio of
loans, which is a subset of the same portfolio of loans in which New Residential invests in a portion of the Excess MSR (Notes 4
and 5), including the basic fee component of the related MSRs. During the year ended December 31, 2014, the Buyer also agreed
to purchase outstanding servicer advances on an additional portfolio of loans. As of December 31, 2014, New Residential and
third-party co-investors had settled $3.0 billion of servicer advances, net of recoveries, financed with $2.8 billion of notes payables
outstanding (Note 11). A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer and owned
an approximately 44.5% interest in the Buyer as of December 31, 2014. As of December 31, 2014, noncontrolling third-party
investors, owning the remaining interest in the Buyer have funded capital commitments to the Buyer of $389.6 million and New
Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment
amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including
New Residential. As of December 31, 2014, the third-party co-investors and New Residential have previously funded their
commitments, however the Buyer may recall $200.0 million and $160.5 million of capital distributed to the third-party co-investors
and New Residential, respectively. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess
of their respective capital commitments, regardless of the capital requirements of the Buyer that holds its investment in servicer
advances.
The Buyer has purchased servicer advances from Nationstar, is required to purchase all future servicer advances made with respect
to these pools from Nationstar, and receives cash flows from advance recoveries and the basic fee component of the related MSRs,
net of compensation paid back to Nationstar in consideration of Nationstar’s servicing activities. The compensation paid to
Nationstar as of December 31, 2014 was approximately 9.2% of the basic fee component of the related MSRs plus a performance
fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return
on its equity.
In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs, all of the servicer
advances and related basic fee portion of the MSR (the “Advance Fee”), and a portion of the call rights related to an underlying
pool of residential mortgage loans with a UPB of approximately $3.0 billion which is serviced by Specialized Loan Servicing LLC
(“SLS”). Fortress-managed funds acquired the other 50% of the Excess MSRs. The aggregate purchase price was approximately
$229.7 million. The par amount of the total advance commitments for the SLS transaction are $219.2 million (with related financing
of $195.5 million). As of December 31, 2014, the closed portion of the purchase of $93.8 million included $8.4 million for 50%
of the Excess MSRs, $83.8 million for servicer advances and Advance Fee (of which $74.3 million was financed as of December
31, 2014), and $1.6 million to fund a portion of the call rights on 57 of the 99 underlying securitization trusts. The remaining
portion of the purchase price of $135.9 million included servicer advances and Advance Fee unfunded commitments of
approximately $133.8 million that were funded in January 2015 (with approximately $121.2 million of related financing) and $2.1
million to fund the remaining portion of the call rights on 57 of the 99 underlying securitization trusts. SLS will continue to service
the loans in exchange for a servicing fee of 10.75 bps and an incentive fee (the “Incentive Fee”) which is based on the ratio of the
outstanding servicer advances to the UPB of the underlying loans.
New Residential elected to record its investments in servicer advances, including the right to the basic fee component of the related
MSRs, 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 market factors.
The following is a summary of the investments in servicer advances, including the right to the basic fee component of the related
MSRs, made by New Residential:
December 31, 2014
Servicer advances
December 31, 2013
Servicer advances
Amortized
Cost Basis
Carrying
Value(A)
Weighted
Average
Discount Rate
Weighted
Average Life
(Years)(B)
Change in Fair
Value Recorded in
Other Income for
Year then Ended
$
$
3,186,622
$ 3,270,839
2,665,551
$ 2,665,551
5.4%
5.6%
4.0
2.7
$
$
84,217
—
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
(A)
(B)
Carrying value represents the fair value of the investments in servicer advances, including the basic fee component of
the related MSRs.
Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this
investment.
The following is additional information regarding the servicer advances and related financing:
UPB of
Underlying
Residential
Mortgage
Loans
Outstanding
Servicer
Advances
Servicer
Advances to
UPB of
Underlying
Residential
Mortgage
Loans
Carrying
Value of
Notes
Payable
Loan-to-Value Cost of Funds(B)
Gross Net(A) Gross
Net
December 31, 2014
Servicer advances(C)
December 31, 2013
Servicer advances(C)
$ 96,547,773
$ 3,102,492
3.2% $ 2,890,230
91.4% 90.4%
3.0%
2.3%
$ 43,444,216
$ 2,661,130
6.1% $ 2,390,778
89.8% 88.6%
4.0%
2.3%
(A)
(B)
(C)
Ratio of face amount of borrowings to par amount of servicer advance collateral, net of an interest reserve maintained
by the Buyer.
Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and
facility fees. Net Cost of Funds excludes facility fees.
The following types of advances comprise the investments in servicer advances:
Principal and interest advances
Escrow advances (taxes and insurance advances)
Foreclosure advances
Total
December 31, 2014
729,713
1,600,713
772,066
3,102,492
$
$
December 31, 2013
1,516,715
934,525
209,890
2,661,130
$
$
Interest income recognized by New Residential related to its investments in servicer advances was comprised of the following:
Interest income, gross of amounts attributable to servicer
compensation
Amounts attributable to base servicer compensation
Amounts attributable to incentive servicer compensation
Interest income from investments in servicer advances
Others' interests in the equity of the Buyer is computed as follows:
Total Advance Purchaser LLC equity
Others' ownership interest
Others' interest in equity of consolidated subsidiary
$
$
$
$
Year Ended December 31,
2013
2014
290,309
(26,092)
(74,011)
190,206
$
$
6,708
(2,287)
—
4,421
December 31, 2014
December 31, 2013
457,545
55.5%
253,836
$
$
362,807
68.1%
247,225
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Others' interests in the Buyer's net income is computed as follows:
Net Advance Purchaser LLC income (loss)
Others' ownership interest as a percent of total(A)
Others' interest in net income (loss) of consolidated subsidiaries
$
$
159,374
56.0%
89,222
$
$
(517)
63.1%
(326)
(A)
As a result, New Residential owned 44.0% and 36.9% of the Buyer, on average during the years ended December 31,
2014 and 2013, respectively.
Year Ended December 31,
2014
2013
See Note 11 regarding the financing of servicer advances.
7. INVESTMENTS IN REAL ESTATE SECURITIES
During the year ended December 31, 2014, New Residential acquired $3.2 billion face amount of Non-Agency RMBS for
approximately $1.5 billion and $1.3 billion face amount of Agency RMBS for approximately $1.4 billion. The $1.3 billion in
Agency RMBS includes $0.3 billion of floating rate securities and $1.0 billion of fixed rate specified pools comprised of new
production mortgages that are expected to carry less prepayment risk and warrant a premium relative to TBA pools. New Residential
sold Non-Agency RMBS with a face amount of approximately $2.0 billion and an amortized cost basis of approximately $1.2
billion for approximately $1.3 billion, recording a gain on sale of approximately $60.6 million. Furthermore, New Residential sold
Agency RMBS with a face amount of $746.9 million and an amortized cost basis of approximately $791.7 million for approximately
$796.4 million, recording a gain on sale of approximately $4.7 million.
During 2013, New Residential acquired $1.3 billion face amount of Non-Agency RMBS for approximately $835.6 million and
$608.9 million face amount of Agency ARM RMBS for approximately $645.5 million. In addition, Newcastle contributed $1.0
billion face amount of Agency ARM RMBS to New Residential during 2013, prior to the spin-off (Note 13). New Residential sold
$729.7 million face amount of Non-Agency RMBS for approximately $521.9 million and recorded a gain of $52.7 million.
During the third quarter of 2013, Nationstar exercised their call rights related to four Non-Agency RMBS trusts, in which Nationstar
was the master servicer. New Residential owned $2.6 million face amount of Non-Agency RMBS issued by these trusts. New
Residential received par on these securities, which had an amortized cost basis of $2.1 million prior to the repayment, and recorded
interest income of $0.6 million related to these securities in the third quarter of 2013.
On March 6, 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated and New Residential entered into an agreement pursuant
to which New Residential agreed to purchase approximately $625 million face amount of Non-Agency residential mortgage
securities for approximately $553 million. The purchased securities were issued by the American General Mortgage Loan Trust
2009-1 and represent 75% of the mezzanine and subordinate tranches (the "2009-1 Retained Certificates") of a securitization
sponsored by Third Street Funding LLC, an affiliate of Springleaf. The securitization, including the 2009-1 Retained Certificates,
is collateralized by residential mortgage loans with a face amount of approximately $0.9 billion. On May 30, 2014, New Residential
sold the 2009-1 Retained Certificates for approximately $598.5 million and recorded a gain of approximately $39.7 million. At
the time of sale, the 2009-1 Retained Certificates had an amortized cost basis of approximately $558.8 million. The purchase and
sale of the 2009-1 Retained Certificates is included in the purchases and sales described above.
On May 27, 2014, New Residential exercised its call rights related to sixteen Non-Agency RMBS trusts and purchased performing
and non-performing residential mortgage loans contained in such trusts prior to their termination. New Residential owned $17.4
million face amount of securities issued by these trusts and received par on these securities, which had an amortized cost basis of
$12.0 million prior to the repayment. See Note 8 for further details on this transaction.
On August 25, 2014, New Residential exercised its call rights related to nineteen Non-Agency RMBS trusts and purchased
performing and non-performing residential mortgage loans contained in such trusts prior to their termination. New Residential
owned $15.4 million face amount of securities issued by these trusts and received par on these securities, which had an amortized
cost basis of $13.1 million prior to the repayment. See Note 8 for further details on this transaction.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
In December 2014, New Residential purchased $186.7 million face amount of Non-Agency RMBS for approximately $114.3
million. The investment was financed with an $84.6 million repurchase agreement with the same counterparty from which it
purchased the securities. This purchase was accounted for as a linked transaction (Note 10).
On December 26, 2014, New Residential exercised its call rights related to twenty-five Non-Agency RMBS trusts and purchased
performing and non-performing residential mortgage loans contained in such trusts prior to their termination. New Residential
owned $27.9 million face amount of securities issued by these trusts and received par on these securities, which had an amortized
cost basis of $24.0 million prior to the repayment. See Note 8 for further details on this transaction.
The following is a summary of New Residential’s real estate securities as of December 31, 2014 and December 31, 2013, 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.
Gross Unrealized
Weighted Average
Outstanding
Face
Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value(A)
Number
of
Securities
Rating(B)
Coupon
Yield
Life
(Years)(C)
Principal
Subordination(D)
$
$
$
1,646,361
$
1,724,329
$ 18,572
$
(2,738)
$ 1,740,163
1,896,150
710,515
15,327
(2,842)
723,000
3,542,511
$
2,434,844
$ 33,899
$
(5,580)
$ 2,463,163
1,314,130
$
1,403,215
$
3,434
$
(3,885)
$ 1,402,764
872,866
566,760
7,618
(3,953)
570,425
$
2,186,996
$
1,969,975
$ 11,052
$
(7,838)
$ 1,973,189
104
142
246
114
100
214
AAA
CCC
3.22%
2.22%
1.98%
3.37%
A
2.86%
2.83%
AAA
CCC-
3.18%
1.33%
0.94%
4.68%
BBB+
2.28%
2.66%
5.0
6.4
5.7
4.1
8.0
5.7
N/A
17.3%
N/A
7.4%
Asset Type
December 31, 2014
Agency RMBS(E)(F)
Non-Agency RMBS(G)
Total/Weighted
Average
December 31, 2013
Agency RMBS(E)(F)
Non-Agency RMBS(G)
Total/Weighted
Average
(A)
(B)
(C)
(D)
(E)
(F)
(G)
Fair value, which is equal to carrying value for all securities. See Note 12 regarding the estimation of fair value.
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 five bonds for which New Residential was unable to obtain rating
information. 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.
The weighted average life is based on the timing of expected principal reduction on the assets.
Percentage of the outstanding face amount of securities that is subordinate to New Residential’s investments.
Includes securities issued or guaranteed by U.S. Government agencies such as the Federal National Mortgage Association
(“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
The total outstanding face amount was $1.0 billion and $0.0 billion for fixed rate securities and $0.6 billion and $1.3
billion for floating rate securities as of December 31, 2014 and 2013, respectively.
The total outstanding face amount was $1.0 billion (including $959.1 million of interest-only notional amount) and $6.6
million for fixed rate securities and $882.4 million (including $130.6 million of residual and interest-only notional amount)
and $866.2 million (including $42.9 million of residual and interest-only notional amount) for floating rate securities as
of December 31, 2014 and 2013, respectively.
Unrealized losses that are considered other than temporary are recognized currently in earnings. During the year ended December
31, 2014, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $1.4 million with respect to real estate
securities. During the year ended December 31, 2013, New Residential recorded OTTI of $5.0 million, of which $3.8 million was
recorded with respect to real estate securities included in the spin-off on May 15, 2013. Based on Newcastle management’s analysis
of these securities, Newcastle determined it did not have the intent to hold the securities past May 15, 2013. New Residential has
also recorded OTTI of $1.0 million with respect to real estate securities sold in January 2014 that were in an unrealized loss position
as of December 31, 2013 since New Residential determined that it did not have the intent to hold the securities, as well as $0.3
million with respect to expected credit loss related to real estate securities in an unrealized loss position as of December 31, 2013,
based on management’s analysis of expected cash flows of these securities. 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 management’s best estimate of their cash flows, which support its belief
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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, 2014.
Securities in an
Unrealized Loss
Position
Less than Twelve
Months
Twelve or More
Months
Total/Weighted
Average
Amortized Cost Basis
Weighted Average
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)
$
1,223,482
$
372,024
$
(448)
$
371,576
$
(3,889)
$ 367,687
135,012
145,401
—
145,401
(1,691)
143,710
$
1,358,494
$
517,425
$
(448)
$
516,977
$
(5,580)
$ 511,397
71
17
88
BBB
2.49% 2.54%
AAA
2.88% 1.69%
A-
2.53% 2.45%
5.4
4.5
5.3
(A)
(B)
This amount represents other-than-temporary impairment recorded on securities that are in an unrealized loss position as
of December 31, 2014.
The weighted average rating of securities in an unrealized loss position for less than twelve months excludes the rating
of five bonds for which New Residential was unable to obtain rating information.
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, 2014
Unrealized Losses
Fair Value
Amortized Cost
Basis After
Impairment
$
— $
—
— $
—
Credit(A)
Non-Credit(B)
—
— $
—
N/A
Securities New Residential intends to sell(C)
Securities New Residential is more likely than not to be
required to sell(D)
Securities New Residential has no intent to sell and is not
more likely than not to be required to sell:
Credit impaired securities
Non credit impaired securities
106,892
404,505
107,712
409,265
Total debt securities in an unrealized loss position
$
511,397
$
516,977
$
(448)
—
(448) $
(820)
(4,760)
(5,580)
(A)
(B)
(C)
(D)
This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion
of credit losses, New Residential’s management 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 management’s expectations of prepayment speeds, 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.
This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other
comprehensive income.
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, 2014.
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.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
The following table summarizes the activity related to credit losses on debt securities:
Year Ended December 31,
2014
2013
Beginning balance of credit losses on debt securities for which a portion of an OTTI was
recognized in other comprehensive income
$
2,071
$
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
Additions for credit losses on securities for which an OTTI was not previously recognized
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
568
823
—
(401)
(1,934)
—
—
4,993
—
(2,878)
(44)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized
in other comprehensive income
$
1,127
$
2,071
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:
December 31, 2014
December 31, 2013
Geographic Location
Western U.S.
Southeastern U.S.
Northeastern U.S.
Midwestern U.S.
Southwestern U.S.
Other(A)
Outstanding
Face Amount
779,930
409,755
344,716
190,480
170,829
440
1,896,150
$
$
Percentage of
Total
Outstanding
Outstanding
Face Amount
317,111
198,298
164,481
98,682
51,425
42,869
872,866
41.1% $
21.6%
18.2%
10.0%
9.0%
0.1%
100.0% $
Percentage of
Total
Outstanding
36.3%
22.7%
18.9%
11.3%
5.9%
4.9%
100.0%
(A)
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, 2014, the face amount of these real estate securities was $754.6 million, with total expected cash flows
of $734.9 million and a fair value of $552.1 million on the dates that New Residential purchased the respective securities. For
those securities acquired during the year ended December 31, 2013, the face amount was $1.1 billion, the total expected cash flows
were $0.9 billion and the fair value was $0.7 billion 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:
December 31, 2014
December 31, 2013
Outstanding Face
Amount
Carrying Value
$
$
536,342
729,895
$
$
414,298
483,680
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
The following is a summary of the changes in accretable yield for these securities:
Beginning Balance
Additions
Accretion
Reclassifications from non-accretable difference
Disposals
Ending Balance
See Note 11 regarding the financing of real estate securities.
8. INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
Year Ended December 31,
2014
2013
$
$
143,067
189,252
(14,035)
20,385
(156,998)
181,671
$
$
90,077
155,854
(19,939)
40,785
(123,710)
143,067
Certain of New Residential's investments in residential mortgage loans were acquired through the exercise of call rights:
• On May 27, 2014, New Residential exercised its call rights related to sixteen Non-Agency RMBS trusts and purchased
performing and non-performing residential mortgage loans with a UPB of approximately $282.2 million at a price of
approximately $289.4 million, contained in such trusts prior to their termination. New Residential securitized
approximately $233.8 million in UPB of performing loans, which was recorded as a sale for accounting purposes, and
recognized a gain on settlement of investments of approximately $3.5 million. New Residential retained performing and
non-performing loans with a UPB of approximately $48.4 million at a price of $40.1 million. Additionally, New Residential
acquired $1.3 million of real estate owned.
• On August 25, 2014, New Residential exercised its call rights related to nineteen Non-Agency RMBS trusts and purchased
performing and non-performing residential mortgage loans with a UPB of approximately $530.1 million at a price of
approximately $536.3 million, contained in such trusts prior to their termination. Additionally, New Residential acquired
$3.0 million of real estate owned. New Residential identified approximately $463.0 million UPB in performing loans for
future securitization and classified as Held-for-Sale. On October 3, 2014, New Residential securitized these loans Held-
for-Sale, which was recorded as a sale for accounting purposes, recognized a gain on settlement of investments of
approximately $7.0 million, and paid approximately $25.8 million to acquire interest-only notes representing a beneficial
interest in the securitization.
• On, December 26, 2014, New Residential exercised its call rights related to twenty-five Non-Agency RMBS trusts and
purchased performing and non-performing loans with a UPB of approximately $597.1 million at a price of approximately
$623.7 million, contained in such trusts prior to their termination. New Residential securitized approximately $516.1
million in UPB of performing loans, which was recorded as a sale for accounting purposes, recognized a gain on settlement
of investments of approximately $0.7 million, and paid approximately $28.9 million to acquire interest only notes
representing a beneficial interest in the securitization. New Residential retained performing and non-performing loans
with a UPB of approximately $81.0 million at a price of $71.7 million. Additionally, New Residential acquired $4.3
million of real estate owned.
Certain of New Residential's investments in residential mortgage loans have historically been accounted for as linked transactions
(see "—Linked Transactions"). New Residential sold the majority of this investment in October 2014.
Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of
acquisition. New Residential accounts for loans based on the following categories:
• Reverse Mortgage Loans
Performing Loans
•
•
Purchased Credit Impaired (“PCI”) Loans
• Loans Held-for-Sale ("HFS")
• Real Estate Owned ("REO")
• Linked Transactions (treated as derivatives, Note 10)
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
The following table presents certain information regarding New Residential's residential mortgage loans outstanding by loan type,
excluding REO and linked transactions at December 31, 2014 and December 31, 2013, respectively.
December 31, 2014
Loan Type
Reverse Mortgage Loans(F)(G)
Performing Loans(H)
Total Residential Mortgage Loans, held-for-
investment
Performing Loans, held-for-sale(H)
Purchased Credit Impaired ("PCI") Loans,
held-for-sale(I)
Total Residential Mortgage Loans, held-for-
sale
December 31, 2013
Loan Type
Reverse Mortgage Loans(F)
$
$
$
$
$
$
Outstanding
Face Amount
Carrying
Value(A)
Loan
Count
Weighted
Average
Yield
Weighted
Average
Life
(Years)(B)
Floating
Rate Loans
as a % of
Face
Amount
Loan to
Value Ratio
("LTV")(C)
Weighted Avg.
Delinquency(D)
Weighted
Average
FICO(E)
45,182
$
24,965
24,399
22,873
47,838
69,581
403,992
$
$
198
731
929
10.2%
7.9%
9.4%
388,485
5,809
5.6%
960,224
737,954
5,025
5.9%
1,364,216
$
1,126,439
10,834
5.8%
57,552
57,552
$
$
33,539
33,539
328
328
10.3%
10.3%
3.9
5.9
4.6
7.2
2.6
4.0
3.7
3.7
21.4%
17.4%
20.0%
108.2%
72.0%
95.5%
82.6%
—%
53.6%
23.0%
85.0%
5.0%
3.7%
104.0%
90.0%
9.4%
98.4%
64.8%
N/A
628
628
626
571
587
22.0%
22.0%
101.4%
101.4%
84.6%
84.6%
N/A
N/A
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
Includes residential mortgage loans with a United States federal income tax basis of $1,159.1 million and $33.9 million
as of December 31, 2014 and 2013, respectively.
The weighted average life is based on the expected timing of the receipt of cash flows.
LTV refers to the ratio comparing the loan’s unpaid principal balance to the value of the collateral property.
Represents the percentage of the total principal balance that are 60+ days delinquent, $2.3 million of which are on non-
accrual status as of December 31, 2014.
The weighted average FICO score is based on the weighted average of information updated and provided by the loan
servicer on a monthly basis.
Represents a 70% interest New Residential holds in reverse mortgage loans. The average loan balance outstanding based
on total UPB is $0.3 million and $0.2 million at December 31, 2014 and December 31, 2013, respectively, and 77% and
82% of these loans outstanding at each respective date have reached a termination event. As a result, the borrower can
no longer make draws on these loans. Each loan matures upon the occurrence of a termination event.
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
Includes loans that are current or less than 30 days past due at acquisition where New Residential expects to collect all
contractually required principal and interest payments. Presented net of unamortized discounts and premiums of $15.2
million.
Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not
collect all contractually required principal and interest payments.
New Residential generally considers the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans
as its credit quality indicators. Delinquency status is a primary credit quality indicator as loans that are more than 30 days past due
provide an early warning of borrowers who may be experiencing financial difficulties. For residential mortgage loans, the current
LTV ratio is an indicator of the potential loss severity in the event of default. Finally, the geographic distribution of the loan
collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes
and specific events will affect credit quality.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
The table below summarizes the geographic distribution of the underlying residential mortgage loans as of December 31, 2014
and December 31, 2013, respectively:
State Concentration
California
New York
New Jersey
Florida
Illinois
Texas
Pennsylvania
Georgia
Maryland
Ohio
Other U.S.
Percentage of Total Outstanding Unpaid Principal Amount
December 31, 2014
December 31, 2013
15.0 %
12.2 %
7.0 %
6.3 %
4.4 %
4.1 %
3.9 %
3.6 %
3.4 %
3.1 %
37.0 %
100.0%
5.7 %
22.0 %
6.9 %
21.2 %
7.7 %
2.8 %
0.9 %
— %
2.8 %
1.1 %
28.9 %
100.0%
See Note 11 regarding the financing of residential mortgage loans.
Reverse Mortgage Loans
On February 27, 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in reverse mortgage loans
with a UPB of approximately $83.1 million as of December 31, 2012. New Residential invested approximately $35.1 million to
acquire a 70% interest in the reverse mortgage loans. Nationstar has co-invested on a pari passu basis with New Residential in
30% of the reverse mortgage loans and is the servicer of the loans performing all servicing and advancing functions and retaining
the ancillary income, servicing obligations and liabilities as the servicer.
Performing Loans
The following table provides past due information for New Residential's Performing Loans, which is an important indicator of
credit quality and the establishment of the allowance for loan losses:
December 31, 2014
Days Past Due
Current
30-59
60-89
90-119(B)
120+(C)
Delinquency Status(A)
79.1%
15.9%
2.1%
1.1%
1.8%
100.0%
(A)
(B)
(C)
Represents the percentage of the total principal balance that corresponds to loans that are in each delinquency status.
Includes loans 90-119 days past due and still accruing because they are generally placed on nonaccrual status at 120 days
or more past due.
Represents nonaccrual loans.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Activities related to the carrying value of reverse mortgage loans and performing loans held-for-investment were as follows:
Year Ended December 31, 2014
Balance at December 31, 2012
Purchases/additional fundings
Proceeds from repayments
Accretion of loan discount and other amortization
Allowance for loan losses
Balance at December 31, 2013
Purchases/additional fundings
Proceeds from repayments
Accretion of loan discount and other amortization
Allowance for loan losses
Transfer of loans to other assets
Transfer of loans to real estate owned
Transfer of loans to held-for-sale
Reversal of valuation provision on loans transferred to other assets
Balance at December 31, 2014
Reverse Mortgage Loans
$
— $
35,138
(3,788)
2,650
(461)
33,539
—
(2,810)
6,501
(1,111)
(10,261)
(947)
—
54
24,965
$
$
Performing Loans
—
—
—
—
—
—
134,818
(10,381)
2,994
(651)
—
—
(103,907)
—
22,873
Activities related to the valuation provision on reverse mortgage loans and allowance for loan losses on performing loans were
as follows:
Balance at December 31, 2012
Allowance for loan losses(A)
Charge-offs(B)
Reversal of valuation provision on loans transferred to other assets
Balance at December 31, 2013
Allowance for loan losses(A)
Charge-offs(B)(C)
Reversal of valuation provision on loans transferred to other assets
Balance at December 31, 2014
$
Reverse Mortgage Loans
$
— $
Performing Loans
—
—
—
—
—
1,811
(364)
—
1,447
461
—
—
461
1,111
—
(54)
1,518
$
(A)
(B)
(C)
Based on an analysis of collective borrower performance, credit ratings of borrowers, loan-to-value ratios, estimated
value of the underlying collateral, key terms of the loans and historical and anticipated trends in defaults and loss severities
at a pool level.
Loans, other than PCI loans, are generally charged off or charged down to the net realizable value of the collateral (i.e.,
fair value less costs to sell), with an offset to the allowance for loan losses, when available information confirms that
loans are uncollectible.
Represents a charge-off upon transfer to held-for-sale.
Purchased Credit Impaired Loans
New Residential determined at acquisition that the PCI loans acquired would be aggregated into pools based on common risk
characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio) and aggregated a total of ten pools. Loans
aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate
expectation of cash flows.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Activities related to the carrying value of PCI loans held-for-investment were as follows:
Balance at December 31, 2013
Purchases/additional fundings
Sales
Proceeds from repayments
Accretion of loan discount and other amortization
Transfer of loans to real estate owned
Transfer of loans to held-for-sale
Balance at December 31, 2014
Purchase Credit
Impaired Loans
$
$
—
749,739
—
(20,431)
30,361
(21,842)
(737,827)
—
The following is the contractually required payments receivable, cash flows expected to be collected, and fair value at acquisition
date for loans acquired during the year ended December 31, 2014:
As of Acquisition Date
$
1,846,100
$
956,970
$
749,739
Contractually
Required Payments
Receivable
Cash Flows Expected
to be Collected
Fair Value
The following is the unpaid principal balance and carrying value for loans, for which, as of the acquisition date, it was probable
that New Residential would be unable to collect all contractually required payments:
December 31, 2014
December 31, 2013
Unpaid Principal
Balance
Carrying Value
$
$
960,224
$
— $
737,954
—
The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2013
Additions
Accretion
Reclassifications from non-accretable difference(A)
Disposals(B)
Transfer to held-for-sale(C)
Balance at December 31, 2014
Year Ended December 31,
2014
$
$
—
207,231
(30,361)
6,836
(8,324)
(175,382)
—
(A)
(B)
(C)
Represents a probable and significant increase in cash flows previously expected to be uncollectible.
Includes sales of loans or foreclosures, which result in removal of the loan from the PCI loan pool at its carrying amount.
Recognition of the accretable yield ceases upon transfer of the PCI loan pools to held-for-sale.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Loans Held-for-Sale
Activities related to the carrying value of loans held-for-sale were as follows:
Balance at December 31, 2013
Purchases(A)
Securitizations
Transfers of loans from linked transactions(B)
Transfers of loans from held-for-investment(C)
Proceeds from repayments
Valuation provision on loans(D)
Balance at December 31, 2014
$
$
—
1,577,933
(1,289,687)
4,595
841,734
(2,413)
(5,723)
1,126,439
(A)
(B)
(C)
(D)
Represents loans acquired with the intent to sell.
Represents loans previously financed with the selling counterparty and accounted for as linked transactions that New
Residential decided to sell.
Represents loans not acquired with the intent to sell that New Residential decided to sell.
Represents the fair value adjustments to loans upon transfer to held-for-sale and provision recorded on certain purchased
held-for-sale loans.
Real estate owned (REO)
New Residential recognizes REO assets at the completion of the foreclosure process or upon execution of a deed in lieu of
foreclosure with the borrower. REO assets are managed for prompt sale and disposition at the best possible economic value.
During the year ended December 31, 2014, New Residential received properties in satisfaction of non-performing residential
mortgage loans included in the PCI loan portfolio. In addition, New Residential acquired properties through its purchases of
residential mortgage loan portfolios. As a result, New Residential has recognized REO assets totaling approximately $30.6 million
(net of a $2.4 million valuation allowance) during the year ended December 31, 2014. As of December 31, 2014, New Residential
had PCI residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $536.6 million. In
addition, see below regarding REO acquired through linked transactions.
Linked Transactions
In the first quarter of 2014, New Residential invested in portfolios of non-performing loans and financed the transactions with the
same counterparties from which it purchased them. New Residential accounts for the contemporaneous purchase of the investments
and the associated financings as linked transactions. Accordingly, New Residential recorded a non-hedge derivative instrument
on a net basis, with changes in market value recorded as Other Income in the Consolidated Statements of Income. For further
information on the transactions, see below and Note 10.
On January 15, 2014, New Residential purchased a portfolio of non-performing residential mortgage loans with a UPB of
approximately $65.6 million at a price of approximately $33.7 million. To finance this purchase, on January 15, 2014, New
Residential entered into a $25.3 million repurchase agreement with Credit Suisse ("CS"). This purchase was accounted for as a
linked transaction (Note 10).
On March 28, 2014, New Residential purchased a portfolio of non-performing mortgage loans with a UPB of approximately $7.0
million at a price of approximately $3.8 million. The investment was financed with a $2.5 million master repurchase agreement
with The Royal Bank of Scotland ("RBS"). This acquisition is accounted for as a linked transaction (Note 10).
On October 28, 2014, New Residential sold substantially all of its non-performing mortgage loans accounted for as linked
transactions for approximately $86.2 million, recording a gain on sale of approximately $5.6 million, and paid off $62.5 million
of related financing under repurchase agreements. At the time of sale, the non-performing mortgage loans had an outstanding
unpaid principal balance of $138.5 million.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
During the year ended December 31, 2014, New Residential received properties in satisfaction of non-performing residential
mortgage loans included in the portfolios acquired from CS and RBS accounted for as linked transactions. As a result, New
Residential has recognized REO assets totaling approximately $29.3 million, as of December 31, 2014. As of December 31, 2014
and December 31, 2013, New Residential had residential mortgage loans accounted for as linked transactions that were in the
process of foreclosure with an unpaid principal balance of $2.1 million and $0.0 million, respectively.
See Notes 2 and 18 regarding new accounting guidance for these transactions applicable in 2015.
9. INVESTMENTS IN CONSUMER LOANS, EQUITY METHOD INVESTEES
On April 1, 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan
Companies”), a co-investment in a portfolio of consumer loans with a UPB of approximately $4.2 billion as of December 31,
2012. The portfolio included over 400,000 personal unsecured loans and personal homeowner loans originated through subsidiaries
of HSBC Finance Corporation. The Consumer Loan Companies acquired the portfolio from HSBC Finance Corporation and its
affiliates. New Residential invested approximately $250 million for 30% membership interests in each of the Consumer Loan
Companies. Of the remaining 70% of the membership interests, Springleaf acquired 47% and an affiliate of Blackstone Tactical
Opportunities Advisors L.L.C. acquired 23%. Springleaf acts as the managing member of the Consumer Loan Companies. The
Consumer Loan Companies initially financed $2.2 billion of the approximately $3.0 billion purchase price with asset-backed notes.
In September 2013, the Consumer Loan Companies issued and sold an additional $0.4 billion of asset-backed notes for 96% of
par. These notes were subordinate to the $2.2 billion of debt issued in April 2013. All of these notes were refinanced in October
2014 as described below. The Consumer Loan Companies were formed on March 19, 2013, for the purpose of making this
investment, and commenced operations upon the completion of the investment. After a servicing transition period, Springleaf
became the servicer of the loans and provides all servicing and advancing functions for the portfolio.
New Residential accounts for its investment in the Consumer Loan Companies pursuant to the equity method of accounting because
it can exercise significant influence over the Consumer Loan Companies, but the requirements for consolidation are not met. New
Residential’s share of earnings and losses in these equity method investees is included in “Earnings from investments in consumer
loans, equity method investees” on the Consolidated Statements of Income. Equity method investments are included in “Investments
in consumer loans, equity method investees” on the Consolidated Balance Sheets.
On October 3, 2014, the Consumer Loan Companies refinanced the outstanding asset-backed notes with an asset-backed
securitization for approximately $2.6 billion. The proceeds in excess of the refinanced debt were distributed to the co-investors.
New Residential received approximately $337.8 million which reduced New Residential’s basis in the consumer loans investment
to $0.0 million and resulted in a gain of approximately $80.1 million. Subsequent to this refinancing, New Residential has
discontinued recording its share of the underlying earnings of the Consumer Loan Companies until such time as their cumulative
earnings exceed their cumulative cash distributions. As a result, cash distributions of $11.9 million were recorded as additional
gain by New Residential in the fourth quarter of 2014.
The following tables summarize the investment in the Consumer Loan Companies held by New Residential:
December 31, 2014
2,088,330
92,051
(2,411,421)
(12,340)
(243,380)
$
December 31, 2013
2,572,577
192,830
(2,010,433)
(32,712)
722,262
215,062
$
— $
30.0%
30.0%
Consumer Loan Assets (amortized cost basis)
Other Assets
Debt
Other Liabilities
Equity
New Residential’s investment
New Residential’s ownership
$
$
$
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Interest income
Interest expense
Provision for finance receivable losses
Other expenses, net
Change in fair value of debt
Loss on extinguishment of debt
Net income
New Residential’s equity in net income through October 3, 2014
New Residential’s ownership
Year Ended December 31,
2014
2013
$
$
$
534,990
(81,706)
(104,921)
(74,781)
(14,810)
(21,151)
237,621
53,840
$
$
$
481,056
(71,639)
(60,619)
(67,225)
—
—
281,573
82,856
30.0%
30.0%
The following is a summary of New Residential’s consumer loan investments made through equity method investees:
December 31, 2014
December 31, 2013
Unpaid
Principal
Balance
Interest in
Consumer
Loan
Companies
Carrying
Value(B)
$ 2,589,748 (A)
30.0% $ 2,088,330
Weighted
Average
Coupon(C)
18.1%
$ 3,298,769
30.0% $ 2,572,577
18.3%
Weighted
Average
Expected
Life
(Years)(D)
3.6
3.2
Weighted
Average
Yield
16.1%
15.9%
(A)
(B)
(C)
(D)
Represents the November 30, 2014 balance.
Represents the carrying value of the consumer loans held by the Consumer Loan Companies.
Substantially all of the cash flows received on the loans is required to be used to make payments on the notes described
above.
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this
investment.
New Residential’s investments in consumer loans, equity method investees changed as follows:
Balance at beginning of period
Contributions to equity method investees
Distributions of earnings from equity method investees(A)
Distributions of capital from equity method investees
Earnings from investments in consumer loan equity method investees
Balance at end of period
Year Ended December 31,
2014
2013
$
$
$
215,062
—
(53,840)
(215,062)
53,840
— $
—
245,421
(82,856)
(30,359)
82,856
215,062
(A)
During the year ended December 31, 2014, the Consumer Loan Companies distributed $53.2 million in cash to, and made
$0.6 million in tax withholding payments on behalf of, New Residential. The tax withholding payments were considered
a non-cash distribution.
10. DERIVATIVES
As of December 31, 2014, New Residential’s derivative instruments included both economic hedges that were not designated as
hedges for accounting purposes as well as RMBS and non-performing loans accounted for as linked transactions that were not
entered into for risk management purposes or for hedging activity. As of December 31, 2013, New Residential's derivative
instruments included RMBS and non-performing loans accounted for as linked transactions that were not entered into for risk
management purposes or for hedging activity. New Residential uses economic hedges to hedge a portion of its interest rate risk
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
exposure. Interest rate risk is sensitive to many factors including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors. New Residential’s credit risk with respect to economic hedges and linked
transactions is the risk of default on New Residential’s investments that results from a borrower’s or counterparty’s inability or
unwillingness to make contractually required payments.
As of December 31, 2014, New Residential held to-be-announced forward contract positions (“TBAs”) of $1.2 billion in a short
notional amount of Agency RMBS and any amounts or obligations owed by or to New Residential are subject to the right of set-
off with the TBA counterparty. New Residential’s net short position in TBAs of $1.2 billion notional was entered into as an economic
hedge in order to mitigate New Residential’s interest rate risk on certain residential mortgage loans and specified mortgage backed
securities.
New Residential’s derivatives are recorded at fair value on the Consolidated Balance Sheets as follows:
Derivative assets
Real Estate Securities(A)
Non-Performing Loans(A)
Interest Rate Caps
Derivative liabilities
Real Estate Securities
TBAs
Interest Rate Swaps
Balance Sheet Location
December 31, 2014
December 31, 2013
December 31,
Derivative assets
Derivative assets
Derivative assets
Accrued expenses and other liabilities
Accrued expenses and other liabilities
Accrued expenses and other liabilities
$
$
$
$
32,090
312
195
32,597
$
$
— $
4,985
9,235
14,220
$
1,452
34,474
—
35,926
18
—
—
18
(A)
Investments purchased from, and financed by, the selling counterparty that New Residential accounts for as linked
transactions and are reflected as derivatives.
The following table summarizes notional amounts related to derivatives:
Non-Performing Loans(A)
Real Estate Securities(B)
TBAs, short position(C)
Interest Rate Caps(D)
Interest Rate Swaps(E)
December 31,
December 31, 2014
2,931
$
186,694
1,234,000
210,000
1,107,000
December 31, 2013
164,598
$
10,000
—
—
—
(A)
(B)
(C)
(D)
(E)
Represents the UPB of the underlying loans of the non-performing loan pools within linked transactions.
Represents the face amount of the real estate securities within linked transactions.
Represents the notional amount of Agency RMBS, classified as derivatives.
Caps LIBOR at 3.0%.
Receive LIBOR and pay a fixed rate.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
The following table summarizes gains (losses) recorded in relation to derivatives:
Other income (loss)
Non-Performing Loans(A)
Real Estate Securities(A)
TBAs
Interest Rate Caps
Interest Rate Swaps
Gain (loss) on settlement of investments
Real Estate Securities(A)
TBAs
Interest Rate Swaps
Non-Performing Loans
U.S.T. Short Positions
Total gains (losses)
Year Ended December 31, 2014
2014
2013
$
$
(1,149) $
2,336
(4,985)
(4)
(9,235)
(13,037)
43
(33,638)
(8,400)
5,609
176
(36,210)
(49,247) $
1,831
(11)
—
—
—
1,820
—
—
—
—
—
1,820
(A)
Investments purchased from, and financed by, the selling counterparty that New Residential accounts for as linked
transactions and are reflected as derivatives.
The following table presents both gross and net information about linked transactions:
Non-Performing Loans
Non-performing loan assets, at fair value(A)
Repurchase agreements(B)
Real Estate Securities
Real estate securities, at fair value(C)
Repurchase agreements(B)
Net assets recognized as linked transactions
December 31,
2014
2013
$
$
$
1,581
(1,269)
312
116,739
(84,649)
32,090
32,402
$
95,014
(60,540)
34,474
9,952
(8,500)
1,452
35,926
(A)
(B)
(C)
Non-performing loans that had a UPB of $2.9 million and $164.6 million as of December 31, 2014 and 2013, respectively,
which represented the notional amount of the linked transaction and accrued interest.
Represents carrying amount that approximates fair value.
Real estate securities that had a current face amount of $186.7 million and $10.0 million as of December 31, 2014 and
2013, respectively, which represented the notional amount of the linked transaction.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
11. DEBT OBLIGATIONS
The following table presents certain information regarding New Residential’s debt obligations:
December 31, 2014(A)
December 31,
2013
Collateral
Month
Issued
Outstanding
Face
Amount
Carrying
Value
Final
Stated
Maturity
Weighted
Average
Funding
Cost
Weighted
Average
Life
(Years)
Outstanding
Face
Amortized
Cost Basis
Carrying
Value
Weighted
Average
Life
(Years)
Carrying
Value
Debt
Obligations/
Collateral
Repurchase
Agreements (B)
Agency
RMBS (C)
Non-Agency
RMBS (D)
Residential
Mortgage
Loans(E)
Real Estate
Owned(F)
Total
Repurchase
Agreements
Notes Payable
Secured
Corporate
Loan
Servicer
Advances(G)
Residential
Mortgage
Loans(H)
Real Estate
Owned(H)
Total Notes
Payable
Total/ Weighted
Average
Various
$
1,707,602
$ 1,707,602
Various
539,049
539,049
Various
867,334
867,334
Various
35,105
35,105
3,149,090
3,149,090
Jan-15 to
Feb-15
Jan-15 to
Mar-15
Jan-15 to
Aug-16
Jan-15 to
Aug-16
2.56%
2.84%
1.19%
N/A
—
—
—
—%
Various
2,890,230
2,890,230
Mar-15 to
Mar-17
3.04%
Dec-13
22,194
22,194
Oct-15
3.33%
Dec-13
785
785
Oct-15
3.33%
2,913,209
2,913,209
$
6,062,299
$ 6,062,299
3.04%
2.08%
1.2
0.7
0.4
—
1.5
0.8
0.8
1.5
0.9
0.35%
0.1
$
1,646,361
$ 1,724,329
$ 1,740,163
5.0
$
1,332,954
1.52%
0.1
1,798,586
690,507
702,572
1,388,615
1,145,122
1,145,122
N/A
N/A
54,124
N/A
6.3
4.0
287,757
—
—
1,620,711
—
—
—
3,102,492
3,186,622
3,270,839
—
4.0
75,000
2,390,778
45,182
26,483
24,965
3.9
22,840
N/A
N/A
883
N/A
—
2,488,618
$
4,109,329
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
Excludes debt related to linked transactions (Note 10).
These repurchase agreements had approximately $2.4 million of associated accrued interest payable as of December 31,
2014.
The counterparties of these repurchase agreements are Bank of America N.A. ($407.3 million), Daiwa ($347.8 million),
Jefferies ($341.0 million), Mizuho ($293.6 million), Barclays ($240.8 million), and Morgan Stanley ($77.2 million) and
were subject to customary margin call provisions. All of the Agency RMBS repurchase agreements have a fixed rate.
The counterparties of these repurchase agreements are Credit Suisse ($134.5 million), UBS ($165.6 million), Bank of
America N.A. ($105.1 million), Goldman Sachs ($72.1 million), Royal Bank of Canada ($55.7 million), and Barclays
($6.0 million) and were subject to customary margin call provisions. All of the Non-Agency RMBS repurchase agreements
have LIBOR-based floating interest rates.
The counterparties on these repurchase agreements are Credit Suisse ($345.7 million maturing in November 2015),
Nomura ($299.5 million maturing in May 2016), Bank of America N.A. ($198.5 million maturing in August 2016),
Citibank ($19.4 million maturing in May 2015) and Royal Bank of Scotland ($4.2 million). All of these repurchase
agreements have LIBOR-based floating interest rates.
The counterparties of these repurchase agreements are Royal Bank of Scotland ($17.1 million), Nomura ($13.7 million),
Bank of America, N.A. ($2.6 million) and Credit Suisse ($1.7 million). All of these repurchase agreements have LIBOR-
based floating interest rates.
$1.1 billion face amount of the notes have a fixed rate while the remaining notes bear interest equal to the sum of (i) a
floating rate index rate equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from
1.5% to 2.1%.
The note is payable to Nationstar and bears interest equal to one-month LIBOR plus 2.875%.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
In October 2014, New Residential paid off the outstanding consumer loan repurchase agreement with Credit Suisse for
approximately $125.0 million.
Certain of the debt obligations included above are obligations of New Residential’s consolidated subsidiaries, which own the
related collateral. In some cases, including the servicer advances, such collateral is not available to other creditors of New
Residential.
New Residential has margin exposure on $3.1 billion of repurchase agreements. To the extent that the value of the collateral
underlying these repurchase agreements declines, New Residential may be required to post margin, which could significantly
impact its liquidity.
As of December 31, 2014, New Residential held TBA positions of $1.2 billion in a short notional amount of Agency RMBS and
any amounts or obligations owed by or to New Residential are subject to the right of set-off with the TBA counterparty (Note 10).
As part of executing these trades, New Residential has entered into agreements with its TBA counterparties that govern the
transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default,
settlements, and various other provisions. New Residential has fulfilled all obligations and requirements entered into under these
agreements.
Activities related to the carrying value of New Residential's debt obligations were as follows:
Balance at December 31, 2012
$
— $
150,922
$
— $
— $
150,922
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Other
Total
Repurchase Agreements
Borrowings
Repayments
Notes Payable
Borrowings
Repayments
Balance at December 31, 2013(A)
Repurchase Agreements
Borrowings
Repayments
Notes Payable
Borrowings
Repayments
Balance at December 31, 2014(A)
—
—
3,745,456
(2,275,667)
—
—
—
—
3,745,456
(2,275,667)
2,449,927
(59,149)
—
—
22,840
75,000
—
—
$
2,390,778
$ 1,620,711
$
22,840
$
75,000
$
2,547,767
(59,149)
4,109,329
—
—
4,122,434
(3,496,494)
2,027,301
(1,124,862)
150,000
(150,000)
6,299,735
(4,771,356)
5,840,232
(5,340,780)
—
—
$
2,890,230
$ 2,246,651
$
1,242
(1,103)
925,418
—
(75,000)
$
— $
5,841,474
(5,416,883)
6,062,299
(A)
Excludes debt related to linked transactions (Note 10).
See Note 18 for recent activities related to New Residential's debt obligations.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Maturities
New Residential’s debt obligations as of December 31, 2014 had contractual maturities as follows:
Year
2015
2016
2017
Nonrecourse
Recourse(A)
Total
$
$
631,604
2,309,062
509,400
3,450,066
$
$
2,411,121
201,112
—
2,612,233
$
$
3,042,725
2,510,174
509,400
6,062,299
(A)
Excludes recourse debt related to linked transactions (Note 10).
Borrowing Capacity
The following table represents New Residential’s borrowing capacity as of December 31, 2014:
Debt Obligations/ Collateral
Collateral Type
Borrowing
Capacity
Balance
Outstanding
Available
Financing
Repurchase Agreements
Residential Mortgage Loans(A)
Notes Payable
Servicer Advances(B)
Real Estate Loans
$
2,074,991
$
903,747
$
1,171,244
Servicer Advances
4,300,900
6,375,891
$
2,890,230
3,793,977
$
1,410,670
2,581,914
$
(A)
(B)
Includes $25.0 million of borrowing capacity and $1.3 million of balance outstanding related to one of New Residential's
linked transactions (Note 10).
New Residential’s unused borrowing capacity is available if New Residential has additional eligible collateral to pledge
and meets other borrowing conditions as set forth in the applicable agreements, including any applicable advance rate.
New Residential pays a 0.2% fee on the unused borrowing capacity.
Certain of the debt obligations are subject to customary loan covenants and event of default provisions, including event of default
provisions triggered by a 50% equity decline over any 12 month period or a 35% decline over any 3 month period and a 4:1
indebtedness to tangible net worth provision. New Residential was in compliance with all of its debt covenants as of December 31,
2014.
12. 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.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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:
Assets:
Investments in:
Excess mortgage servicing rights, at fair
value(A)
Excess mortgage servicing rights, equity
method investees, at fair value(A)
Servicer advances
Real estate securities, available-for-sale
Residential mortgage loans, held for
investment
Residential mortgage loans, held for
sale
Non-hedge derivatives(B)
Cash and cash equivalents
Restricted cash
Liabilities:
Repurchase agreements
Notes payable
Derivative liabilities
Principal
Balance or
Notional
Amount
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
$ 102,481,758
$
417,733
$
— $
— $
417,733
$
417,733
146,257,821
3,102,492
3,542,511
330,876
3,270,839
2,463,163
69,581
47,838
1,364,216
1,126,439
399,625
212,985
29,418
32,597
212,985
212,985
29,418
29,418
—
—
—
—
—
—
—
—
330,876
330,876
3,270,839
3,270,839
1,740,163
723,000
2,463,163
—
—
195
—
—
47,913
47,913
1,140,070
1,140,070
32,402
—
—
32,597
212,985
29,418
$ 7,931,888
$ 242,403
$ 1,740,358
$ 5,962,833
$ 7,945,594
$
3,149,090
$ 3,149,090
$
— $ 2,246,651
$
902,439
$ 3,149,090
2,913,209
2,341,000
2,913,209
14,220
—
—
822,587
2,092,814
2,915,401
14,220
—
14,220
$ 6,076,519
$
— $ 3,083,458
$ 2,995,253
$ 6,078,711
(A)
(B)
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.
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.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:
Excess MSRs(A)
Excess MSRs in Equity
Method Investees(A)(B)
Level 3
Agency
Non-
Agency
Agency
Non-
Agency
Servicer
Advances
Non-Agency
RMBS
Linked
Transactions
Total
$
130,702
$
114,334
$
— $
— $
— $
289,756
$
— $
534,792
—
—
—
—
—
—
32,660
20,672
—
—
—
—
—
—
—
—
—
—
19,416
21,505
—
—
—
—
—
—
—
—
47,493
2,850
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,421
—
—
(978)
—
—
—
52,657
—
(11,604)
20,556
—
—
—
—
—
—
—
1,820
—
—
—
—
(978)
53,332
50,343
—
52,657
1,820
(11,604)
65,898
Balance at December 31, 2012
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)
Included in change in fair value of
investments in excess mortgage
servicing rights(D)
Included in change in fair value of
investments in excess mortgage
servicing rights, equity method
investees(D)
Included in change in fair value of
investments in servicer advances
Included in gain on settlement of
investments, net
Included in other income(D)
Gains (losses) included in other
comprehensive income, net of tax(E)
Interest income
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
Proceeds from repayments
Settlements(F)
Balance at December 31, 2013
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)
Included in change in fair value of
investments in excess mortgage
servicing rights(D)
Included in change in fair value of
investments in excess mortgage
servicing rights, equity method
investees(D)
Included in change in fair value of
investments in servicer advances
Included in gain on settlement of
investments, net
Included in other income(D)
Gains (losses) included in other
comprehensive income, net of tax(E)
Interest income
Purchases, sales and repayments
Purchases
Proceeds from sales
Proceeds from repayments
Settlements(F)
—
—
—
—
—
—
—
—
—
—
(40,509)
(38,063)
(46,244)
(10,198)
(103,394)
—
—
—
—
—
—
(521,865)
(83,968)
—
—
—
—
—
—
(521,865)
(322,376)
—
$
144,660
$
179,491
$
245,399
$
107,367
$
2,665,551
$
570,425
$
35,926
$
3,948,819
—
—
—
—
—
—
24,265
17,350
—
—
—
1,157
—
22,451
66,197
—
—
—
—
—
—
26,729
27,916
—
—
—
—
—
—
—
—
—
40,120
17,160
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
84,217
—
—
—
190,206
—
—
(927)
—
—
—
60,553
—
8,819
17,713
—
—
—
—
—
—
5,652
1,187
—
—
—
—
(927)
41,615
57,280
84,217
66,205
2,344
8,819
257,099
6,830,266
1,455,996
39,538
8,419,913
—
(1,288,980)
(25,240)
(1,314,220)
(41,211)
(51,272)
(52,901)
(26,269)
(6,499,401)
(100,599)
(9,069)
(6,780,722)
—
—
—
—
—
—
(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)
(B)
(C)
Includes the Recapture Agreement for each respective pool.
Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New
Residential has a 50% interest.
Transfers are assumed to occur at the beginning of the respective period.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
(D)
(E)
(F)
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.
These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of
Comprehensive Income.
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.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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:
Directly Held (Note 4)
Agency
Original and Recaptured Pools
Recapture Agreement
Non-Agency(F)
Original and Recaptured Pools
Recapture Agreement
Total/Weighted Average--Directly Held
Held through Equity Method Investees (Note 5)
Agency
Original and Recaptured Pools
Recapture Agreement
Non-Agency(F)
Original and Recaptured Pools
Recapture Agreement
Total/Weighted Average--Held through Investees
Total/Weighted Average--All Pools
Significant Inputs(A)
Prepayment
Speed(B)
Delinquency(C)
Recapture Rate(D)
Excess Mortgage
Servicing Amount
(bps)(E)
10.9%
8.0%
10.7%
12.5%
8.0%
12.2%
11.5%
13.2%
8.0%
12.3%
13.4%
8.0%
13.1%
12.5%
12.2%
5.5%
5.0%
5.5%
N/A
N/A
N/A
5.5%
6.7%
5.0%
6.4%
N/A
N/A
N/A
6.4%
6.3%
31.1%
19.8%
30.4%
10.0%
20.0%
10.7%
20.0%
33.3%
20.0%
30.9%
10.0%
20.0%
10.7%
24.1%
22.6%
22
21
22
15
20
15
18
19
23
19
12
20
12
17
17
(A)
(B)
(C)
(D)
(E)
(F)
Weighted by amortized cost basis of the mortgage loan portfolio.
Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
Projected percentage of mortgage loans in the pool that will miss their mortgage payments.
Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar.
Weighted average total mortgage servicing amount in excess of the basic fee.
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.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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
2.1%
Prepayment
Speed
12.6%
Delinquency
15.6%
Mortgage
Servicing
Amount(A)
19.4 bps
Discount
Rate
5.4%
December 31, 2014
(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.
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, and vintage on a loan level
basis. Management considers collateral-specific prepayment experience when determining this vector.
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
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
•
•
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)
$ 1,740,163
Single
Quote(B)
$
Total
Level
Agency RMBS
Non-Agency RMBS(C)
Total
$
$
1,646,361
$ 1,724,329
— $ 1,740,163
1,896,150
710,515
709,346
13,654
723,000
3,542,511
$ 2,434,844
$ 2,449,509
$
13,654
$ 2,463,163
2
3
(A)
(B)
(C)
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.
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).
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:
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
December 31, 2014
Fair Value
Performing Loans
PCI Loans
Total/Weighted Average
$
$
36,613
573,510
610,123
Discount
Rate
Weighted
Average Life
(Years)(A)
Prepayment
Rate
CDR(B)
Loss
Severity(C)
4.6%
5.7%
5.6%
7.5
2.6
2.9
4.2%
2.9%
3.0%
4.2%
N/A
40.2%
30.9%
31.5%
(A)
(B)
(C)
The weighted average life is based on the expected timing of the receipt of cash flows.
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.
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%
Performing Loans
PCI Loans
374,745
164,444
383,689
169,206
N/A
N/A
Total/Weighted Average
$
564,154
$
577,860
$
1,057
4.6%
5.5%
5.1%
3.9
7.0
2.8
5.6
N/A
5.7%
2.3%
N/A
2.2%
N/A
5.9%
44.9%
25.8%
37.6%
(A)
(B)
(C)
(D)
The weighted average life is based on the expected timing of the receipt of cash flows.
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.
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.
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
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
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.
13. EQUITY AND EARNINGS PER SHARE
Equity and Dividends
On April 26, 2013, Newcastle announced that its board of directors had formally declared the distribution of shares of common
stock of New Residential, a then wholly owned subsidiary of Newcastle. Following the spin-off, New Residential is an independent,
publicly-traded REIT primarily focused on investing in residential mortgage related assets. The spin-off was completed on May
15, 2013 and New Residential began trading on the New York Stock Exchange under the symbol “NRZ.” The spin-off transaction
was effected as a taxable pro rata distribution by Newcastle of all the outstanding shares of common stock of New Residential to
the stockholders of record of Newcastle as of May 6, 2013. The stockholders of Newcastle as of the record date received one share
of New Residential common stock for each share of Newcastle common stock held.
New Residential’s certificate of incorporation authorizes 2,000,000,000 shares of common stock, par value $0.01 per share, and
100,000,000 shares of preferred stock, par value $0.01 per share. At the time of the completion of the spin-off, there were 126,512,823
outstanding shares of common stock which was based on the number of Newcastle’s shares of common stock outstanding on May
6, 2013 and a distribution ratio of one share of New Residential common stock for each share of Newcastle common stock (adjusted
for the reverse split described below).
New Residential’s Board of Directors authorized a one-for-two reverse stock split on August 5, 2014, subject to stockholder
approval. In a special meeting on October 15, 2014, New Residential’s stockholders approved the reverse split. On October 17,
2014, New Residential effected the one-for-two reverse stock split of its common stock. As a result of the reverse stock split,
every two shares of New Residential’s common stock were converted into one share of common stock, reducing the number of
issued and outstanding shares of New Residential’s common stock from approximately 282.8 million to approximately 141.4
million. The impact of this reverse stock split has been retroactively applied to all periods presented.
In April 2014, New Residential issued 13,875,000 shares of its common stock in a public offering at a price to the public of $12.20
per share for net proceeds of approximately $163.8 million. One of New Residential’s executive officers participated in this offering
and purchased an additional 500,000 shares at the public offering price for net proceeds of approximately $6.1 million. For the
purpose of compensating the Manager for its successful efforts in raising capital for New Residential, in connection with this
offering, New Residential granted options to the Manager to purchase 1,437,500 shares of New Residential’s common stock at a
price of $12.20, which had a fair value of approximately $1.4 million as of the grant date. The assumptions used in valuing the
options were: a 2.87% risk-free rate, a 12.584% dividend yield, 25.66% volatility and a 10 year term.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
An employee of the Manager exercised 107,500 options with a weighted average exercise price of $5.61 on May 7, 2014. Upon
exercise, 107,500 shares of common stock of New Residential were issued. Employees of the Manager and one of New Residential's
directors exercised an aggregate of 498,500 options with a weighted average exercise price of $5.62 in August 2014. Upon exercise,
276,037 shares of common stock of New Residential were issued. A former employee of the Manager exercised 42,566 options
with a weighted average exercise price of $7.19 on December 5, 2014. Upon exercise, 42,566 shares of common stock of New
Residential were issued.
Common dividends have been declared as follows:
Declaration Date
June 3, 2013
September 18, 2013
December 17, 2013
March 19, 2014
June 17, 2014
September 18, 2014
December 18, 2014
Per Share
Quarterly
Dividend
Special
Dividend
Total
Dividend
Total Amounts
Distributed
(millions)
0.14
0.35
0.35
0.35
0.35
0.35
0.38
$
— $
—
0.15
—
0.15
—
—
$
0.14
0.35
0.50
0.35
0.50
0.35
0.38
17.7
44.3
63.3
44.3
70.6
49.5
53.7
Payment Date
July 31, 2013
$
October 31, 2013
January 31, 2014
April 30, 2014
July 31, 2014
October 31, 2014
January 30, 2015
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals
at December 31, 2014.
Option Plan
New Residential has a Nonqualified Stock Option and Incentive Award Plan, as amended (the “Plan”) which provides for the grant
of equity-based awards, including restricted stock, options, stock appreciation rights, performance awards, tandem awards and
other equity-based and non-equity based awards, in each case to the Manager, and to the directors, officers, employees, service
providers, consultants and advisor of the Manager who perform services for New Residential, and to New Residential’s directors,
officers, service providers, consultants and advisors. New Residential has initially reserved 15,000,000 shares of its common stock
for issuance under the Plan; on the first day of each fiscal year beginning during the ten-year term of the Plan in and after calendar
year 2014, that number will be increased by a number of shares of New Residential’s common stock equal to 10% of the number
of shares of common stock newly issued by New Residential during the immediately preceding fiscal year (and, in the case of
fiscal year 2013, after the effective date of the Plan). No adjustment was made on January 1, 2014. An increase of 1,437,500 was
made on January 1, 2015. New Residential’s board of directors may also determine to issue options to the Manager that are not
subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital
raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules. Upon exercise, all
options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of
exercise over the strike price per share unless advance approval is made to settle options in shares of common stock.
Prior to the spin-off, Newcastle had issued options to the Manager in connection with capital raising activities. In connection with
the spin-off, 10.7 million options that were held by the Manager, or by the directors, officers or employees of the Manager, were
converted into an adjusted Newcastle option and a new New Residential option. The exercise price of each adjusted Newcastle
option and New Residential option was set to collectively maintain the intrinsic value of the Newcastle option immediately prior
to the spin-off and to maintain the ratio of the exercise price of the adjusted Newcastle option and the New Residential option,
respectively, to the fair market value of the underlying shares as of the spin-off date, in each case based on the five day average
closing price subsequent to the spin-off date.
Upon joining the board, non-employee directors were, in accordance with the Plan, granted options relating to an aggregate of
4,000 shares of common stock. The fair value of such options was not material at the date of grant.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
New Residential’s outstanding options were summarized as follows:
December 31, 2014
December 31, 2013
Issued Prior
to 2011
Issued in 2011-
2014
Total
Issued Prior
to
2011
Issued in 2011 -
2013
Total
Held by the Manager
473,377
8,432,597
8,905,974
748,277
8,088,167
8,836,444
Issued to the Manager and subsequently
transferred to certain of the Manager’s
employees
Issued to the independent directors
Total
125,622
1,000
599,999
1,700,497
1,826,119
4,000
5,000
267,785
1,000
1,255,000
1,522,785
5,000
6,000
10,137,094
10,737,093
1,017,062
9,348,167
10,365,229
The following table summarizes New Residential’s outstanding options as of December 31, 2014. The last sales price on the New
York Stock Exchange for New Residential’s common stock in the year ended December 31, 2014 was $12.77 per share.
Recipient
Directors
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Exercised(D)
Expired unexercised
Outstanding
Date of
Grant/
Exercise(A)
Various
2003 - 2007
Mar-11
Sep-11
Apr-12
May-12
Jul-12
Jan-13
Feb-13
Apr-14
2013-2014
2003 - 2004
Number of
Options
6,000
1,226,555
838,417
1,269,917
948,750
1,150,000
1,265,000
2,875,000
1,150,000
1,437,500
(802,492)
(627,554)
10,737,093
Options
Exercisable
as of
December 31,
2014
Weighted
Average
Exercise
Price(B)
Intrinsic
Value as of
December 31,
2014
(millions)
$
5,000
598,999
547,583
849,916
920,983
1,117,333
1,192,344
2,204,165
843,332
383,333
N/A
N/A
8,662,988
$
17.54
31.52
6.58
4.98
6.82
7.34
7.34
10.24
11.48
12.20
5.81
N/A
—
—
3.4
6.6
5.5
6.1
6.6
5.6
1.1
0.2
N/A
N/A
(A)
(B)
(C)
Options expire on the tenth anniversary from date of grant.
The strike prices are subject to adjustment in connection with return of capital dividends.
The Manager assigned certain of its options to Fortress’s employees as follows:
Date of Grant
2004 - 2007
2012
2013
Total
Range of Strike
Prices
Total Unexercised
Inception to Date
$29.92 to $33.80
$6.82 to $7.34
$10.24 to $11.48
125,622
600,000
1,100,497
1,826,119
(D)
Exercised by employees of Fortress, subsequent to their assignment, or by directors. The options exercised had an intrinsic
value of $4.5 million.
Income and Earnings Per Share
Net income earned prior to the spin-off is included in additional paid-in capital instead of retained earnings since the accumulation
of retained earnings began as of the date of spin-off from Newcastle.
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
New Residential is required to present both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net
income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income
by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common
stock equivalents during each period. New Residential’s common stock equivalents are its outstanding options. During the years
ended December 31, 2014 and 2013 based on the treasury stock method, New Residential had 3,092,844 and 2,145,104 dilutive
common stock equivalents, respectively.
For the purposes of computing EPS for periods prior to the spin-off on May 15, 2013, New Residential treated the common shares
issued in connection with the spin-off as if they had been outstanding for all periods presented, similar to a stock split. For the
purposes of computing diluted EPS for periods prior to the spin-off on May 15, 2013, New Residential treated the 10.7 million
options issued on the spin-off date as a result of the conversion of Newcastle options as if they were granted on May 15, 2013
since no New Residential awards were outstanding prior to that date.
Noncontrolling Interests
Noncontrolling interests is comprised of the interests held by third parties in consolidated entities that hold New Residential’s
investment in servicer advances (Note 6).
14. COMMITMENTS AND CONTINGENCIES
Litigation – New Residential may, from time to time, be a defendant in legal actions from transactions conducted in the ordinary
course of business. As of December 31, 2014, New Residential is not subject to any material litigation, individually or in the
aggregate, nor, to management’s knowledge, is any material litigation currently threatened against New Residential.
Indemnifications – In the normal course of business, New Residential and its subsidiaries enter into contracts that contain a variety
of representations and warranties and that provide general indemnifications. New Residential’s maximum exposure under these
arrangements is unknown as this would involve future claims that may be made against New Residential that have not yet occurred.
However, based on Newcastle’s and its own experience, New Residential expects the risk of material loss to be remote.
Capital Commitments — As of December 31, 2014, New Residential had outstanding capital commitments related to investments
in the following investment types (also refer to Note 18 for additional capital commitments entered into subsequent to December 31,
2014):
Excess MSRs — As of December 31, 2014, New Residential had outstanding capital commitments of $7.2 million related to the
acquisition of Excess MSRs on portfolios of Agency residential mortgage loans. See Notes 4 and 5 for information on New
Residential’s investments in Excess MSRs.
Servicer Advances — New Residential and third-party co-investors agreed to purchase future servicer advances related to Non-
Agency mortgage loans. The actual amount of future advances purchased will be based on: (a) the credit and prepayment
performance of the underlying loans, (b) the amount of advances recoverable prior to liquidation of the related collateral and (c)
the percentage of the loans with respect to which no additional advance obligations are made. The actual amount of future advances
is subject to significant uncertainty. See Note 6 for information on New Residential’s investments in servicer advances.
Residential Mortgage Loans — As part of its investment in residential mortgage loans, New Residential may be required to outlay
capital. These capital outflows primarily consist of advance escrow and tax payments, residential maintenance and property
disposition fees. The actual amount of these outflows is subject to significant uncertainty. See Note 8 for information on New
Residential’s investments in residential mortgage loans.
Debt Covenants — New Residential’s debt obligations contain various customary loan covenants (Note 11).
Certain Tax-Related Covenants — If New Residential is treated as a successor to Newcastle under applicable U.S. federal income
tax rules, and if Newcastle fails to qualify as a REIT, New Residential could be prohibited from electing to be a REIT. Accordingly,
Newcastle has (i) represented that it has no knowledge of any fact or circumstance that would cause New Residential to fail to
qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with New Residential as necessary to enable
New Residential to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
information and representations to New Residential and its tax counsel with respect to the composition of Newcastle’s income and
assets, the composition of its stockholders, and its operation as a REIT; and (iii) covenanted to use its reasonable best efforts to
maintain its REIT status for each of Newcastle’s taxable years ending on or before December 31, 2014 (unless Newcastle obtains
an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Newcastle’s failure to
maintain its REIT status will not cause New Residential to fail to qualify as a REIT under the successor REIT rule referred to
above). Additionally, New Residential covenanted to use its reasonable best efforts to qualify for taxation as a REIT for its taxable
year ended December 31, 2013.
15. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES
New Residential is party to a Management Agreement with its Manager which provides for automatically renewing one-year terms
subject to certain termination rights. The Manager’s performance is reviewed annually and the Management Agreement may be
terminated by New Residential by payment of a termination fee, as defined in the Management Agreement, equal to the amount
of management fees earned by the Manager during the twelve consecutive calendar months immediately preceding the termination,
upon the affirmative vote of at least two-thirds of the independent directors, or by a majority vote of the holders of common stock.
Pursuant to the Management Agreement, the Manager, under the supervision of New Residential’s board of directors, formulates
investment strategies, arranges for the acquisition of assets and associated financing, monitors the performance of New Residential’s
assets and provides certain advisory, administrative and managerial services in connection with the operations of New Residential.
Effective May 15, 2013, the Manager is entitled to receive a management fee in an amount equal to 1.5% per annum of New
Residential’s gross equity calculated and payable monthly in arrears in cash. Gross equity is generally the equity transferred by
Newcastle on the distribution date, plus total net proceeds from stock offerings, plus certain capital contributions to subsidiaries,
less capital distributions and repurchases of common stock.
In addition, effective May 15, 2013, the Manager is entitled to receive annual incentive compensation in an amount equal to the
product of (A) 25% of the dollar amount by which (1) (a) New Residential’s funds from operations before the incentive
compensation, excluding funds from operations from investments in the Consumer Loan Companies and any unrealized gains or
losses from mark-to-market valuation changes on investments and debt (and any deferred tax impact thereof), per share of common
stock, plus (b) earnings (or losses) from the Consumer Loan Companies computed on a level-yield basis (such that the loans are
treated as if they qualified as loans acquired with a discount for credit quality as set forth in ASC 310-30, as such codification was
in effect on June 30, 2013) as if the Consumer Loan Companies had been acquired at their GAAP basis on May 15, 2013, earnings
(or losses) from equity method investees invested in Excess MSRs as if such equity method investees had not made a fair value
election, and gains (or losses) from debt restructuring and gains (or losses) from sales of property and other assets, in each case
per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity
transferred by Newcastle on the date of the spin-off and the prices per share of New Residential’s common stock in any offerings
(adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied
by (B) the weighted average number of shares of common stock outstanding. “Funds from operations” means net income (computed
in accordance with GAAP), excluding gains (or losses) from debt restructuring and gains (or losses) from sales of property, plus
depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations
will be computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of New
Residential’s independent directors based on changes in, or certain applications of, GAAP. Funds from operations is determined
from the date of the spin-off and without regard to Newcastle’s prior performance.
In addition to the management fee and incentive compensation, New Residential is responsible for reimbursing the Manager for
certain expenses paid by the Manager on behalf of New Residential.
Due to affiliates is comprised of the following amounts:
Management fees
Incentive compensation
Expense reimbursements and other
Purchase price payable
Total
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December 31,
2014
2013
1,710
54,334
1,380
—
57,424
$
$
1,495
16,847
827
—
19,169
$
$
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Affiliate expenses and fees were comprised of:
Management fees
Incentive compensation
Expense reimbursements(A)
Total
Year Ended December 31,
2014
2013
19,651
54,334
500
74,485
$
$
15,343
16,847
500
32,690
$
$
(A)
Included in General and Administrative Expenses in the Consolidated Statements of Income.
On June 27, 2013, New Residential purchased Agency ARM RMBS with an aggregate face amount of approximately $22.7 million
from Newcastle for approximately $1.2 million, net of related financing. New Residential purchased the securities on the same
terms as they were purchased by Newcastle and paid the $1.2 million to Newcastle during the third quarter of 2013.
New Residential's board of directors approved a change in the computation of incentive compensation to exclude unrealized gains
(or losses) on investments and debt (and any deferred tax impact thereof) as of June 30, 2014. The impact of this change on the
six months ended June 30, 2014 was to reduce incentive compensation by $5.5 million.
See Notes 4, 5, 6, 7, 8, 11, 14 and 18 for a discussion of transactions with Nationstar. As of December 31, 2014, 98.8% and 97.0%
of the UPB of the loans underlying New Residential's investments in Excess MSRs and servicer advances, respectively, was
serviced or master serviced by Nationstar. As of December 31, 2014, a total face amount of $1.7 billion of New Residential’s Non-
Agency RMBS portfolio and approximately $92.9 million of New Residential's Agency portfolio was serviced or master serviced
by Nationstar. The total UPB of the loans underlying these Nationstar serviced Non-Agency RMBS was approximately $7.5 billion
as of December 31, 2014. New Residential holds a limited right to cleanup call options with respect to certain securitization trusts
serviced or master serviced by Nationstar with an aggregate UPB of underlying mortgage loans of approximately $93.4 billion,
whereby, when the outstanding balance falls below a pre-determined threshold, it can effectively purchase the underlying mortgage
loans by repaying all of the outstanding securitization financing at par, in exchange for a fee paid to Nationstar. As of December 31,
2014, $976.2 million UPB of New Residential's residential mortgage loans were being serviced by Nationstar. As of December 31,
2014, $33.6 million of REO was being serviced by Nationstar. As a result of these relationships, New Residential routinely has
receivables from, and payables to, Nationstar, which are included in Other Assets and Accrued Expenses and Other Liabilities,
respectively.
See Note 9 for a discussion of a transaction with Springleaf.
16. RECLASSIFICATION FROM ACCUMULATED OTHER COMPREHENSIVE INCOME INTO NET INCOME
The following table summarizes the amounts reclassified out of accumulated other comprehensive income into net income:
Accumulated Other
Comprehensive Income
Components
Reclassification of net realized
(gain) loss on securities into
earnings
Reclassification of net realized
(gain) loss on securities into
earnings
Total reclassifications
Statement of Income
Location
Year Ended December 31,
2013
2012
2014
Gain on settlement of
securities
Other-than-temporary
impairment on securities
$
$
(65,701) $
(52,657) $
1,391
(64,310) $
4,993
(47,664) $
—
—
—
New Residential did not allocate any income tax expense or benefit to any component of other comprehensive income for any
period presented as no taxable subsidiary generated other comprehensive income.
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17. INCOME TAXES
The provision for income taxes consists of the following:
Current:
Federal
State and Local
Total Current Provision
Deferred:
Federal
State and Local
Total Deferred Provision
Total Provision for Income Taxes
Year Ended December 31,
2014
2013
$
$
3,737
2,799
6,536
12,853
3,568
16,421
22,957
$
$
—
—
—
—
—
—
—
New Residential intends to qualify as a REIT for the tax years ending December 31, 2013 and 2014. A REIT is generally not
subject to U.S. federal corporate income tax on that portion of its income that is distributed to stockholders if it distributes at least
90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. New
Residential was a wholly owned subsidiary of Newcastle until May 15, 2013 and, as a qualified REIT subsidiary, was a disregarded
entity until such date. As a result, no provision or liability for U.S. federal or state income taxes has been included in the
accompanying consolidated financial statements for the period from January 1, 2013 through May 15, 2013. New Residential
distributed 100% of its 2013 REIT taxable income by the prescribed dates.
New Residential operates a securitization vehicle and has made certain investments, particularly its investments in servicer advances
(Note 6) and REO (Note 7), through TRSs that are subject to regular corporate income taxes. In addition, some investments are
held through limited partnership interests which may be subject to the New York City unincorporated business tax (“UBT”).
Regular corporate income taxes on the TRSs and UBT have been provided for in the provision for income taxes, as applicable.
The increase in the provision for income taxes for the year ended December 31, 2014 is primarily due to an increase in taxable
profits in entities subject to corporate income tax rates.
The difference between New Residential's reported provision for income taxes and the U.S. federal statutory rate of 35% is as
follows:
Provision at the statutory rate
Non-taxable REIT income
State and local taxes
Other
Total provision
December 31,
2014
2013
35.00 %
(31.12)%
0.69 %
0.37 %
4.94 %
35.00 %
(35.00)%
— %
— %
— %
The tax effects of temporary differences that give rise to significant portions of the deferred tax liability as of December 31,
2014 are presented below:
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Deferred tax assets:
Allowance for loan losses
Net operating losses
Other
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Unrealized gains on servicer advances
Total deferred tax liability
Net deferred tax liability
$
$
$
$
$
962
2,657
134
3,753
(3,619)
134
15,248
15,248
15,114
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which temporary differences become deductible. As of December 31, 2014 New
Residential recorded a valuation allowance related to net operating losses and loan loss reserves as management does not believe
that it is more likely than not that the deferred tax assets will be realized.
The following table summarizes the change in the deferred tax asset valuation allowance:
Valuation allowance at December 31, 2013
Increase related to net operating losses and loan loss reserves
Other increase (decrease)
Valuation allowance at December 31, 2014
$
$
493
3,126
—
3,619
New Residential and its subsidiaries file income tax returns with the U.S. federal government and various state and local jurisdictions
beginning with the tax year ending December 31, 2013. Generally, these income tax returns will be subject to tax examinations
by tax authorities for a period of three years after the date of filing. As of December 31, 2014, New Residential recorded an increase
to the income tax provision of $2.3 million for unrecognized tax benefits. The reserve for unrecognized tax benefits relates to state
and local tax positions expected to be taken on the income tax returns. A reconciliation of the unrecognized tax benefits is as
follows:
Balance at December 31, 2013
Additions for tax position of current year
Other Additions (Reductions)
Balance at December 31, 2014
$
$
—
2,258
—
2,258
New Residential records penalties and interest related to uncertain tax positions as a component of income tax expense, where
applicable. As of December 31, 2014, New Residential did not accrue interest or penalties related to uncertain tax positions. New
Residential believes there is a possibility that a significant change to the uncertain tax benefits could occur during the next 12
months. However, an estimate of such change is unavailable at this time. The total unrecognized tax benefits that, if recognized,
would affect the effective tax rate was $2.3 million as of December 31, 2014.
Common stock distributions were taxable as follows:
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Year
2014
2013
18. RECENT ACTIVITIES
Dividends
per Share
Ordinary
Income
Long-term
Capital
Gain
Return
of
Capital
$
$
1.58
0.99
84.78%
90.01%
15.22%
9.99%
—
—
These financial statements include a discussion of material events that have occurred subsequent to December 31, 2014 (referred
to as “subsequent events”) through the issuance of these consolidated financial statements. Events subsequent to that date have
not been considered in these financial statements.
Excess MSRs
On January 16, 2015, New Residential invested approximately $23.8 million to acquire a 33.3% interest in the Excess MSR on a
portfolio of Freddie Mac residential mortgage loans with an aggregate UPB of $8.4 billion. Fortress-managed funds and Nationstar
each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing
functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in each of
the portfolios. Under the terms of these investments, to the extent that any loans in the portfolios are refinanced by Nationstar, the
resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to
certain limitations. New Residential has remaining commitments of $2.6 million to invest in Excess MSRs on this portfolio of
Freddie Mac residential mortgage loans.
Subsequent to December 31, 2014, New Residential and the Fortress-managed funds restructured their investments in two of the
Excess MSR joint ventures and now each directly owns their share of the underlying assets of the joint ventures.
Servicer Advances
Subsequent to December 31, 2014 and prior to February 28, 2015, New Residential funded a total of $133.8 million remaining
servicer advances and related basic fee portion of the MSR (the “Advance Fee” commitments)(with approximately $121.2 million
of related financing) and $2.1 million to fund the remaining portion of the call rights on 57 of the 99 underlying securitization
trusts, which represents substantially all of the remaining balance to complete the acquisition (the “SLS Transaction”) of 50% of
the Excess MSRs, all of the servicer advances and Advance Fee, and a portion of the call rights related to an underlying pool of
residential mortgage loans with a UPB of approximately $3.0 billion which is serviced by Specialized Loan Servicing LLC (“SLS”).
New Residential funded a total of $33.8 million of new servicer advances in February 2015 and notes payable outstanding decreased
by $0.2 million in relation to these fundings (net of $18.1 million of principal paydown of the existing debt and $17.9 million of
additional financing). New Residential recovered $79.1 million of existing servicer advances and restricted cash increased
approximately $0.7 million in relation to the January and February 2015 fundings.
Subsequent to December 31, 2014 and prior to February 28, 2015, the Buyer funded a total of $458.0 million of servicer advances
and recovered $571.1 million of existing servicer advances. Notes payable outstanding decreased by $100.4 million and restricted
cash decreased approximately $1.1 million in relation to these fundings. Additionally, the Buyer paid $8.1 million to Nationstar
as a contractual incentive fee.
Subsequent to December 31, 2014, the Buyer entered into agreements to increase financing pursuant to one servicer advance
facility and one of the notes, which will settle in March 2015. The facility will increase capacity from $500.0 million to $1.0 billion,
and the note will increase from $650.0 million to $800.0 million and will have a fixed interest rate equal to 2.50% with an expected
repayment date of March 2017.
Real Estate Securities
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
Subsequent to December 31, 2014, New Residential acquired Non-Agency RMBS with an aggregate face amount of approximately
$40.7 million for approximately $26.1 million, financed with repurchase agreements. New Residential acquired Agency RMBS
with an aggregate face amount of approximately $980.7 million for approximately $1.0 billion, financed with repurchase
agreements. New Residential sold Non-Agency RMBS with a face amount of $245.3 million and an amortized cost basis of
approximately $222.2 million for approximately $223.9 million and recorded a gain of approximately $1.8 million. New Residential
sold Agency RMBS with a face amount of $1.0 billion and an amortized cost basis of approximately $1.0 billion for approximately
$1.1 billion and recorded a gain of approximately $20.4 million.
Subsequent to December 31, 2014, New Residential paid off $1.0 billion of Agency RMBS financing within various repurchase
facilities as a result of sales. In addition, New Residential also rolled $40.1 million within various repurchase facilities to mature
between March 2015 and May 2015.
Subsequent to December 31, 2014, New Residential paid off $175.3 million of Non-Agency RMBS financing within various
repurchase facilities as a result of sales. In addition, New Residential also rolled $11.4 million within various repurchase facilities
to mature between March 2015 and May 2015.
Residential Mortgage Loans
Subsequent to December 31, 2014, New Residential obtained financing for $34.3 million of real estate owned and $28.2 million
of non-performing residential mortgage loans, respectively, with a $30.6 million repurchase facility and used the proceeds to fully
pay down another outstanding repurchase facility. Borrowings on this facility bear interest equal to the sum of (i) a floating rate
index rate equal to one-month LIBOR and (ii) a margin of 2.75% and have an expected repayment date of May 28, 2016. This
facility contains customary covenants, event of default provisions, and is subject to required monthly principal payments.
As a result of ASU No. 2014-11 (Note 2), New Residential has determined that, as of January 1, 2015, its linked transactions will
be accounted for as secured borrowings. As a result, $32.4 million carrying amount of derivatives will be removed from the balance
sheet and replaced with $116.7 million carrying amount of Non-Agency RMBS, $1.6 million carrying amount of Residential
Mortgage Loans, Held-for-Investment, and $85.9 million of Repurchase Agreements.
Subsequent to December 31, 2014 and prior to February 28, 2015, New Residential sold non-performing residential mortgage
loans with a UPB of $135.2 million for proceeds of $102.8 million.
Subsequent to December 31, 2014 and prior to February 28, 2015, New Residential committed to sell re-performing and non-
performing residential mortgage loans and REO with a UPB of approximately $699.9 million.
Corporate Activities
On December 18, 2014, New Residential’s board of directors declared a fourth quarter 2014 dividend of $0.38 per common share
or $53.7 million, which was paid on January 30, 2015 to stockholders of record as of December 30, 2014.
Subsequent to December 31, 2014, New Residential entered into a $100.0 million secured corporate loan with Credit Suisse First
Boston Mortgage Capital LLC, an affiliate of Credit Suisse Securities (USA) LLC. The loan bears interest equal to the sum of (i)
a floating rate index rate equal to one-month LIBOR and (ii) a margin of 3.75%. The loan contains customary covenants and event
of default provisions.
On February 22, 2015, New Residential entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Home
Loan Servicing Solutions, Ltd. (“HLSS”) and Hexagon Merger Sub, Ltd., a wholly owned subsidiary of New Residential (“Merger
Sub”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Merger Sub will merge
with and into HLSS (the “Merger”), with HLSS continuing as the surviving company and a wholly owned subsidiary of New
Residential.
Pursuant to the Merger Agreement, and upon the terms and conditions set forth therein, at the effective time of the Merger (the
“Effective Time”), each ordinary share of HLSS, par value $0.01 per share, issued and outstanding immediately prior to the
Effective Time, will be automatically converted into the right to receive $18.25 in cash, without interest (the “Merger
Consideration”).
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
In aggregate, the Merger Consideration is expected to be approximately $1.3 billion. The acquisition is expected to close in the
second quarter of 2015.
The Merger does not require the approval of New Residential’s shareholders and is not conditioned on the receipt of financing by
New Residential. However, consummation of the Merger is subject to, among other things: (i) approval of the Merger by the
requisite vote of HLSS’s shareholders (the “HLSS Shareholder Approval”) and (ii) certain other customary closing conditions.
The Merger Agreement may be terminated by either party under certain circumstances, including, among others: (i) if the closing
of the Merger (“Closing”) has not occurred by the six-month anniversary of the Merger Agreement; (ii) if a court or other
governmental entity has issued a final and non-appealable order prohibiting the Closing; (iii) if HLSS fails to obtain the HLSS
Shareholder Approval; (iv) upon a material uncured breach by the other party that would result in a failure of the conditions to the
Closing to be satisfied; or (v) if the Board of Directors of HLSS makes an Adverse Recommendation Change (as defined in the
Merger Agreement). In addition, prior to obtaining the HLSS Shareholder Approval and subject to the payment of a termination
fee, HLSS may terminate the Merger Agreement in order to enter into an agreement for a Superior Proposal (as defined in the
Merger Agreement). Upon termination of the Merger Agreement under specified circumstances (including in connection with a
Superior Proposal), HLSS will be required to pay the Company a termination fee of $45,400,000. In the event that the Merger
Agreement is terminated for failure to obtain the HLSS Shareholder Approval, HLSS will be required to reimburse the Company
for out-of-pocket expenses incurred by the Company, up to a maximum amount of $7,000,000.
19. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is an unaudited summary information on New Residential’s quarterly operations.
2014
Interest income
Interest expense
Net interest income
Impairment
Other-than-temporary impairment (“OTTI”)
on securities
Valuation allowance on loans and real estate
owned
Net interest income after impairment
Other income(A)
Operating Expenses
Income (Loss) Before Income Taxes
Income tax expense (benefit)
Net Income (Loss)
Noncontrolling Interests in Income (Loss) of
Consolidated Subsidiaries
Net Income (Loss) Attributable to Common
Stockholders
Net Income Per Share of Common Stock
Basic
Diluted
Weighted Average Number of Shares of
Common Stock Outstanding
Basic
Diluted
$
$
$
$
$
Quarter Ended
March 31
June 30
September 30
December 31
$
71,490
$
92,656
$
97,587
$
85,124
$
38,997
32,493
328
164
492
32,001
35,050
9,899
57,152
287
56,865
8,093
48,772
0.39
0.38
$
$
$
$
$
36,512
56,144
615
293
908
55,236
177,889
29,522
203,603
21,395
182,208
58,705
123,503
0.91
0.88
$
$
$
$
$
33,307
64,280
—
1,134
1,134
63,146
122,064
25,311
159,899
7,801
152,098
25,726
126,372
0.89
0.88
$
$
$
$
$
Year Ended
December 31
346,857
140,708
206,149
1,391
9,891
11,282
194,867
375,088
104,899
465,056
22,957
442,099
31,892
53,232
448
8,300
8,748
44,484
40,085
40,167
44,402
(6,526)
50,928
$
(3,302) $
89,222
54,230
0.38
0.38
$
$
$
352,877
2.59
2.53
126,604,510
136,465,454
141,211,580
141,395,307
136,472,865
129,919,967
139,668,128
144,166,601
144,294,088
139,565,709
Dividends Declared per Share of Common Stock $
0.35
$
0.50
$
0.35
$
0.38
$
1.58
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014, 2013 and 2012
(dollars in tables in thousands, except share data)
2013
Quarter Ended
Interest income
Interest expense
Net interest income
Impairment
Other-than-temporary impairment (“OTTI”)
on securities
Valuation allowance on loans and real estate
owned
Net interest income after impairment
Other income(A)
Operating Expenses
Income (Loss) Before Income Taxes
Income tax expense (benefit)
Net Income (Loss)
Noncontrolling Interests in Income (Loss) of
Consolidated Subsidiaries
Net Income (Loss) Attributable to Common
Stockholders
Net Income Per Share of Common Stock
Basic
Diluted
Weighted Average Number of Shares of
Common Stock Outstanding
Basic
Diluted
March 31
June 30
September 30
December 31
$
16,191
$
22,999
$
21,885
$
26,492
$
899
15,292
—
—
—
15,292
2,827
5,044
13,075
—
2,651
20,348
3,756
—
3,756
16,592
98,182
5,552
109,222
—
3,443
18,442
—
—
—
18,442
56,195
11,492
63,145
—
8,031
18,461
1,237
461
1,698
16,763
83,804
20,386
80,181
—
Year Ended
December 31
87,567
15,024
72,543
4,993
461
5,454
67,089
241,008
42,474
265,623
—
$
$
$
$
$
13,075
$
109,222
$
63,145
$
80,181
$
265,623
— $
— $
— $
(326) $
(326)
13,075
0.10
0.10
$
$
$
109,222
0.86
0.85
$
$
$
63,145
0.50
0.49
$
$
$
80,507
0.64
0.62
$
$
$
265,949
2.10
2.07
126,512,823
126,512,823
126,536,394
126,593,203
126,539,024
126,512,823
128,329,744
129,944,643
129,898,247
128,684,128
Dividends Declared per Share of Common Stock $
— $
0.14
$
0.35
$
0.50
$
0.99
(A)
Earnings from investments in equity method investees is included in other income.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a)
(b)
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) as of the end of the period covered by this report. The Company’s disclosure
controls and procedures are designed to provide reasonable assurance that information is recorded, processed,
summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure
controls and procedures are effective.
Changes in Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control Over Financing Reporting
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as
amended, as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers
and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States,
and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections
of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in the 1992 Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of December 31, 2014, the Company’s internal control over financial
reporting was effective.
The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s
internal control over financial reporting. This report appears at the beginning of “Financial Statements and Supplementary Data.”
Item 9B. Other Information.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Incorporated by reference to our definitive proxy statement for the 2015 annual meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within
120 days after the fiscal year ended December 31, 2014.
Item 11. Executive Compensation.
Incorporated by reference to our definitive proxy statement for the 2015 annual meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within
120 days after the fiscal year ended December 31, 2014.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to our definitive proxy statement for the 2015 annual meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within
120 days after the fiscal year ended December 31, 2014.
Item 13. Certain Relationships and Related Transactions, Director Independence.
Incorporated by reference to our definitive proxy statement for the 2015 annual meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within
120 days after the fiscal year ended December 31, 2014.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference to our definitive proxy statement for the 2015 annual meeting of stockholders to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, within
120 days after the fiscal year ended December 31, 2014.
PART IV
Item 15. Exhibits; Financial Statement Schedules.
(a) and (c) Financial statements and schedules:
See “Financial Statements and Supplementary Data.”
(b) Exhibits filed with this Form 10-K:
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Exhibit
Number
Exhibit Description
Separation and Distribution Agreement dated April 26, 2013, between New Residential Investment Corp. and Newcastle
Investment Corp. (incorporated by reference to Amendment No. 6 of New Residential Investment Corp.’s Registration
Statement on Form 10, filed April 29, 2013)
Purchase Agreement, among the Sellers listed therein, HSBC Finance Corporation and SpringCastle Acquisition LLC,
dated March 5, 2013 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
March 11, 2013)
Master Servicing Rights Purchase Agreement between Nationstar Mortgage LLC and Advance Purchaser LLC, dated
as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form
8-K, filed on December 23, 2013)
Sale Supplement (Shuttle 1) between Nationstar Mortgage LLC and Advance Purchaser LLC, dated as of December 17,
2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed on
December 23, 2013)
Sale Supplement (Shuttle 2) between Nationstar Mortgage LLC and Advance Purchaser LLC, dated as of December 17,
2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed on
December 23, 2013)
Sale Supplement (First Tennessee) between Nationstar Mortgage LLC and Advance Purchaser LLC, dated as of
December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K,
filed on December 23, 2013)
Agreement and Plan of Merger, dated as of February 22, 2015, by and among New Residential Investment Corp.,
Hexagon Merger Sub, Ltd. and Home Loan Servicing Solutions, Ltd. (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed on February 24, 2015)
Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated by reference
to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
Amended and Restated Bylaws of New Residential Investment Corp. (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
Amendment to Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated
by reference to New Residential Investment Corp.'s Current Report on Form 8-K, filed on October 17, 2014)
Amended and Restated Indenture among NRZ Servicer Advance Receivables Trust BC (f/k/a Nationstar Servicer
Advance Receivables Trust 2013-BC), as issuer, Wells Fargo Bank, N.A., as indenture trustee, calculation agent, paying
agent and securities intermediary, Advance Purchaser LLC, as administrator, as owner of the rights to the servicing
rights and as servicer, Nationstar Mortgage LLC, as subservicer, and as servicer, and Barclays Bank PLC, as
administrative agent, dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s
Current Report on Form 8-K, filed on December 23, 2013)
Series 2013-VF1 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust BC
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-BC), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Barclays Bank PLC, as administrative agent, dated as
of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-
K, filed on December 23, 2013)
Amended and Restated Indenture among NRZ Servicer Advance Receivables Trust CS (f/k/a Nationstar Servicer
Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee, calculation agent, paying
agent and securities intermediary, Advance Purchaser LLC, as administrator, as owner of the rights to the servicing
rights and as servicer, Nationstar Mortgage LLC, as subservicer, and as servicer, and Credit Suisse AG, New York
Branch, as administrative agent, dated as of December 17, 2013 (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed on December 23, 2013)
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3.1
3.2
3.3
4.1
4.2
4.3
166
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Exhibit
Number
Exhibit Description
Series 2013-VF1 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Credit Suisse AG, New York Branch, as administrative
agent, dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report
on Form 8-K, filed on December 23, 2013)
Series 2013-VF2 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Natixis, New York Branch, as administrative agent,
dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on
Form 8-K, filed on December 23, 2013)
Series 2013-VF3 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Morgan Stanley Bank, N.A., as administrative agent,
dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on
Form 8-K, filed on December 23, 2013)
Management and Advisory Agreement between New Residential Investment Corp. and FIG LLC (incorporated by
reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 17, 2013)
Amended and Restated Management and Advisory Agreement between New Residential Investment Corp. and FIG
LLC, dated August 1, 2013 (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on
Form 10-Q, filed August 8, 2013)
Second Amended and Restated Management and Advisory Agreement between New Residential Investment Corp.
and FIG LLC, dated August 5, 2014 (incorporated by reference to New Residential Investment Corp.'s Quarterly
Report on Form 10-Q, filed August 7, 2014)
Form of Indemnification Agreement by and between New Residential Investment Corp. and its directors and officers
(incorporated by reference to Amendment No. 3 of New Residential Investment Corp.’s Registration Statement on
Form 10, filed March 27, 2013)
New Residential Investment Corp. Nonqualified Stock Option and Incentive Award Plan (incorporated by reference
to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
Amended and Restated New Residential Investment Corp. Nonqualified Stock Option and Incentive Plan, adopted
as of November 4, 2014 (incorporated by reference to New Residential Investment Corp.'s Quarterly Report on
Form 10-Q, filed November 7, 2014)
Investment Guidelines (incorporated by reference to Amendment No. 4 of New Residential Investment Corp.’s
Registration Statement on Form 10, filed April 9, 2013)
Excess Servicing Spread Sale and Assignment Agreement, by and between Nationstar Mortgage LLC and NIC MSR
I LLC, dated December 8, 2011 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form
10-K, filed March 15, 2012)
Excess Spread Refinanced Loan Replacement Agreement, by and between Nationstar Mortgage LLC and NIC MSR
I LLC, dated December 8, 2011 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form
10-K, filed March 15, 2012)
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR IV LLC,
dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
May 15, 2012)
10.10
Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR V LLC, dated
May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed May 15,
2012)
10.11
Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VI
LLC, dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K,
filed May 15, 2012)
10.12
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Exhibit
Number
Exhibit Description
Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VII, LLC,
dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
May 15, 2012)
10.13
Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage
LLC and NIC MSR III LLC, dated May 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current
Report on Form 8-K, filed June 6, 2012)
10.14
Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR III LLC,
dated May 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
June 6, 2012)
10.15
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment
Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.16
Amended and Restated Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and
NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on
Form 8-K, filed June 7, 2012)
10.17
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment
Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.18
Amended and Restated Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC
and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report
on Form 8-K, filed June 7, 2012)
10.19
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans,
between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.20
Amended and Restated Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage
LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current
Report on Form 8-K, filed June 7, 2012)
10.21
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR V LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.22
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR IV LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.23
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans,
between Nationstar Mortgage LLC and NIC MSR VI LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.24
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR VII LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.25
Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage
LLC and MSR VIII LLC, dated December 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.26
Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR VIII LLC, dated
December 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.27
Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage
LLC and MSR IX LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.28
Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and MSR IX LLC, dated
January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.29
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Exhibit
Number
Exhibit Description
Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between Nationstar Mortgage
LLC and MSR X LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.30
Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR X LLC, dated
January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.31
Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage
LLC and MSR XI LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.32
Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR XI LLC, dated
January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.33
Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar
Mortgage LLC and MSR XII LLC, dated January 6, 2013, (incorporated by reference to Newcastle Investment Corp.’s
Annual Report on Form 10-K, filed February 28, 2013)
10.34
Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XII LLC,
dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.35
Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar
Mortgage LLC and MSR XIII LLC, dated January 6, 2013, (incorporated by reference to Newcastle Investment Corp.’s
Annual Report on Form 10-K, filed February 28, 2013)
10.36
Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XIII LLC,
dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.37
Interim Servicing Agreement, among the Interim Servicers listed therein, HSBC Finance Corporation, as Interim
Servicer Representative, HSBC Bank USA, National Association, SpringCastle America, LLC, SpringCastle Credit,
LLC, SpringCastle Finance, LLC, Wilmington Trust, National Association, as Loan Trustee, and SpringCastle Finance
LLC, as Owner Representative (incorporated by reference to Amendment No. 4 to New Residential Investment Corp.’s
Registration Statement on Form 10, filed April 9, 2013)
10.38
Amended and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC, dated April 1, 2013
(incorporated by reference to the confidential submission by the Registrant of the draft Registration Statement on
Form S-11 on August 19, 2013)
10.39
Amended and Restated Receivables Sale Agreement among Nationstar Mortgage LLC, as initial receivables seller and
as servicer, Advance Purchaser LLC, as receivables seller and as servicer, and NRZ Servicer Advance Facility Transferor
BC, LLC (f/k/a Nationstar Servicer Advance Facility Transferor, LLC 2013-BC), as depositor, dated as of December 17,
2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed on
December 23, 2013)
10.40
Amended and Restated Receivables Pooling Agreement between NRZ Servicer Advance Facility Transferor BC, LLC,
as depositor, and NRZ Servicer Advance Receivables Trust BC (f/k/a Nationstar Servicer Advance Receivables Trust
2013-BC), as issuer, dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s
Current Report on Form 8-K, filed on December 23, 2013)
10.41
21.1
List of Subsidiaries of New Residential Investment Corp.
23.1
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
23.2
Consent of Ernst & Young LLP, independent registered public accounting firm.
31.1
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
32.2
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
169
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99.1
Audited Combined Financial Statements of SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle
Finance, LLC and SpringCastle Acquisition, LLC
170
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Exhibit
Number
Exhibit Description
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
*
Furnished electronically herewith.
The following amended and restated limited liability company agreements of the Consumer Loan Companies are substantially
identical in all material respects, except as to the parties thereto and the initial capital contributions required under each agreement,
to the Amendment and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC that is filed as Exhibit
10.37 hereto and are being omitted in reliance on Instruction 2 to Item 601 of Regulation S-K:
•
•
•
Amended and Restated Limited Liability Company Agreement of SpringCastle America, LLC,
dated as of April 1, 2013.
Amended and Restated Limited Liability Company Agreement of SpringCastle Credit, LLC,
dated as of April 1, 2013.
Amended and Restated Limited Liability Company Agreement of SpringCastle Finance, LLC,
dated as of April 1, 2013.
In addition, the following Amended and Restated Receivables Sale Agreement and Amended and Restated Receivables Pooling
Agreement are substantially identical in all material respects, except as to the parties thereto, to the Amended and Restated
Receivables Sale Agreement and Amended and Restated Receivables Pooling Agreement that are filed as Exhibits 10.38 and 10.39,
respectively, hereto and are being omitted in reliance on Instruction 2 to Item 601 of Regulation S-K:
•
•
Amended and Restated Receivables Sale Agreement among Nationstar Mortgage LLC, as
initial receivables seller and as servicer, Advance Purchaser LLC, as receivables seller and as
servicer, and NRZ Servicer Advance Facility Transferor CS, LLC (f/k/a Nationstar Servicer
Advance Facility Transferor, LLC 2013-CS), as depositor, dated as of December 17, 2013.
Amended and Restated Receivables Pooling Agreement between NRZ Servicer Advance
Facility Transferor CS, LLC, as depositor, and NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, dated as of
December 17, 2013.
171
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
NEW RESIDENTIAL INVESTMENT CORP.
By:
/s/ Wesley R. Edens
Wesley R. Edens
Chairman of the Board
March 2, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
person on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Wesley R. Edens
By:
Wesley R. Edens
Chairman of the Board
March 2, 2015
/s/ Kevin J. Finnerty
By:
Kevin J. Finnerty
Director
March 2, 2015
/s/ Douglas L. Jacobs
By:
Douglas L. Jacobs
Director
March 2, 2015
/s/ David Saltzman
By:
David Saltzman
Director
March 2, 2015
/s/ Alan L. Tyson
By:
Alan L. Tyson
Director
March 2, 2015
/s/ Michael Nierenberg
By:
Michael Nierenberg
Director, Chief Executive Officer and President
March 2, 2015
/s/ Jonathan R. Brown
By:
Jonathan R. Brown
Interim Chief Financial Officer and Principal Accounting
Officer
March 2, 2015
172
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SPECIAL NOTE REGARDING EXHIBITS
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to
provide you with information regarding their terms and are not intended to provide any other factual or disclosure information
about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the
parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties
to the applicable agreement and:
•
•
•
•
should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk
tone of the parties if those statements provide to be inaccurate;
have been qualified by disclosures that were made to the other party in connection with the negotiation of the
applicable agreement, which disclosures are not necessarily reflected in the agreement;
may apply standards of materiality in a way that is different from what may be viewed as material to you or
other investors; and
were made only as of the date of the applicable agreement or such other date or dates as may be specified in the
agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at
any other time. Additional information about the Company may be found elsewhere in this Annual Report on Form 10-K and the
Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. See “Business
– Corporate Governance and Internet Address; Where Readers Can Find Additional Information.”
The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for
considering whether additional specific disclosures of material information regarding material contractual provisions are required
to make the statements in this report not misleading.
173
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Exhibit
Number
Exhibit Index
Exhibit Description
Separation and Distribution Agreement dated April 26, 2013, between New Residential Investment Corp. and Newcastle
Investment Corp. (incorporated by reference to Amendment No. 6 of New Residential Investment Corp.’s Registration
Statement on Form 10, filed April 29, 2013)
Purchase Agreement, among the Sellers listed therein, HSBC Finance Corporation and SpringCastle Acquisition LLC,
dated March 5, 2013 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
March 11, 2013)
Master Servicing Rights Purchase Agreement between Nationstar Mortgage LLC and Advance Purchaser LLC, dated
as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form
8-K, filed on December 23, 2013)
Sale Supplement (Shuttle 1) between Nationstar Mortgage LLC and Advance Purchaser LLC, dated as of December 17,
2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed on
December 23, 2013)
Sale Supplement (Shuttle 2) between Nationstar Mortgage LLC and Advance Purchaser LLC, dated as of December 17,
2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed on
December 23, 2013)
Sale Supplement (First Tennessee) between Nationstar Mortgage LLC and Advance Purchaser LLC, dated as of
December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K,
filed on December 23, 2013)
Agreement and Plan of Merger, dated as of February 22, 2015, by and among New Residential Investment Corp.,
Hexagon Merger Sub, Ltd. and Home Loan Servicing Solutions, Ltd. (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed on February 24, 2015)
Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated by reference
to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
Amended and Restated Bylaws of New Residential Investment Corp. (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
Amendment to Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated
by reference to New Residential Investment Corp.'s Current Report on Form 8-K, filed on October 17, 2014)
Amended and Restated Indenture among NRZ Servicer Advance Receivables Trust BC (f/k/a Nationstar Servicer
Advance Receivables Trust 2013-BC), as issuer, Wells Fargo Bank, N.A., as indenture trustee, calculation agent, paying
agent and securities intermediary, Advance Purchaser LLC, as administrator, as owner of the rights to the servicing
rights and as servicer, Nationstar Mortgage LLC, as subservicer, and as servicer, and Barclays Bank PLC, as
administrative agent, dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s
Current Report on Form 8-K, filed on December 23, 2013)
Series 2013-VF1 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust BC
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-BC), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Barclays Bank PLC, as administrative agent, dated as
of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-
K, filed on December 23, 2013)
Amended and Restated Indenture among NRZ Servicer Advance Receivables Trust CS (f/k/a Nationstar Servicer
Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee, calculation agent, paying
agent and securities intermediary, Advance Purchaser LLC, as administrator, as owner of the rights to the servicing
rights and as servicer, Nationstar Mortgage LLC, as subservicer, and as servicer, and Credit Suisse AG, New York
Branch, as administrative agent, dated as of December 17, 2013 (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed on December 23, 2013)
2.1
2.2
2.3
2.4
2.5
2.6
2.7
3.1
3.2
3.3
4.1
4.2
4.3
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Exhibit
Number
Exhibit Description
Series 2013-VF1 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Credit Suisse AG, New York Branch, as administrative
agent, dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report
on Form 8-K, filed on December 23, 2013)
Series 2013-VF2 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Natixis, New York Branch, as administrative agent,
dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on
Form 8-K, filed on December 23, 2013)
Series 2013-VF3 Amended and Restated Indenture Supplement among NRZ Servicer Advance Receivables Trust CS
(f/k/a Nationstar Servicer Advance Receivables Trust 2013-CS), as issuer, Wells Fargo Bank, N.A., as indenture trustee,
calculation agent, paying agent and securities intermediary, Advance Purchaser LLC, as administrator and as servicer,
Nationstar Mortgage LLC, as subservicer, and as servicer, and Morgan Stanley Bank, N.A., as administrative agent,
dated as of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on
Form 8-K, filed on December 23, 2013)
Management and Advisory Agreement between New Residential Investment Corp. and FIG LLC (incorporated by
reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 17, 2013)
Amended and Restated Management and Advisory Agreement between New Residential Investment Corp. and FIG
LLC, dated August 1, 2013 (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on
Form 10-Q, filed August 8, 2013)
Second Amended and Restated Management and Advisory Agreement between New Residential Investment Corp. and
FIG LLC, dated August 5, 2014 (incorporated by reference to New Residential Investment Corp.'s Quarterly Report
on Form 10-Q, filed August 7, 2014)
Form of Indemnification Agreement by and between New Residential Investment Corp. and its directors and officers
(incorporated by reference to Amendment No. 3 of New Residential Investment Corp.’s Registration Statement on
Form 10, filed March 27, 2013)
New Residential Investment Corp. Nonqualified Stock Option and Incentive Award Plan (incorporated by reference
to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
Amended and Restated New Residential Investment Corp. Nonqualified Stock Option and Incentive Plan, adopted as
of November 4, 2014 (incorporated by reference to New Residential Investment Corp.'s Quarterly Report on Form 10-
Q, filed November 7, 2014)
Investment Guidelines (incorporated by reference to Amendment No. 4 of New Residential Investment Corp.’s
Registration Statement on Form 10, filed April 9, 2013)
Excess Servicing Spread Sale and Assignment Agreement, by and between Nationstar Mortgage LLC and NIC MSR
I LLC, dated December 8, 2011 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form
10-K, filed March 15, 2012)
Excess Spread Refinanced Loan Replacement Agreement, by and between Nationstar Mortgage LLC and NIC MSR
I LLC, dated December 8, 2011 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form
10-K, filed March 15, 2012)
4.4
4.5
4.6
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR IV LLC,
dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
May 15, 2012)
10.10
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Exhibit
Number
Exhibit Description
Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR V LLC, dated
May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed May 15,
2012)
10.11
Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VI
LLC, dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K,
filed May 15, 2012)
10.12
Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR VII, LLC,
dated May 13, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
May 15, 2012)
10.13
Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage
LLC and NIC MSR III LLC, dated May 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current
Report on Form 8-K, filed June 6, 2012)
10.14
Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and NIC MSR III LLC,
dated May 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on Form 8-K, filed
June 6, 2012)
10.15
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment
Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.16
Amended and Restated Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and
NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report on
Form 8-K, filed June 7, 2012)
10.17
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment
Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.18
Amended and Restated Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC
and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current Report
on Form 8-K, filed June 7, 2012)
10.19
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans,
between Nationstar Mortgage LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed June 7, 2012)
10.20
Amended and Restated Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage
LLC and NIC MSR II LLC, dated June 7, 2012 (incorporated by reference to Newcastle Investment Corp.’s Current
Report on Form 8-K, filed June 7, 2012)
10.21
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR V LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.22
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR IV LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.23
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans,
between Nationstar Mortgage LLC and NIC MSR VI LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.24
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Exhibit
Number
Exhibit Description
Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between
Nationstar Mortgage LLC and NIC MSR VII LLC, dated June 28, 2012 (incorporated by reference to Newcastle
Investment Corp.’s Current Report on Form 8-K, filed July 5, 2012)
10.25
Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage
LLC and MSR VIII LLC, dated December 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.26
Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR VIII LLC, dated
December 31, 2012 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.27
Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage
LLC and MSR IX LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.28
Future Spread Agreement for FHLMC Mortgage Loans, between Nationstar Mortgage LLC and MSR IX LLC, dated
January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.29
Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, between Nationstar Mortgage
LLC and MSR X LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.30
Future Spread Agreement for FNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR X LLC, dated
January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.31
Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, between Nationstar Mortgage
LLC and MSR XI LLC, dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual
Report on Form 10-K, filed February 28, 2013)
10.32
Future Spread Agreement for GNMA Mortgage Loans, between Nationstar Mortgage LLC and MSR XI LLC, dated
January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.33
Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar
Mortgage LLC and MSR XII LLC, dated January 6, 2013, (incorporated by reference to Newcastle Investment Corp.’s
Annual Report on Form 10-K, filed February 28, 2013)
10.34
Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XII LLC,
dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.35
Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, between Nationstar
Mortgage LLC and MSR XIII LLC, dated January 6, 2013, (incorporated by reference to Newcastle Investment Corp.’s
Annual Report on Form 10-K, filed February 28, 2013)
10.36
Future Spread Agreement for Non-Agency Mortgage Loans, between Nationstar Mortgage LLC and MSR XIII LLC,
dated January 6, 2013 (incorporated by reference to Newcastle Investment Corp.’s Annual Report on Form 10-K, filed
February 28, 2013)
10.37
Interim Servicing Agreement, among the Interim Servicers listed therein, HSBC Finance Corporation, as Interim
Servicer Representative, HSBC Bank USA, National Association, SpringCastle America, LLC, SpringCastle Credit,
LLC, SpringCastle Finance, LLC, Wilmington Trust, National Association, as Loan Trustee, and SpringCastle Finance
LLC, as Owner Representative (incorporated by reference to Amendment No. 4 to New Residential Investment Corp.’s
Registration Statement on Form 10, filed April 9, 2013)
10.38
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Exhibit
Number
10.39
10.40
10.41
21.1
23.1
23.2
31.1
31.2
32.1
32.2
99.1
Exhibit Description
Amended and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC, dated April 1, 2013
(incorporated by reference to the confidential submission by the Registrant of the draft Registration Statement on
Form S-11 on August 19, 2013)
Amended and Restated Receivables Sale Agreement among Nationstar Mortgage LLC, as initial receivables seller
and as servicer, Advance Purchaser LLC, as receivables seller and as servicer, and NRZ Servicer Advance Facility
Transferor BC, LLC (f/k/a Nationstar Servicer Advance Facility Transferor, LLC 2013-BC), as depositor, dated as
of December 17, 2013 (incorporated by reference to New Residential Investment Corp.’s Current Report on Form
8-K, filed on December 23, 2013)
Amended and Restated Receivables Pooling Agreement between NRZ Servicer Advance Facility Transferor BC,
LLC, as depositor, and NRZ Servicer Advance Receivables Trust BC (f/k/a Nationstar Servicer Advance Receivables
Trust 2013-BC), as issuer, dated as of December 17, 2013 (incorporated by reference to New Residential Investment
Corp.’s Current Report on Form 8-K, filed on December 23, 2013)
List of Subsidiaries of New Residential Investment Corp.
Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm.
Consent of Ernst & Young LLP, independent registered public accounting firm.
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Audited Combined Financial Statements of SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle
Finance, LLC and SpringCastle Acquisition, LLC
101.INS XBRL Instance Document *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
*
Furnished electronically herewith.
The following amended and restated limited liability company agreements of the Consumer Loan Companies are substantially
identical in all material respects, except as to the parties thereto and the initial capital contributions required under each agreement,
to the Amendment and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC that is filed as Exhibit
10.37 hereto and are being omitted in reliance on Instruction 2 to Item 601 of Regulation S-K:
•
•
•
Amended and Restated Limited Liability Company Agreement of SpringCastle America, LLC, dated as of April
1, 2013.
Amended and Restated Limited Liability Company Agreement of SpringCastle Credit, LLC, dated as of April
1, 2013.
Amended and Restated Limited Liability Company Agreement of SpringCastle Finance, LLC, dated as of April
1, 2013.
178
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In addition, the following Amended and Restated Receivables Sale Agreement and Amended and Restated Receivables Pooling
Agreement are substantially identical in all material respects, except as to the parties thereto, to the Amended and Restated
Receivables Sale Agreement and Amended and Restated Receivables Pooling Agreement that are filed as Exhibits 10.38 and 10.39,
respectively, hereto and are being omitted in reliance on Instruction 2 to Item 601 of Regulation S-K:
•
•
Amended and Restated Receivables Sale Agreement among Nationstar Mortgage LLC, as initial receivables
seller and as servicer, Advance Purchaser LLC, as receivables seller and as servicer, and NRZ Servicer Advance
Facility Transferor CS, LLC (f/k/a Nationstar Servicer Advance Facility Transferor, LLC 2013-CS), as depositor,
dated as of December 17, 2013.
Amended and Restated Receivables Pooling Agreement between NRZ Servicer Advance Facility Transferor
CS, LLC, as depositor, and NRZ Servicer Advance Receivables Trust CS (f/k/a Nationstar Servicer Advance
Receivables Trust 2013-CS), as issuer, dated as of December 17, 2013.
179
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NEW RESIDENTIAL
INVESTMENT CORP.
BOARD OF DIRECTORS
WESLEY R. EDENS
Chairman of the Board
KEVIN J. FINNERTY
Independent Director (1,2,3)
DOUGLAS L. JACOBS
Independent Director (1,3)
DAVID SALTZMAN
Independent Director (2)
ALAN L. TYSON
Independent Director (1,2,3)
MICHAEL NIERENBERG
Board Member
(1) Audit Committee member (2) Compensation Committee member (3) Nominating and Corporate Governance Committee member
CORPORATE OFFICERS
MICHAEL NIERENBERG
Chief Executive Officer & President
JONATHAN BROWN
Interim Chief Financial Officer &
Chief Accounting Officer
CAMERON MACDOUGALL
Secretary
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
New Residential Investment Corp.
c/o Fortress Investment Group LLC
1345 Avenue of the Americas, 46th Floor
New York, NY 10105
www.newresi.com
SHAREHOLDER SERVICES, TRANSFER
AGENT AND REGISTRAR
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP
Five Times Square
New York, NY 10036-6530
STOCK EXCHANGE LISTING
New Residential Investment Corp.
is listed on the New York Stock Exchange
(NYSE:NRZ)
INVESTOR INFORMATION SERVICES
New Residential Investment Corp.
c/o Fortress Investment Group LLC
1345 Avenue of the Americas, 46th Floor
New York, NY 10105
Tel: (212) 479-3150
Email: ir@newresi.com
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain items herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995,
such as statements regarding New Residential’s expected lifetime IRRs, life-to-date IRRs, expected future cash flows, and statements
regarding the Company’s investment pipeline and investment opportunities. These statements are not historical facts. They represent man-
agement’s current expectations regarding future events and are subject to a number of trends and uncertainties, many of which are beyond
our control, that could cause actual results to differ materially from those described in the forward-looking statements. Accordingly, you
should not place undue reliance on any forward-looking statements contained herein. For a discussion of some of the risks and important fac-
tors that could affect such forward-looking statements, see the sections entitled “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K, which is available on the Company’s website
(www.newresi.com). New risks and uncertainties emerge from time to time, and it is not possible for New Residential to predict or assess the
impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Forward-looking
statements contained herein speak only as of the date of the annual report, and New Residential expressly disclaims any obligation to release
publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in New Residential’s expectations
with regard thereto or change in events, conditions or circumstances on which any statement is based.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
NEW RESIDENTIAL
INVESTMENT CORP.
1345 AVENUE OF THE AMERICAS
46TH FLOOR
NEW YORK, NY 10105
(212) 479-3150
IR@NEWRESI.COM