2015 Annual Report
NEW RESIDENTIAL INVESTMENT CORP.
NEW RESIDENTIAL
INVESTMENT CORP.
NEW RESIDENTIAL INVESTMENT CORP. (NYSE: NRZ)*
15%
Dividend Yield(1)
11%
YoY Increase
to 2015
Dividend(2)
NEW RESIDENTIAL
INVESTMENT CORP.
22%
YoY Growth in
2015 Core
Earnings(2)
$1.4Bn
HLSS Acquisition
in April 2015
~$200Bn
UPB(3)
Call Rights
$699M
Total Lifetime
Dividends
$2.8Bn
Market Cap(1)
(NYSE)
$402Bn
Excess MSR
Portfolio(1)
1) As of December 31, 2015.
2) Year-over-year growth is calculated based on full year dividend per share and full year core earnings per share in 2015 and 2014. Core Earnings is a
Non-GAAP measure. Please see the Company’s 2015 Annual Report on Form 10-K for a reconciliation to the most comparable GAAP measure.
3) UPB of loans subject to call rights is an estimate based on information available to the Company. Actual UPB of loans subject to call rights and any related
economics may be materially lower than the estimates contained in this Annual Report.
NET INVESTMENT BY PORTFOLIO**
EXCESS MSRs
SERVICER ADVANCES
$2,881M
$2,881M
RESIDENTIAL SECURITIES & CALL RIGHTS
EXCESS MSRs
RESIDENTIAL & CONSUMER LOANS
SERVICER ADVANCES
CASH
RESIDENTIAL SECURITIES & CALL RIGHTS
$1,614M
$365M
$447M
$1,614M
$205M
$365M
$250M
$447M
RESIDENTIAL & CONSUMER LOANS
$205M
CASH
$250M
CUMULATIVE COMMON DIVIDENDS SINCE SPIN-OFF*
$4.32
$4.32
$3.86
$3.86
$3.40
$3.40
$2.95
$2.95
$2.57
$2.57
$2.19
$2.19
$1.84
$1.84
$1.34
$1.34
$0.99
$0.99
$0.49
$0.14
Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15
$0.49
*All data as of December 31, 2015.
$0.14
** Detailed endnotes regarding our “Net Investment by Portfolio” are included in the appendix of the Company’s
4Q 2015 Quarterly Supplement. You can find the Company’s 4Q 2015 Quarterly Supplement on the Company’s website
at www.newresi.com.
Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q2-15 Q3-15 Q4-15
5
4
5
3
4
2
3
1
2
0
1
0
DEAR FELLOW SHAREHOLDERS,
2015 was another outstanding and notable year for New
Residential Investment Corp. (NYSE: NRZ; “we,” “New Residential”
or the “Company”). Despite a relatively challenging market
environment, we were able to leverage our expertise and
insight into the mortgage market, execute across our stra-
tegic initiatives and deliver our strongest performance to
date. In par ticular, the year was distinguished by the
substantial growth of our servicing asset portfolio as a
result of our acquisition of Home Loan Servicing Solutions,
Ltd. (“HLSS”).
In 2015, we generated core earnings return on equity of 19%,
increased our quarterly dividend twice, achieved record core
earnings in each quarter of the year and created meaningful
shareholder value. For the full fiscal year, the Company’s Core
Earnings totaled $389 million, or $1.92 per diluted share,
representing a 22% year-over-year increase per share. GAAP
Net Income for the year totaled $269 million, or $1.32 per
diluted share. During the year, New Residential paid out $355
million in Common Dividends, or $1.75 per diluted share, rep-
resenting an 11% year-over-year increase per share.
Since the Company’s inception in May 2013, we have contin-
uously focused on identifying and executing on attractive
investments across the mortgage markets. Today we have a
well-diversified portfolio of high-quality assets, consisting
mainly of excess mortgage servicing rights (“Excess MSRs”),
servicer advances and non-agency securities with associ-
ated call rights. As one of the major capital providers in the
mortgage servicing industry, our business continues to pro-
duce consistently strong cash flows, superior earnings and
attractive dividends.
ACQUISITION OF HOME LOAN SERVICING SOLUTIONS:
One of the most notable events in 2015 for New Residential
was the $1.4 billion acquisition of HLSS announced on April 6,
2015. The transaction was a transformational and important
milestone for the Company. As a result of the transaction,
we acquired approximately $156 billion of servicing-related
assets, which meaningfully grew our servicing asset portfolio
to approximately $402 billion unpaid principal balance
(“UPB”). Furthermore, we were able to diversify our relation-
ship with non-bank servicers by acquiring a new servicing
partner, Ocwen Financial Corporation. We believe our existing
relationships and platform will help provide us with additional
bandwidth to acquire more servicing assets going forward.
More importantly, we remain confident that the HLSS acqui-
sition will continue to be accretive to our future earnings.
KEY INVESTMENT HIGHLIGHTS:
In 2015, we continued to achieve impressive results across
our three key business segments. In total, we deployed over
$2.0 billion throughout the year across our business seg-
ments, including Excess MSRs, servicer advances and non-
agency securities with associated call rights.
EXCESS MSRS:
As of year-end, our Excess MSR portfolio totaled $402
billion in UPB. Since inception, Excess MSRs have been
the foundation of our investment thesis. Our Excess MSR
portfolio today consists mainly of well-seasoned mort-
gage loans with an average tenor of approximately
9 years. We believe the well-seasoned and credit impaired
nature of our Excess MSR portfolio provides us with a
competitive advantage that helps protect our invest-
ments against various interest rate environments.
Excess MSRs are one of the few fixed income assets that
we expect will increase in value as interest rates rise,
because mortgages underlying the Excess MSRs are less
likely to be refinanced. Furthermore, our legacy, credit-
impaired Excess MSRs are less sensitive to prepayments
in lower interest rate environments.
From 2011 to 2015, we invested a total of $1.9 billion in
32 loan pools with $548 billion of initial UPB. In 2015
alone, we acquired a total of $214 billion UPB of Excess
MSRs across 8 loan pools. Through the end of December
2015, we received life-to-date cash flows totaling $693
million, representing 36% of our initial investment and a
life-to-date internal rate of return (“IRR”) of 22%.
Looking ahead in 2016, we remain optimistic about our
ability to maintain momentum in growing our portfolio
of servicing assets. In 2015 we began obtaining state
licenses with the goal of becoming a fully licensed MSR
owner across 50 states and have additional flexibility
around growing our MSR business. As of year-end, we are
qualified to own non-agency MSRs in 38 states and we
expect to obtain remaining state and agency approvals in
2016. Furthermore, we expect MSR sales from both bank
and non-bank servicers to con tinue, given operational
pressure and regulatory capital requirements. As market
activity becomes increasingly robust, we estimate an
actionable MSR pipeline totaling approximately $500 bil-
lion UPB or more over the course of 2016.
NEW RESIDENTIAL INVESTMENT CORP. | 2015 Annual Report | 1
SERVICER ADVANCES:
Our servicer advance investments continued to deliver
outstanding results since we made our first invest-
ment in December 2013, where we acquired approxi-
mately $3.2 billion of non-agency servicer advances
from Nationstar Mortgage Holdings Inc. (NYSE: NSM,
“Nationstar”). On our initial invested capital of $313
million, we have received $244 million of cash flows,
resulting in a life-to-date IRR of 26%.
Throughout 2015, we made meaningful improvements
to our advance financings and investment returns by
lowering cost of funds, enhancing advance rates,
increasing financing capacity and extending maturities.
During the year, we extended maturities on 5 advance
facilities totaling $3.1 billion and established new
financing facilities totaling $6.8 billion. Furthermore, we
continued to diversify our funding sources by issuing 4
series of servicer advance-backed term notes, totaling
$1.6 billion, during the year.
NON-AGENCY SECURITIES & ASSOCIATED CALL RIGHTS:
In 2015, we continued to focus and execute on our call
rights strategy. Our strategy is simple, we aim to buy
non-agency securities where we own the associated call
rights, because they permit us to pay off outstanding
RMBS at face value (or “par”) in exchange for ownership
of the underlying collateral. We believe there can be a
meaningful discrepancy between the value of the non-
agency RMBS and the recovery value of the underlying
mortgage loans. We believe that the acquisition and exe-
cution 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 of the call rights. We look to continually mon-
etize the call rights as they become exercisable over time
once the current collateral balances are reduced below
the applicable thresholds (generally expressed as a per-
centage of the original balances).
As of December 31, 2015, we owned call rights on approx-
imately $200 billion UPB of non-agency residential mort-
gage securitizations, of which $29 billion is callable as of
year-end. In 2015, we collapsed approximately $1.3
billion of UPB across 53 non-agency deals in 2015,
resulting in $21.4 million of income from discount bonds
paid off at par and proceeds from re-securitizations. In
addition, we purchased $2.4 billion face value of non-
agency RMBS for $1.3 billion throughout the year and
sold $476 million face value for $426 million, recognizing
gains of approximately $3 million. As of year-end, our
non-agency RMBS portfolio totaled approximately $1.6
billion in fair market value.
OTHER INVESTMENTS—CONSUMER LOAN PORTFOLIO:
In addition to our three core business segments, from
time to time, we also make opportunistic investments
that we believe have the potential to generate outsized
returns. For example, in April 2013, we invested $241
million to purchase an interest in a $3.9 billion UPB
consumer 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 refinancing pro-
ceeds, we received total life-to-date cash flows of $517
million and achieved outstanding returns. On our initial
equity investment of $241 million, the investment has
generated an impressive IRR of 91% to date. To further
enhance our future investment returns, on March 31,
2016, we increased our equity investment from $241
million to $297 million which increased our equity inter-
est in the consumer loan portfolio from 30% to approxi-
mately 54%.
LOOKING AHEAD:
In summary, 2015 was a transformational year for New
Residential that included many landmark accomplishments.
During the year, we achieved record earnings, made mean-
ingful accretive acquisitions and successfully executed on
multiple key strategic initiatives, demonstrating our ability to
seize opportunities in today’s dynamic mortgage markets.
Throughout the year, we remained focused on optimizing the
value of our investments and continued to position New
Residential for future growth. We believe our portfolio of
assets is well positioned for various interest rate environ-
ments and to continue to deliver strong risk-adjusted
returns. Furthermore, we are encouraged by the meaningful
progress we have achieved thus far in becoming a fully
licensed MSR owner and the opportunities to come from our
call rights strategy.
Looking ahead, we believe we remain well positioned to
execute on a robust investment pipeline and will continue
to strive to generate sustainable earnings and dividend
growth for our shareholders. We thank you for your continued
support and we look forward to keeping you updated on our
business developments in the coming quarters.
Sincerely,
Michael Nierenberg
Chief Executive Officer & President
2 | NEW RESIDENTIAL INVESTMENT CORP. | 2015 Annual Report
2015 Form 10-K
NEW RESIDENTIAL INVESTMENT CORP.
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, 2015
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
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
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, 2015 (computed based on the closing price on such date as reported
on the NYSE) was: $3.5 billion.
Common stock, $0.01 par value per share: 230,471,202 shares outstanding as of February 18, 2016.
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 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.A
DOCUMENTS INCORPORATED BY REFERENCE
Table of Contents
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:
•
•
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, Ocwen, OneMain 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;
•
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 for U.S. federal income tax purposes and the potentially
onerous consequences that any failure to maintain such qualification would have on our business;
i
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• our ability to maintain our exclusion from registration under the 1940 Act and the fact that maintaining such exclusion
imposes limits on our operations;
the risks related to HLSS liabilities that we have assumed;
the impact of current or future legal proceedings and regulatory investigations and inquiries;
the impact of any material transactions with FIG LLC (the Manager) or one of its affiliates, including the impact of any
actual, potential or perceived conflicts of interest; and
•
•
•
• events, conditions or actions that might occur at HLSS or Ocwen.
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 proved 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
Table of Contents
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, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and
2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
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
Note 15. Transactions with Affiliates and Affiliated Entities
iv
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Note 16. Reclassification from Accumulated Other Comprehensive Income into Net Income
Note 17. Income Taxes
Note 18. Subsequent Events
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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Table of Contents
Item 1. Business.
General
PART I
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 our investments, and our 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 risk-adjusted returns for our stockholders, which at times incorporates the use
of leverage.
We intend to continue to invest opportunistically across the residential real estate market. 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 under
which the borrower is typically paid 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 borrower defaults on a loan and the lender takes
ownership of the underlying property through foreclosure, that property is referred to as real estate owned (“REO”).
Residential Mortgage Backed Securities (“RMBS”): Agency and Non-Agency and Call Rights
Mortgage loans are often packaged into pools held in securitization entities which issue securities (RMBS) collateralized by
the loans. Agency RMBS are RMBS issued or guaranteed by a U.S. government agency, such as the Government National
Mortgage Association (“Ginnie Mae”), or by a government-sponsored enterprise (“GSE”), such as the Federal National
Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). Non-Agency RMBS
are issued by either public trusts or private label securitization (“PLS”) entities.
RMBS may be subject to call rights. Call rights permit the holder of the rights to purchase all of the mortgage loans which
are collateralizing the related securitization for a price generally equal to the outstanding balance of such loans plus interest
and certain other amounts (such as outstanding servicing advances and unpaid servicing fees). 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).
1
Table of Contents
Mortgage Servicing Rights and Excess Mortgage Servicing Rights
A mortgage servicing right (“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 unless otherwise specified through
agreement.
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 generally permitted to be repaid from amounts received with respect to the related mortgage loan or
pool of mortgage loans.
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 unpaid principal balance (“UPB”) as of December 31, 2015 of $402.4 billion. As of December 31,
2015, the carrying value of our Excess MSRs was approximately $1.8 billion, representing 11.9% of our total assets,
and our Excess MSRs segment represented 58.4% of our equity, net of financing.
Servicer Advances: We have made three direct investments in servicer advances, including the basic fee component of
the related MSRs. The first direct 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. In addition, we have indirectly invested
in servicer advances through securities collateralized by servicer advances. As of December 31, 2015, the carrying
value of our servicer advances, including the basic fee component of the related MSRs, and related securities, was
approximately $7.9 billion, representing 51.7% of our total assets, and our Servicer Advances segment represented
17.5% 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, 2015, the carrying value of our real estate securities, excluding
those collateralized by servicer advances, which are included in our Servicer Advances segment above, was
approximately $2.1 billion ($0.9 billion for Agency RMBS and $1.2 billion for Non-Agency RMBS), representing
13.6% of our total assets, and our Real Estate Securities segment represented 16.5% of our equity, net of financing. In
addition, we own call rights with respect to certain securitization trusts which are collateralized by mortgage loans
with a UPB of approximately $200.0 billion.
• Real Estate Loans: We have acquired residential mortgage loans, including performing, non-performing, re-performing
and reverse mortgage loans, and related REO. We have also directly purchased REO unrelated to the collapse or non-
performing loan resolution process. As of December 31, 2015, the carrying value of our residential mortgage loans
(including REO) was $1.2 billion, representing 7.6% of our total assets, and our Real Estate Loans segment represented
9.2% 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 the carrying value of our investment in consumer loans was reduced to zero. We continue
to own an interest in this entity, from which we expect to receive significant future cash flows.
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In addition, as of December 31, 2015, we had cash and cash equivalents, restricted cash, derivative assets, and other assets of $2.3
billion, representing 15.2% of our total assets, and our Consumer Loans and Corporate segments represented (1.6)% of our equity,
net of dividends, financings and other payables, primarily as a result of dividends payable.
The following table summarizes our segments as of December 31, 2015 (in thousands):
Servicing Related Assets
Residential Securities and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
$
1,798,738
$
7,857,841
$
2,070,834
$
1,157,433
$
— $
— $ 12,884,846
42,984
13,262
6,359
73,138
18,507
878
—
34
95,686
93,824
2,689
198,962
$
$
1,818,157
182,978
2,277
$
$
8,249,002
7,550,680
$
$
18,153
185,255
7,568,833
1,632,902
680,169
—
—
1,600,091
3,713,909
2,513,538
740,392
3,253,930
459,979
—
—
106,330
$
$
1,277,025
1,004,980
$
$
14,382
1,019,362
257,663
—
—
1,767
8,126
40,446
459
40,905
(32,779)
$
$
249,936
94,702
2,689
—
—
53,365
1,960,549
126,503
$ 15,192,722
— $ 11,292,622
137,857
137,857
913,520
12,206,142
(11,354)
2,986,580
—
190,647
—
—
—
—
190,647
$
1,632,902
$
489,522
$
459,979
$
257,663
$
(32,779) $
(11,354) $
2,795,933
December 31, 2015
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
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 November
2015, including about $12.1 trillion of home equity and $9.4 trillion of mortgage debt outstanding, according to Freddie Mac. 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, which entitle the owner of such securities to receive a portion of the interest and/or 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, hedge funds 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. The role of private capital has increased in financing the mortgage
origination process despite the GSEs’ presence as the largest purchasers of home mortgage loans.
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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. 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. 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.
Segments of the Residential Mortgage Loan Market
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 (“FHA”) 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 weak 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
needed for the performance of servicing duties (including advance obligations), 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
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the loan pools underlying our investment, unless otherwise specified through agreement. We have purchased servicer advances,
including the basic fee component of the related MSRs, on certain loan pools underlying our Excess MSRs.
As of the third quarter of 2015, the Top 100 mortgage servicers serviced approximately $10 trillion of residential mortgages
according to Inside Mortgage Finance. Of the $10 trillion, approximately 74% of these MSRs were serviced by banks,
according to Inside Mortgage Finance. We expect this percentage 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 or nonbank servicers sell MSRs, there may be an opportunity for us to
invest in the corresponding Excess MSRs.
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 $3 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 billion 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 Mortgage LLC (“Nationstar”), will continue to sell a portion
of the Excess MSRs. In addition, approximately $1.5 trillion of new loans are expected to be originated in 2016 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 $2 trillion of MSRs could be sold or available over the next few years. Increased
competition for these MSR 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. While prices have rebounded from the lows, we believe that MSRs continue to offer attractive returns.
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 have begun the process
of acquiring servicing licenses from various states and seeking servicing licenses from GSEs to facilitate our ability to
directly purchase mortgage servicing rights.
We pioneered investments in Excess MSRs (while we were a wholly owned subsidiary of Newcastle) and 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 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.
The purpose of the advances is to provide liquidity, rather than credit enhancement, to the underlying residential mortgage
securitization transaction. Servicer advances are generally permitted to be repaid from amounts received with respect to the related
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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.”
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.
In 2015, we purchased our first rated bonds backed by securitized pools of servicer advances issued through transactions sponsored
by mortgage servicers. Servicer advance securitizations are generally rated “Master Trust” structures with multiple series of notes
and one or more variable funding notes sharing in the same pool of collateral. Each note class has a specific advance rate and
rating. We may pursue similar investments as opportunities arise.
Residential Securities and Loans
RMBS
We invest in both Agency RMBS and Non-Agency RMBS. As of the third quarter of 2015, 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, and the balance was 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.
To-be-announced forward contract positions (“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.
We believe there continue to be 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. 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 continue to pursue opportunities in structured transactions that enable us to realize this difference,
particularly through the acquisition and execution of call rights. We control the call rights on Non-Agency deals with a total UPB
of approximately $200.0 billion. Call rights become exercisable when the current principal balance of the underlying mortgage
loans is generally equal to or lower than 10% of their original balance. We will exercise call rights when economical, which is
impacted by the value of underlying performing loans as well as non-performing loan and real estate owned percentages and
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values. However, the timing, size and potential returns of future call transactions may be less attractive than our prior activity in
this sector due to a number of factors, most of which are beyond our control.
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.
Real Estate Loans and Real Estate Owned
We believe there may be attractive opportunities to invest in portfolios of non-performing and other residential mortgage loans,
along with foreclosed properties. 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. In other investments, we would expect to acquire the foreclosed property at a deep discount to its value, and we would
seek to monetize the discount through property improvements and sales. We would seek to improve performance by transferring
the servicing to Nationstar or another reputable servicer, which we believe could increase our returns. 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 non-performing loans from Ginnie Mae
securitizations, has been increasing the number of portfolio sales. Fannie Mae and Freddie Mac have also undertaken a 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. For more information about our investment guidelines, see
“—Investment Guidelines.”
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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 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, 2015 (dollars in thousands):
Investments in:
Excess MSRs(B)
Servicer Advances(B)
Agency RMBS(C)
Non-Agency RMBS(C)
Residential Mortgage Loans
Real Estate Owned
Consumer Loans(B)
Total / Weighted Average
Reconciliation to GAAP total assets:
Cash and restricted cash
Derivative assets
Trade receivable
Deferred tax asset, net
Other assets
GAAP total assets
Outstanding
Face Amount
Amortized
Cost Basis
$ 402,426,021
7,578,110
884,578
3,533,974
1,365,849
N/A
2,094,904
1,593,734
7,400,068
918,633
1,579,445
1,122,602
50,574
N/A
Percentage of
Total
Amortized
Cost Basis
Carrying
Value
Weighted
Average Life
(years)(A)
12.5% $
1,798,738
58.4%
7.3%
12.5%
8.9%
0.4%
N/A
7,426,794
917,598
1,584,283
1,106,859
50,574
—
6.3
4.4
6.6
6.8
3.3
N/A
3.1
5.0
$ 417,883,436
$
12,665,056
100.0% $
12,884,846
344,638
2,689
1,538,481
185,311
236,757
$
15,192,722
(A)
(B)
(C)
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.
Amortized cost basis is net of impairment.
Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions.
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, which at times incorporates the use of leverage.
To date, we have generally funded the acquisition of Excess MSRs on an unlevered basis; however, we may at times lever our
Excess MSRs. 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 on 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.
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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 taxable REIT subsidiary
(“TRS”) that is fully subject to U.S. federal corporate income taxation. Our interest rate management techniques may include:
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, on August 5, 2014 and on May 7, 2015, 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 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 No. 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, plus earnings (or losses) from equity
method investees invested in Excess MSRs as if such equity method investees had not made a fair value election, plus gains (or
losses) from debt restructuring and gains (or losses) from sales of property, and plus non-routine items, minus amortization of
non-routine items, 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.
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“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 and should not be
considered as a substitute for, or superior to, net income, or as a substitute for, or superior to, cash flows from operating activities,
each as determined in accordance with U.S. GAAP, and our calculation of this measure may not be comparable to similarly entitled
measures reported by other companies.
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 relating to an additional 10.9 million shares of our common stock, representing approximately 5.5% of our
common stock on a fully diluted basis, as of December 31, 2015.
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.
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.
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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 OneMain (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 OneMain Holdings, Inc. (formerly known as
Springleaf Holdings, Inc.) (together with its subsidiaries, including SpringCastle Acquisition LLC, “OneMain”). 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 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, 2015, Fortress had two funds primarily focused on investing in Excess MSRs with approximately $0.7 billion in
capital commitments in aggregate. We have co-invested with these funds in Excess MSRs and may do so with similar Fortress
funds in the future. 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.
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 have been 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.
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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 SLS-serviced
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 SLS-serviced 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.
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 Securities and Exchange
Commission (“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
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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
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, REITs, 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.
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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
For a discussion of our legal proceedings, see Part I, Item 3, “Legal Proceedings” in this report.
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 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, (v) Risks Related to Our Common Stock and (vi) Risks Related to the HLSS Acquisition. However, these categories do
overlap and should not be considered exclusive.
Risks Related to Our Business
We may not be able to successfully operate our business strategy or generate sufficient revenue to make or sustain
distributions to our stockholders. Any 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 cannot assure you that we will be able to successfully operate our business or implement our operating policies and strategies.
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.
Any financial information included in this report for periods prior to our spin-off in May 2013 has been derived from Newcastle’s
historical financial statements for the periods prior to the spin-off. Therefore, any financial information in this report for the periods
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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:
• Any 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 and recoveries (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
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 by the related servicer 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
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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 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 (in the case of Nationstar, together with certain third-party investors) to purchase from certain of our servicers 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 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 the
related servicing agreement provided for a “general collections backstop”, from collections on other mortgage loans to which such
servicing agreement relates. The rate and timing of payments on the servicer advances and the deferred servicing fees, are
unpredictable for several reasons, including the following:
•
•
•
•
•
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 one of our servicers 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.
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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, mortgaged property or 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, according to information made available to us, Nationstar and Ocwen Financial Corporation (together with its
subsidiaries, “Ocwen”) have each recovered more than 99% of the advances that they have made. While we do not expect recovery
rates to vary materially during the term of our investments, 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, Non-Agency RMBS and residential mortgage loans is dependent
on the satisfactory performance of servicing obligations by the related 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 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 and Ocwen are the servicers of most of the loans underlying our
investments in Excess MSRs and servicer advances, and Nationstar and Ocwen are 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, Ocwen and OneMain, and are subject to other counterparty concentration and default risks.” As a result, we could be
materially and adversely affected if Nationstar, Ocwen or any other servicer of the loans underlying our investments is unable to
adequately carry out its duties as a result of:
•
•
•
•
•
•
•
•
•
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 in the ordinary course of business, 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,
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Superintendent of the New York Department of Financial Services (“NY DFS”), in connection with Nationstar’s recent growth,
certain operational issues, and certain alleged recent complaints from certain New York consumers. Other servicers, including
Ocwen, have experienced heightened regulatory scrutiny, and Nationstar could be adversely affected by the market’s perception
that Nationstar could experience similar regulatory issues. See “—Ocwen has been and is subject to certain federal and state
regulatory matters” for more information on heightened regulatory scrutiny of Ocwen.
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 any of
our servicers or subservicers fails to adequately perform its 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 one of our servicers from which we are obligated to purchase servicer advances is required by the
applicable Servicing Guidelines to make advances in excess of amounts that we or, in the case of Nationstar, the co-investors, are
willing or able to fund, such servicer 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 such servicer. 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, and could lead to civil and criminal liability, loss of licensing, damage to our reputation and
litigation, 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 Ratings Services (“S&P”), Moody’s Investors Service
(“Moody’s”) and Fitch Ratings (“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 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 materially and adversely affect us. See “—A bankruptcy of any of our mortgage servicers could materially and
adversely affect us.”
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.”
Ocwen has been and is subject to certain federal and state regulatory matters.
Ocwen has publicly announced that, on December 19, 2013, Ocwen reached an agreement, which was approved by consent
judgment by the U.S. District Court for the District of Columbia on February 26, 2014, involving the Consumer Financial Protection
Bureau, various state attorneys general and other agencies that regulate the mortgage servicing industry. According to Ocwen’s
disclosure, the key elements of the settlement are as follows:
• A commitment by Ocwen to service loans in accordance with specified servicing guidelines and to be subject to oversight
by an independent national monitor for three years;
• A payment of $127.3 million to a consumer relief fund to be disbursed by an independent administrator to eligible
borrowers. In May 2014, Ocwen satisfied this obligation with regard to the consumer relief fund, $60.4 million of which
is the responsibility of former owners of certain servicing portfolios acquired by Ocwen, pursuant to indemnification and
loss sharing provisions in the applicable agreements; and
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• A commitment by Ocwen to continue its principal forgiveness modification programs to delinquent and underwater
borrowers, including underwater borrowers at imminent risk of default, in an aggregate amount of at least $2.0 billion
over three years from the date of the consent order. Ocwen will only receive credit towards its $2.0 billion commitment
for principal reductions that satisfy various criteria set forth in the settlement. If Ocwen fails to fulfill its $2.0 billion
commitment before the deadline, Ocwen will be required to pay a cash penalty in an amount equal to the unmet commitment
amount, unless the parties to the settlement negotiate an extension or other modification of the terms of the commitment.
On December 22, 2014, Ocwen announced that it had reached a settlement agreement with the NY DFS related to investigations
into Ocwen’s mortgage servicing practices in New York. According to Ocwen’s disclosure, the key elements of the settlement are
as follows:
•
•
•
Payment of $100 million to the NY DFS to be used by the State of New York for housing, foreclosure relief and community
redevelopment programs;
Payment of $50 million as restitution to certain New York borrowers;
Installation of a NY DFS Operations Monitor to monitor and assess the adequacy and effectiveness of Ocwen’s operations
for a period of two years, which may be extended another twelve months at the option of the NY DFS;
• Requirements that Ocwen will not share any common officers or employees with any related party and will not share
risk, internal audit or vendor oversight functions with any related party;
• Requirements that certain Ocwen employees, officers and directors be recused from negotiating or voting to approve
certain transactions with a related party;
• Resignation of Ocwen’s Chairman of the Board from the Board of Directors of Ocwen and at related companies, including
HLSS; and
• Restrictions on Ocwen’s ability to acquire new MSRs.
On January 23, 2015, Ocwen announced that it had reached a settlement with the California Department of Business Oversight
(the “CA DBO”) in relation to an administrative action dated October 3, 2014 in California. According to Ocwen’s disclosure, the
key elements of the settlement are as follows:
Payment of $2.5 million;
•
• Engagement of an independent auditor to assess Ocwen’s compliance with laws and regulations impacting California’
•
borrowers for a period of at least two years; and
Prevention of Ocwen from acquiring additional MSRs for loans secured in the State of California until the CA DBO is
satisfied that Ocwen can satisfactorily respond to the requests for information and documentation made in the course of
a regulatory exam.
Regulatory action against Ocwen could increase our financing costs or operating expenses, reduce our revenues or otherwise
materially adversely affect our business, financial condition, results of operations and liquidity. Ocwen may be subject to additional
federal and state regulatory matters in the future that could materially and adversely affect the value of our investments because
we rely heavily on Ocwen to achieve our investment objectives and have no direct ability to influence its performance.
We have significant counterparty concentration risk in Nationstar, Ocwen and OneMain, 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.
A majority of our co-investments in Excess MSRs and servicer advances related to loans serviced by Nationstar or Ocwen. If
Nationstar or Ocwen 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, a large portion of the loans underlying our Non-
Agency RMBS are serviced by Nationstar or Ocwen. We closely monitor Nationstar’s and Ocwen’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 and Ocwen that enable
us to monitor their 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 our servicers’ performance, and our diligence cannot
prevent, and may not even help us anticipate, the termination of any such servicers’ servicing agreement.
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Furthermore, Nationstar and Ocwen are 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.
None of our servicers have an 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 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 any applicable servicer or subservicer breaches any of its obligations under
the related servicing agreements, including, without limitation, any failure of such servicer to perform its servicing and advancing
functions in accordance with the terms of such servicing agreements. If any 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, Ocwen 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 our
servicer or subservicer to satisfy various covenants and tests can result in an amortization event and/or an event of default. We
have no direct ability to control our servicer or subservicer’s compliance with those covenants and tests. Failure of our servicer
or subservicer to satisfy any such covenants or tests could result in a partial or total loss on our investment.
In addition, Ocwen is a party to substantially all financing agreements with subsidiaries of HLSS acquired by us in the HLSS
Acquisition (including the servicer advance facilities). Our ability to obtain financing for the assets of those acquired subsidiaries
is dependent on Ocwen’s agreement to be a party to its financing agreements. If Ocwen does not agree to be a party to these
financing agreements for any reason, we may not be able to obtain financing on favorable terms or at all. Breaches and other
events with respect to Ocwen (including, without limitation, failure of Ocwen to satisfy certain financial tests) could cause certain
or all of the financing, in respect of assets acquired from HLSS to become due and payable prior to maturity. Our ability to obtain
financing on such assets is dependent on Ocwen’s ability to satisfy various tests under such financing arrangements. We will be
dependent on Ocwen as the servicer of the mortgage loans with respect to which we are entitled to the basic fee component, and
Ocwen’s servicing practices may impact the value of certain of our assets. We may be adversely impacted:
• By regulatory actions taken against Ocwen;
• By a default by Ocwen under its debt agreements;
• By further downgrades in Ocwen’s servicer rating;
•
•
•
•
If Ocwen fails to ensure its servicer advances comply with the terms of its Purchase and Sale Agreements (“PSAs”);
If Ocwen were terminated as servicer under certain PSAs;
If Ocwen becomes subject to a bankruptcy proceeding; or
If Ocwen fails to meet its obligations or is deemed to be in default under the indenture governing notes issued under any
servicer advance facility with respect to which Ocwen is the servicer.
In addition, the consumer loans in which we have invested are serviced by OneMain. If OneMain 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.
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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.
A bankruptcy of any of our mortgage servicers could materially and adversely affect us.
If Nationstar, Ocwen or any of our other mortgage servicers becomes subject to a bankruptcy proceeding, we could be materially
and adversely affected, and you could suffer losses, as discussed below.
A sale of Excess MSRs, servicer advances or other asset, including loans, could be re-characterized as a pledge of such assets in
a bankruptcy proceeding.
We believe that a mortgage servicer’s transfer to us of Excess MSRs, servicer advances and any other asset transferred pursuant
to a related purchase agreement, including loans, constitutes a sale of such assets, in which case such assets would not be part of
such servicer’s bankruptcy estate. The servicer (as debtor-in-possession in the bankruptcy proceeding), a bankruptcy trustee
appointed in such servicer’s bankruptcy proceeding, or any other party in interest, however, might assert in a bankruptcy proceeding
that Excess MSRs, servicer advances or any other assets transferred to us pursuant to the related purchase agreement were not
sold to us but were instead pledged to us as security for such servicer’s obligation to repay amounts paid by us to the servicer
pursuant to the related purchase agreement. If such assertion were successful, all or part of the Excess MSRs, servicer advances
or any other asset transferred to us pursuant to the related purchase agreement would constitute property of the bankruptcy estate
of such servicer, and our rights against the servicer would be those of a secured creditor with a lien on such assets. Under such
circumstances, cash proceeds generated from our collateral would constitute “cash collateral” under the provisions of the U.S.
bankruptcy laws. Under U.S. bankruptcy laws, the servicer could not use our cash collateral without either (a) our consent or
(b) approval by the bankruptcy court, subject to providing us with “adequate protection” under the U.S. bankruptcy laws. In
addition, under such circumstances, an issue could arise as to whether certain of these assets generated after the commencement
of the bankruptcy proceeding would constitute after-acquired property excluded from our lien pursuant to the U.S. bankruptcy
laws.
If such a recharacterization occurs, the validity or priority of our security interest in the Excess MSRs, servicer advances or other
assets could be challenged in a bankruptcy proceeding of such servicer.
If the purchases pursuant to the related purchase agreement are recharacterized as secured financings as set forth above, we
nevertheless created and perfected security interests with respect to the Excess MSRs, servicer advances and other assets that we
may have purchased from such servicer by including a pledge of collateral in the related purchase agreement and filing financing
statements in appropriate jurisdictions. Nonetheless, our security interests may be challenged and ruled unenforceable, ineffective
or subordinated by a bankruptcy court. If this were to occur, then the servicer’s obligations to us with respect to purchased Excess
MSRs, servicer advances and other assets would be deemed unsecured obligations, payable from unencumbered assets to be shared
among all of such servicer’s unsecured creditors. In addition, even if the security interests are found to be valid and enforceable,
if a bankruptcy court determines that the value of the collateral is less than such servicer’s underlying obligations to us, the
difference between such value and the total amount of such obligations will be deemed an unsecured “deficiency” claim and the
same result will occur with respect to such unsecured claim. In addition, even if the security interest is found to be valid and
enforceable, such servicer would have the right to use the proceeds of our collateral subject to either (a) our consent or (b) approval
by the bankruptcy court, subject to providing us with “adequate protection” under U.S. bankruptcy laws. Such servicer also would
have the ability to confirm a chapter 11 plan over our objections if the plan complied with the “cramdown” requirements under
U.S. bankruptcy laws.
Payments made by a servicer to us could be voided by a court under federal or state preference laws.
If one of our mortgage servicers were to file, or to become the subject of, a bankruptcy proceeding under the United States
Bankruptcy Code or similar state insolvency laws, and our security interest is declared unenforceable, ineffective or subordinated,
payments previously made by a servicer to us pursuant to the related purchase agreement may be recoverable on behalf of the
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bankruptcy estate as preferential transfers. A payment could constitute a preferential transfer if a court were to find that the payment
was a transfer of an interest of property of such servicer that:
• Was made to or for the benefit of a creditor;
• Was for or on account of an antecedent debt owed by such servicer before that transfer was made;
• Was made while such servicer was insolvent (a company is presumed to have been insolvent on and during the 90 days
preceding the date the company’s bankruptcy petition was filed);
• Was made on or within 90 days (or if we are determined to be a statutory insider, on or within one year) before such
•
servicer’s bankruptcy filing;
Permitted us to receive more than we would have received in a chapter 7 liquidation case of such servicer under U.S.
bankruptcy laws; and
• Was a payment as to which none of the statutory defenses to a preference action apply.
If the court were to determine that any payments were avoidable as preferential transfers, we would be required to return such
payments to such servicer’s bankruptcy estate and would have an unsecured claim against such servicer with respect to such
returned amounts.
Payments made to us by such servicer, or obligations incurred by it, could be voided by a court under federal or state fraudulent
conveyance laws.
The mortgage servicer (as debtor-in-possession in the bankruptcy proceeding), a bankruptcy trustee appointed in such servicer’s
bankruptcy proceeding, or another party in interest could also claim that such servicer’s transfer to us of Excess MSRs, servicer
advances or other assets or such servicer’s agreement to incur obligations to us under the related purchase agreement was a
fraudulent conveyance. Under U.S. bankruptcy laws and similar state insolvency laws, transfers made or obligations incurred
could be voided if such servicer, at the time it made such transfers or incurred such obligations: (a) received less than reasonably
equivalent value or fair consideration for such transfer or incurrence and (b) either (i) was insolvent at the time of, or was rendered
insolvent by reason of, such transfer or incurrence; (ii) was engaged in, or was about to engage in, a business or transaction for
which the assets remaining with such servicer were an unreasonably small capital; or (iii) intended to incur, or believed that it
would incur, debts beyond its ability to pay such debts as they mature. If any transfer or incurrence is determined to be a fraudulent
conveyance, Ocwen or Nationstar, as the case may be, (as debtor-in-possession in the bankruptcy proceeding) or a bankruptcy
trustee on such servicer’s behalf would be entitled to recover such transfer or to avoid the obligation previously incurred.
Any purchase agreement pursuant to which we purchase Excess MSRs, servicer advances or other assets, including loans, could
be rejected in a bankruptcy proceeding of one of our mortgage servicers.
The mortgage servicer (as debtor-in-possession in the bankruptcy proceeding) or a bankruptcy trustee appointed in such servicer’s
bankruptcy proceeding could seek to reject the related purchase agreement and thereby terminate such servicer’s obligation to
service the Excess MSRs, servicer advances and any other asset transferred pursuant to such purchase agreement, and terminate
our right to acquire additional assets under such purchase agreement and our right to require such servicer to use commercially
reasonable efforts to transfer servicing. If the bankruptcy court approved the rejection, we would have a claim against such servicer
for any damages from the rejection.
A bankruptcy court could stay a transfer of servicing to another servicer.
Our ability to require a mortgage servicer to use commercially reasonable efforts to transfer servicing rights to a new servicer
would be subject to the automatic stay in such servicer’s bankruptcy proceeding. To enforce this right, we would have to seek
relief from the bankruptcy court to lift such stay, and there is no assurance that the bankruptcy court would grant this relief.
The Subservicing Agreement could be rejected in a bankruptcy proceeding.
If one of our mortgage servicers were to file, or to become the subject of, a bankruptcy proceeding under the United States
Bankruptcy Code or similar state insolvency laws, such servicer (as debtor-in-possession in the bankruptcy proceeding) or the
bankruptcy trustee could reject its subservicing agreement with us and terminate such servicer’s obligation to service the Excess
MSRs, servicer advances or loans in which we have an investment. Any claim we have for damages arising from the rejection of
a subservicing agreement would be treated as a general unsecured claim for purposes of distributions from such servicer’s
bankruptcy estate.
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Our mortgage servicers could discontinue servicing.
If one of our mortgage servicers were to file or to become the subject of a bankruptcy proceeding under the United States Bankruptcy
Code, such servicer could be terminated as servicer (with bankruptcy court approval) or could discontinue servicing, in which
case there is no assurance that we would be able to continue receiving payments and transfers in respect of the Excess MSRs,
servicer advances and other assets purchased under the related purchase agreement. Even if we were able to obtain the servicing
rights, because we do not and in the future may not have the employees, servicing platforms, or technical resources necessary to
service mortgage loans, we would need to engage an alternate subservicer (which may not be readily available on acceptable terms
or at all) or negotiate a new subservicing agreement with such servicer, which presumably would be on less favorable terms to
us. Any engagement of an alternate subservicer by us would require the approval of the related RMBS trustees.
The automatic stay under the United States Bankruptcy Code may prevent the ongoing receipt of servicing fees or other amounts
due.
Even if we are successful in arguing that we own the Excess MSRs, servicer advances and other assets, including loans, purchased
under the related purchase agreement, we may need to seek relief in the bankruptcy court to obtain turnover and payment of
amounts relating to such assets, and there may be difficulty in recovering payments in respect of such assets that may have been
commingled with other funds of such servicer.
A bankruptcy of any of our servicers defaults our advance financing facilities and negatively impacts our ability to continue to
purchase servicer advances.
If any of our servicers were to file or to become the subject of a bankruptcy proceeding, it will result in an event of default under
certain of our advance financing facilities that would terminate the revolving period of such facilities. In this scenario, our advance
financing facilities would not have the ability to continue funding the purchase of servicer advances under the related purchase
agreement. Notwithstanding this inability to fund, such servicer may try to force us to continue making such purchases. If it is
determined that we are in breach of our obligation to purchase servicer advances, any claims that we may have against such servicer
may be subject to offset against claims such servicer may have against us by reason of this breach.
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 basis points of the UPB for fixed rate mortgages. As has been widely
publicized, 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.
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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.
We do not have legal ownership of our acquired mortgage servicing rights.
We do not have legal ownership of the MSRs related to the transactions contemplated by the purchase agreements pursuant to
which we acquire advances, and are subject to increased risks as a result of the servicer continuing to own the mortgage servicing
rights. The validity or priority of our interest in the underlying mortgage servicing could be challenged in a bankruptcy proceeding
of the servicer, and the related purchase agreement could be rejected in such proceeding. Any of the foregoing events might have
a material adverse effect on our business, financial condition, results of operations and liquidity.
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 may 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;
the ability of securities dealers to make markets in relevant securities and loans;
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, at various points
in time, 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. While market conditions have generally improved since 2008, they could deteriorate as a result of a variety of
factors beyond our control with adverse effects to our financial condition.
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 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, 2015, 24.4% of the total UPB of the residential mortgage loans underlying our Excess MSRs was secured by
properties located in California, which are particularly susceptible to natural disasters such as fires, earthquakes and mudslides,
and 8.7% was secured by properties located in Florida. As of December 31, 2015, 35.3% of the collateral securing our Non-Agency
RMBS was located in the Western U.S., 24.4% was located in the Southeastern U.S., 18.8% was located in the Northeastern U.S.,
10.8% was located in the Midwestern U.S. and 10.0% was located in the Southwestern U.S. We were unable to obtain geographical
information for 0.7% of the collateral. As a result of this concentration, we may be more susceptible to adverse developments in
those markets than if we owned a more geographically diverse portfolio. To the extent any of the foregoing risks arise in 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.
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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 (in certain cases, together with third-party
co-investors) are required to purchase from Nationstar, Ocwen and our other servicers, advances on certain loan pools. While a
mortgage loan is in foreclosure, servicers 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 our servicers
are 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, Ocwen and our other servicers, 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 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
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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 the related servicer if servicer advances exceed pre-determined amounts, those
fee reductions may not be sufficient to cover the expenses resulting from longer foreclosure timelines.
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.
A failure by any or all of the members of Buyer 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.
Buyer has agreed to purchase all future arising servicer advances from Nationstar under certain residential mortgage servicing
agreements. Buyer relies, in part, on its members to make committed capital contributions in order to pay the purchase price for
future servicing advances. A failure by any or all of the members to make such 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 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.
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Our investments in real estate related securities are subject to changes in credit spreads as well as available market liquidity,
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
spreads. As of December 31, 2015, 53.3% of our Non-Agency RMBS Portfolio consisted of floating rate securities and 46.7%
consisted of fixed rate securities, and 21.4% of our Agency RMBS portfolio consisted of floating rate securities and 78.6% 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. 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/mortgagors 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 may purchase securities that have a higher or lower 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 would 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 would have to amortize our premiums
on an accelerated basis which may adversely affect our profitability. As compensation for a lower coupon rate, we would then pay
a discount to par value to acquire these securities. In accordance with GAAP, we would accrete any discounts on our Agency
RMBS over the life of the related securities. If the mortgage loans securing these securities prepay at a slower rate than anticipated,
we would have to accrete our discounts on an extended 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
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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
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 or discount 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 the lending 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, 2015, we had outstanding repurchase agreements
with an aggregate face amount of approximately $1.3 billion to finance Non-Agency RMBS and approximately $1.7 billion to
finance Agency RMBS and related trade receivables. 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.
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The financing sources under our servicer advance financing facilities may elect not to extend financing to us or may have
or take positions adverse 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 purchaser of
such servicer advances, which is a subsidiary of the Company, transfer our right to repayment for certain servicer advances we
have acquired from one of our mortgage servicers to one of our wholly owned bankruptcy remote subsidiaries (a “Depositor”).
We are generally required to continue to transfer to the related Depositor all of our rights to repayment for any particular pool of
servicer advances as they arise (and are transferred from one of our mortgage servicers) 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.
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, including, but not limited to, due to legal or regulatory matters
applicable to us or our mortgage servicers, 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, 2015, 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 counterparties. 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.
Many of our servicer advance financing arrangements are provided by financial institutions with whom we have substantial
relationships. Some of our servicer advance financing arrangements entail the issuance of term notes to capital markets investors
with whom we have little or no relationships or the identities of which we may not be aware and, therefore, we have no ability to
control or monitor the identity of the holders of such term notes. Holders of such term notes may have or may take positions - for
example, “short” positions in our stock or the stock of our servicers - that could be benefited by adverse events with respect to us
or our servicers. If any holders of term notes allege or assert noncompliance by us or the related servicer under our advance
financing arrangements in order to realize such benefits, we or our servicers, or our ability to maintain advance financing on
favorable terms, could be materially and adversely affected.
We may not be able to finance our investments on attractive terms or at all, and financing for Excess MSRs or servicer
advances 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. 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 may mature in the short term, 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
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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 our servicers in accordance with the applicable agreement,
any such servicer could default on its obligation to fund such advances, which could result in its 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
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.
The final Basel FRTB Ruling, which raised capital charges for bank holders of ABS, CMBS and Non-Agency MBS beginning
in 2019, could adversely impact available trading liquidity.
In January 2006, the Basel Committee on Banking Supervision released a finalized framework for calculating minimum capital
requirements for market risk, which will take effect in January 2019. In the final proposal, capital requirements would overall be
meaningfully higher than current requirements, but are less punitive than the previous December 2014 proposal. However, each
country’s specific regulator may codify the rules differently. Under the framework, capital charges on a bond are calculated based
on three components: default, market and residual risk. Implementation of the final proposal could impose meaningfully higher
capital charges on dealers compared with current requirements, and could reduce liquidity in the securitized products market.
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
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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 Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) (which, among other things,
established the Consumer Financial Protection Bureau with broad 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.
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Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans and/or MSRs, 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 and/or MSRs. 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. With respect to mortgage
loans, 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 have formed 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
or MSRs 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.
A significant portion 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.
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.
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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
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.”
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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 us. 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 . For purposes of the foregoing,
we currently treat our SLS-serviced 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 generally treat our interests in our SLS-serviced 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 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 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
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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.
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, Ocwen
and our other servicers 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.
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The valuations of our assets are subject to uncertainty because 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.
Stockholder or other litigation against HLSS and/or us could result in the payment of damages and/or may materially and
adversely affect our business, financial condition, results of operations and liquidity.
Transactions such as the HLSS Acquisition (see Note 1 to our Consolidated Financial Statements) often give rise to lawsuits by
stockholders or other third parties. Stockholders may, among other things, assert claims relating to the parties’ mutual agreement
to terminate the Agreement and Plan of Merger (the “HLSS Initial Merger Agreement”). Stockholders may also assert claims
relating to the fact that HLSS no longer owns any significant assets other than the cash received from us in the HLSS Acquisition
and any cash proceeds it received pursuant to its sale of our common stock. The defense or settlement of any lawsuit or claim
regarding the HLSS Acquisition may materially and adversely affect our business, financial condition, results of operations and
liquidity. Further, such litigation could be costly and could divert our time and attention from the operation of the business.
On May 22, 2015, a purported stockholder of the Company, Chester County Employees’ Retirement Fund, filed a class action and
derivative action in the Delaware Court of Chancery purportedly on behalf of all stockholders and the Company, titled Chester
County Employees’ Retirement Fund v. New Residential Investment Corp., et al., C.A. No. 11058-VCMR. On October 30, 2015,
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plaintiff filed an Amended Complaint. The lawsuit names the Company, our directors, our Manager, Fortress and Fortress Operating
Entity I LP as defendants, and alleges breaches of fiduciary duties by the Company, our directors, our Manager, Fortress and
Fortress Operating Entity I LP in connection with the HLSS Acquisition. The lawsuit also seeks declaratory judgment, among
other things, as to the applicability of Article Twelfth of the Company’s Certificate of Incorporation and as to the validity of the
release of claims of the Company’s stockholders related to the termination of the HLSS Initial Merger Agreement. The Amended
Complaint seeks declaratory relief, equitable relief and damages. On December 11, 2015, defendants filed a motion to dismiss the
Amended Complaint, and on February 23, 2016, plaintiffs filed a response. The Company intends to vigorously defend against
the lawsuit.
We may be unable to successfully integrate the acquired assets and assumed liabilities.
Achieving the anticipated benefits of the HLSS Acquisition is subject to a number of uncertainties, including, without limitation,
whether we are able to integrate HLSS’s assets and manage the assumed liabilities efficiently. HLSS depends on Ocwen for
significant accounting and operational support, which could exacerbate the difficulties associated with acquiring these assets and
impair our ability to produce accurate financial information on a timely basis, as required by the SEC. It is possible that the
integration process could take longer than anticipated and could result in additional and unforeseen expenses, the disruption of
our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices and policies, any of
which could adversely affect our ability to achieve the anticipated benefits of the HLSS Acquisition. There may be increased risk
due to integrating the assets into our financial reporting and internal control systems. Difficulties in adding the assets into our
business 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. We could
also be adversely affected by any issues attributable to either company’s operations that arise or are based on events or actions
that occurred prior to the closing of the HLSS Acquisition. The integration process is subject to a number of uncertainties, and no
assurance can be given that the anticipated benefits will be realized in their entirety or at all 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 cash flows.
We are responsible for certain of HLSS’s contingent and other corporate liabilities.
Under the HLSS Acquisition Agreement, we have assumed and are responsible for the payment of HLSS’s contingent and other
corporate liabilities of: (i) liabilities for litigation relating to, arising out of or resulting from certain lawsuits in which HLSS is
named as the defendant, (ii) HLSS’s tax liabilities, (iii) HLSS’s corporate liabilities, (iv) generally any actions with respect to the
HLSS Acquisition brought by any third party and (v) payments under contracts. We currently cannot estimate the amount we may
ultimately be responsible for as a result of assuming substantially all of HLSS’s contingent and other corporate liabilities. The
amount for which we are ultimately responsible may be material and have a material adverse effect on our business, financial
condition, results of operations and liquidity. In addition, certain claims and lawsuits may require significant costs to defend and
resolve and may divert management’s attention away from other aspects of operating and managing our business, each of which
could materially and adversely affect our business, financial condition, results of operations and liquidity.
In August 2014, HLSS restated its consolidated financial statements for the quarter ended March 31, 2014, and for the years ended
December 31, 2013 and 2012, including the quarterly periods within those years, to correct the valuation and the related effect on
amortization of its Notes Receivable-Rights to MSRs that resulted from a material weakness in its internal control over financial
reporting.
On September 15, 2014, the SEC instituted an investigation into HLSS’s restatement of its consolidated financial statements for
the years ended December 31, 2013 and 2012 and for the quarter ended March 31, 2014 and disclosures concerning related party
transactions (the “HLSS Investigation”). HLSS agreed to resolve such matter by consenting to the entry of a Cease and Desist
Order, without admitting or denying that HLSS violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange
Act of 1934, as amended, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder, and to a settlement payment of $1.5 million
to the SEC. On October 5, 2015, the terms of the settlement were approved and accepted by the SEC. Pursuant to the HLSS
Acquisition Agreement, the Company acquired substantially all of the assets of HLSS and assumed substantially all of the liabilities
of HLSS, including the obligation for the aforementioned settlement payment. The matter giving rise to the HLSS Investigation
and related settlement is unrelated to any activities of the Company.
On March 23, 2015, HLSS received a subpoena from the SEC requesting that it provide information concerning communications
between HLSS and certain investment advisors and hedge funds. The SEC also requested documents relating to HLSS’s structure,
certain governance documents and any investigations or complaints connected to trading in HLSS’s securities. We are cooperating
with the SEC in this matter.
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Two shareholder derivative actions have been filed purportedly on behalf of Ocwen naming as defendants HLSS and certain
current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey, entitled (i) Sokolowski
v. Erbey, et al., No. 9:14-CV-81601 (S.D. Fla.), filed on December 24, 2014 (the “Sokolowski Action”), and (ii) Moncavage v.
Faris, et al., No. 2015CA003244 (Fla. Palm Beach Cty. Ct.), filed on March 20, 2015 (collectively, with the Sokolowski Action,
the “Ocwen Derivative Actions”). The original complaint in the Sokolowski Action named as defendants certain current and former
directors and officers of Ocwen, including former HLSS Chairman William C. Erbey. On February 11, 2015, plaintiff in the
Sokolowski Action filed an amended complaint naming additional defendants, including HLSS. On January 8, 2016, two related
derivative actions – Hutt v. Erbey, et al., No. 9:15-CV-81709 (S.D. Fla.) and Lowinger v. Erbey, et al., No. 0:15-CV-62628 (S.D.
Fla.) – were consolidated with the Sokolowski Action. On February 17, 2016, the court appointed lead counsel and ordered that
lead counsel file a consolidated complaint on or before March 8, 2016. The Ocwen Derivative Actions assert a cause of action for
aiding and abetting certain alleged breaches of fiduciary duty under Florida law against HLSS and others, and claim that HLSS
(i) substantially assisted Ocwen’s alleged wrongful conduct by purchasing Ocwen’s MSRs and (ii) received improper benefits as
a result of its business dealings with Ocwen due to Mr. Erbey’s purported control over both HLSS and Ocwen. Additionally, the
Sokolowski Action asserts a cause of action for unjust enrichment against HLSS and others. The Ocwen Derivative Actions seek
money damages from HLSS in an amount to be proven at trial. We intend to vigorously defend these lawsuits.
Three putative class action lawsuits have been filed against HLSS and certain of its current and former officers and directors in
the United States District Court for the Southern District of New York entitled: (i) Oliveira v. Home Loan Servicing Solutions,
Ltd., et al., No. 15-CV-652 (S.D.N.Y.), filed on January 29, 2015; (ii) Berglan v. Home Loan Servicing Solutions, Ltd., et al., No.
15-CV-947 (S.D.N.Y.), filed on February 9, 2015; and (iii) W. Palm Beach Police Pension Fund v. Home Loan Servicing Solutions,
Ltd., et al., No. 15-CV-1063 (S.D.N.Y.), filed on February 13, 2015. On April 2, 2015, these lawsuits were consolidated into a
single action, which is referred to as the “Securities Action.” On April 28, 2015, lead plaintiffs, lead counsel and liaison counsel
were appointed in the Securities Action. On November 9, 2015, lead plaintiffs filed an amended class action complaint. On January
27, 2016, the Securities Action was transferred to the United States District Court for the Southern District of Florida and given
the Index No. 16-CV-60165 (S.D. Fla.).
The Securities Action names as defendants HLSS, former HLSS Chairman William C. Erbey, HLSS Director, President and Chief
Executive Officer John P. Van Vlack, and HLSS Chief Financial Officer James E. Lauter. The Securities Action asserts causes of
action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on certain public disclosures made by HLSS
relating to its relationship with Ocwen and HLSS’s risk management and internal controls. More specifically, the consolidated
class action complaint alleges that a series of statements in HLSS’s disclosures were materially false and misleading, including
statements about (i) Ocwen’s servicing capabilities; (ii) HLSS’s contingencies and legal proceedings; (iii) its risk management
and internal controls; and (iv) certain related party transactions. The consolidated class action complaint also appears to allege
that HLSS’s financial statements for the years ended 2012 and 2013, and the first quarter ended March 30, 2014, were false and
misleading based on HLSS’s August 18, 2014 restatement. Lead plaintiffs in the Securities Action also allege that HLSS misled
investors by failing to disclose, among other things, information regarding governmental investigations of Ocwen’s business
practices. Lead plaintiffs seek money damages under the Securities Exchange Act in an amount to be proven at trial and reasonable
costs, expenses, and fees. We intend to vigorously defend the Securities Action and consistent therewith on February 11, 2015,
defendants filed motions to dismiss the Securities Action in its entirety.
On March 11, 2015, plaintiff David Rattner filed a shareholder derivative action purportedly on behalf of HLSS entitled Rattner
v. Van Vlack, et al., No. 2015CA002833 (Fla. Palm Beach Cty. Ct.) (the “HLSS Derivative Action”). The lawsuit names as
defendants HLSS directors John P. Van Vlack, Robert J. McGinnis, Kerry Kennedy, Richard J. Lochrie, and David B. Reiner
(collectively, the “Director Defendants”), New Residential Investment Corp., and Hexagon Merger Sub, Ltd. The HLSS Derivative
Action alleges that the Director Defendants breached their fiduciary duties of due care, diligence, loyalty, honesty and good faith
and the duty to act in the best interests of HLSS under Cayman law and claims that the Director Defendants approved a proposed
merger with New Residential Investment Corp. that (i) provided inadequate consideration to HLSS’s shareholders, (ii) included
unfair deal protection devices, and (iii) was the result of an inadequate process due to conflicts of interest. On July 8, 2015, the
complaint was voluntarily dismissed without prejudice.
Refer to “Risk Factors—Risks Related to Our Business—Stockholder or other litigation against HLSS and/or us could result in
the payment of damages and/or may materially and adversely affect our business, financial condition results of operations and
liquidity” for a description of the Chester County Employees’ Retirement Fund litigation.
We cannot guarantee that we will not receive further regulatory inquiries or be subject to litigation regarding the subject matter
of the subpoenas or matters relating thereto, or that existing inquires, or, should they occur, any future regulatory inquiries or
litigation, will not consume internal resources, result in additional legal and consulting costs or negatively impact our stock
price.
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We could be materially and adversely affected by events, conditions or actions that might occur at HLSS or Ocwen.
HLSS acquired assets and assumed liabilities could be adversely affected as a result of events or conditions that occurred or existed
before the closing of the HLSS Acquisition. Adverse changes in the assets or liabilities we have acquired or assumed, respectively,
as part of the HLSS Acquisition, 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. We are subject to a
variety of risks as a result of our dependence on mortgage servicers such as Nationstar and Ocwen, 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. A significant decline in the value of HLSS assets or a significant increase in HLSS
liabilities we have acquired could adversely affect our future business, financial condition, cash flows and results of operations.
HLSS is subject to a number of other risks and uncertainties, including regulatory investigations and legal proceedings against
HLSS, and others with whom HLSS conducted and conducts business. Moreover, any insurance proceeds received with respect
to such matters may be inadequate to cover the associated losses. Ocwen disclosed in its Quarterly Report on Form 10-Q for the
quarter ended June 30, 2014 that it received a subpoena from the SEC “requesting production of various documents relating to its
business dealings from Altisource Portfolio Solutions, S.A., HLSS, Altisource Asset Management Corporation and Altisource
Residential Corporation and the interests of its directors and executive officers in these companies.” Ocwen subsequently disclosed
in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 that it received an additional subpoena from the
SEC related to an amendment to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013 and its Quarterly
Report on Form 10-Q for the quarter ended March 31, 2014. Ocwen subsequently disclosed in its Annual Report on Form 10-K
for the year ended December 31, 2014 that it received a further subpoena from the SEC requesting certain documents related to
Ocwen’s agreement with Southwest Business Corporation and related to former HLSS and Ocwen Chairman William C. Erbey’s
approvals for specifically enumerated board actions. Ocwen subsequently settled these investigations with the SEC in January
2016. Ocwen also disclosed that it received a letter from the SEC staff dated February 10, 2015 informing it that the SEC was
conducting an investigation relating to mortgage loan servicer use of collection agents and requesting voluntary production of
documents and information. Adverse developments at Ocwen, including liquidity issues, ratings downgrades, defaults under debt
agreements, servicer rating downgrades, failure to comply with the terms of PSAs, termination under PSAs, Ocwen bankruptcy
proceedings and additional regulatory issues and settlements, could have a material adverse effect on us. See “—We rely heavily
on mortgage servicers to achieve our investment objective and have no direct ability to influence their performance.”
HLSS failed to timely file its Annual Report on Form 10-K for the year ended December 31, 2014.
On March 3, 2015, HLSS filed a Form 12b-25 with the SEC, stating that HLSS required additional time to complete its Annual
Report in order to complete an assessment of recent events related to HLSS’s business and determine the impact on HLSS’s
financial statements and related disclosures. In this filing, HLSS also stated that it expected to file the Annual Report within the
fifteen (15) day extension period under Rule 12b-25(b)(ii) of the Exchange Act, or by March 18, 2015. HLSS filed its Annual
Report on Form 10-K for the year ended December 31, 2014 on April 6, 2015.
On March 18, 2015, HLSS filed a Current Report on Form 8-K with the SEC that disclosed that HLSS would need additional time
to complete its Annual Report “to prepare information relating to its ability to operate as a going concern.” Also on March 18,
2015, The NASDAQ Stock Market LLC notified HLSS that it was no longer in compliance with NASDAQ Listing Rule 5250(c)
(1) for continued listing because of the failure to timely file its Annual Report, and HLSS was given until May 18, 2015 to submit
a plan to regain compliance. On April 20, 2015, HLSS filed a Current Report on Form 8-K with the SEC that disclosed that HLSS
had received a letter from The NASDAQ Stock Market LLC notifying HLSS that it would be delisted pursuant to Listing Rule
5101. HLSS did not appeal this decision and was delisted on April 29, 2015.
On March 20, 2015, HLSS entered into an amendment to its term loan in order to extend to April 10, 2015 the deadline thereunder
for HLSS to furnish its annual financial statements, and to amend certain terms of the cross-default to HLSS’s advance financing
facilities. In addition, consent was granted thereunder to permit certain amendments to the Ocwen subservicing agreement.
We cannot guarantee that we will not receive further inquiries or be subject to litigation regarding HLSS’s failure to timely file
its Annual Report on Form 10-K for the year ended December 31, 2014 or that any future inquiries or litigation will not consume
internal resources, result in significant legal and consulting costs or negatively impact our stock price.
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Our ability to borrow may be adversely affected by the suspension or delay of the rating of the notes issued under the
NRART facility, the HSART facility and the existing “HSART II facility” or other future advance facilities by the credit
agency providing the ratings.
All or substantially all of the notes issued under the New Residential Advance Receivables Trust (“NRART”) facility, the HLSS
Servicer Advance Receivables Trust (“HSART”) facility and the existing “HSART II facility” are rated by one rating agency and
we may sponsor advance facilities in the future that are rated by credit agencies. The related agency may suspend rating notes
backed by servicer advances at any time. Rating agency delays may result in our inability to obtain timely ratings on new notes,
which could adversely impact the availability of borrowings or the interest rates, advance rates or other financing terms and
adversely affect our results of operations and liquidity. Further, if we are unable to secure ratings from other agencies, limited
investor demand for unrated notes could result in further adverse changes to our liquidity and profitability.
A downgrade of certain of the notes issued under the NRART facility, the HSART and HSART II facilities or other future advance
facilities would cause such notes to become due and payable prior to their expected repayment date/maturity date, which could
have a material adverse effect on our business, financial condition, results of operations and liquidity.
Regulatory scrutiny regarding foreclosure processes could lengthen foreclosure timelines, which could increase advances
and materially and adversely affect our business, financial condition, results of operations and liquidity.
When a mortgage loan is in foreclosure, the servicer is generally required to continue to advance delinquent principal and interest
to the securitization trust and to also make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of
vacant property in foreclosure to the extent we determine that such amounts are recoverable. These 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, lengthen the time it takes for reimbursement of such advances and increase the costs incurred
during the foreclosure process. In addition, advance financing facilities generally contain provisions that 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 need to be funded from the related servicer’s
own capital. Such increases in foreclosure timelines could increase the need for capital to fund servicer advances, which would
increase our interest expense, delay the collection of interest income or servicing fee revenue until the foreclosure has been resolved
and, therefore, reduce the cash that we have available to pay our operating expenses or to pay dividends. According to Ocwen’s
public disclosure, on April 28, 2014, Ocwen received a letter from the staff of the New York Regional Office of the SEC informing
Ocwen that the SEC was conducting an investigation relating to Ocwen and making a request for voluntary production of documents
and information relating to the April 22, 2014 surrender of certain options to purchase its common stock by Mr. Erbey, its former
Executive Chairman, including the 2007 Equity Incentive Plan and the related option grant and surrender documents. On June 12,
2014, Ocwen received a subpoena from the SEC requesting production of various documents relating to its business dealings with
HLSS, Altisource Portfolio Solutions, S.A., Altisource Asset Management Corporation and Altisource Residential Corporation
and the interests of its directors and executive officers in these companies. Ocwen has also disclosed that it received an additional
subpoena from the SEC related to its amendments to its Annual Report on Form 10-K for the fiscal year ended December 31, 2013
and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014. Ocwen subsequently disclosed in its Annual Report
on Form 10-K for the year ended December 31, 2014 that it received a further subpoena from the SEC requesting certain documents
related to Ocwen’s agreement with Southwest Business Corporation and related to former HLSS and Ocwen Chairman William
C. Erbey’s approvals for specifically enumerated board actions, and that it received a letter from the SEC staff dated February 10,
2015 informing it that the SEC was conducting an investigation relating to mortgage loan servicer use of collection agents and
requesting voluntary production of documents and information.
Certain of our servicers have triggered termination events or events of default under some PSAs underlying the MSRs
with respect to which we are entitled to the basic fee component or Excess MSRs, and the parties to the related securitization
transactions could enforce their rights against such servicer as a result.
If a servicer termination event or event of default occurs under a PSA, the servicer may be terminated without any right to
compensation for its loss from the trustee for the securitization trust, other than the right to be reimbursed for any outstanding
servicer advances as the related loans are brought current, modified, liquidated or charged off. So long as we are in compliance
with our obligations under our servicing agreements and purchase agreements, if a servicer is terminated as servicer, we may have
the right to receive an indemnification payment from such servicer, even if such termination related to servicer termination events
or events of default existing at the time of any transaction with such servicer. If one of our servicers is terminated as servicer under
a PSA, we will lose any investment related to such servicer’s MSRs. If such servicer is terminated as servicer with respect to a
PSA and we are unable to enforce our contractual rights against such servicer or if such servicer is unable to make any resulting
indemnification payments to us, if any such payment is due and payable, it may have a material adverse effect on our financial
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condition, results of operations, ability to make distributions, liquidity and financing arrangements, including our advance financing
facilities, and may make it more difficult for us to acquire additional MSRs in the future.
During February and March 2015, Ocwen received two notices of servicer termination affecting four separate PSAs related to
MSRs related to the transactions contemplated by the Ocwen Purchase Agreement (see Note 1 to our Consolidated Financial
Statements). Ocwen could be subject to further terminations as a result of its failure to maintain required minimum servicer ratings,
which could have an adverse effect on our business, financing activities, financial condition and results of operations.
On January 23, 2015, Gibbs & Bruns LLP, on behalf of its clients, issued a press release regarding the notices of nonperformance
provided to various trustees in relation to Ocwen’s servicing practices under 119 residential mortgage-backed securities trusts. Of
these transactions, 90 relate to agreements for MSRs related to the transactions contemplated by the Ocwen Purchase Agreement.
It is possible that Ocwen could be terminated for other servicing agreements related to such MSRs.
On January 29, 2015, Moody’s downgraded Ocwen’s SQ assessment from SQ3+ to SQ3- as a primary servicer of subprime
residential loans and as a special servicer of residential mortgage loans. During February 2015, Fitch Ratings downgraded Ocwen’s
residential primary servicer rating for subprime products from “RPS3” to “RPS4” and, in February 2016, upgraded such rating to
“RPS3-.” During February 2015, Morningstar also downgraded Ocwen’s residential primary servicer rating from “MOR RS2” to
“MOR RS3.” On June 18, 2015, S&P downgraded Ocwen’s ratings as a residential mortgage prime, subprime, special, and
subordinate-lien servicer from “average” to “below average.” On October 1, 2015, S&P downgraded Ocwen’s master servicer
rating to “below average.”
The performance of loans that we acquired in the HLSS Acquisition may be adversely affected by the performance of
parties who service or subservice these mortgage loans.
HLSS and its subsidiaries acquired by us in the HLSS Acquisition contracted with third parties for the servicing of the mortgage
loans in its early buy-out (“EBO”) portfolio. The performance of this portfolio and our ability to finance this portfolio are subject
to risks associated with inadequate or untimely servicing. If our servicers or subservicers commit a material breach of their
obligations as a servicer, we may be subject to damages if the breach is not cured within a specified period of time following
notice. In addition, we may be required to indemnify an investor or our lenders against losses from any failure of our servicer or
subservicer to perform the servicing obligations properly. Poor performance by a servicer or subservicer may result in greater than
expected delinquencies and foreclosures and losses on our mortgage loans. A substantial increase in our delinquency or foreclosure
rate or the inability to process claims in accordance with Ginnie Mae or FHA guidelines could adversely affect our ability to access
the capital and secondary markets for our financing needs.
Servicing issues in the portfolio of loans that was acquired in the HLSS Acquisition could adversely impact our claims
against FHA insurance and result in our reliance on servicer indemnifications which could increase losses.
We will rely on HLSS’s servicers (including Ocwen) to service our Ginnie Mae EBO loans in a manner that supports our ability
to make claims to the FHA for shortfalls on these loans. If servicing issues result in the curtailment of FHA insurance claims, we
will only have recourse against the servicer for any shortfall. If the servicer is unable to make indemnification payments owed to
us under this circumstance, we could incur losses.
Our borrowings collateralized by loans require that we make certain representations and warranties that, if determined
to be inaccurate, could require us to repurchase loans or cover losses.
Our financing facilities require us to make certain representations and warranties regarding the loans that collateralize the
borrowings. Although we perform due diligence on the loans that we acquire, certain representations and warranties that we make
in respect of such loans may ultimately be determined to be inaccurate. In the event of a breach of a representation or warranty,
we may be required to repurchase affected loans, make indemnification payments to certain indemnified parties or address any
claims associated with such breach. Further, we may have limited or no recourse against the seller from whom we purchased the
loans. Such recourse may be limited due to a variety of factors, including the absence of a representation or warranty from the
seller corresponding to the representation provided by us or the contractual expiration thereof.
Representations and warranties made by us in our loan sale agreements may subject us to liability.
In March 2015, HLSS sold reperforming loans to an unrelated third party and transferred mortgages into a trust in exchange for
cash. We may be liable to purchasers under the related sale agreement for any breaches of representations and warranties made
by HLSS at the time the applicable loans are sold. Such representations and warranties may include, but are not limited to, issues
such as the validity of the lien; the absence of delinquent taxes or other liens; the loans compliance with all local, state and federal
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laws and the delivery of all documents required to perfect title to the lien. If the purchaser is successful in asserting their claim
for recourse, it could adversely affect the availability of financing under loan financing facilities or otherwise adversely impact
our results of operations and liquidity. From time to time we sell residential mortgage loans pursuant to loan sale agreements. The
risks describe in this paragraph relate to any such sale as well.
Our ability to exercise our cleanup call rights may be limited or delayed if a third party contests our ability to exercise our
cleanup call rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is
subject to bankruptcy proceedings.
Certain servicing contracts permit more than one party to exercise a cleanup call-meaning the right of a party to collapse a
securitization trust by purchasing all of the remaining loans held by the securitization trust pursuant to the terms set forth in the
applicable servicing agreement. While the servicers from which we acquired our cleanup call rights (or other servicers from which
our servicers acquired MSRs) may be named as the party entitled to exercise such rights, certain third parties may also be permitted
to exercise such rights. If any such third party exercises a cleanup call, we could lose our ability to exercise our cleanup call right
and, as a result, lose the ability to generate positive returns with respect to the related securitization transaction. In addition, another
party could impair our ability to exercise our cleanup call rights by contesting our rights (for example, by claiming that they hold
the exclusive cleanup call right with respect to the applicable securitization trust). Moreover, because the ability to exercise a
cleanup call right is governed by the terms of the applicable servicing agreement, any ambiguous or conflicting language regarding
the exercise of such rights in the agreement may make it more difficult and costly to exercise a cleanup call right. Furthermore,
certain servicing contracts provide cleanup call rights to a servicer currently subject to bankruptcy proceedings from which our
servicers have acquired MSRs. While, notwithstanding the related bankruptcy proceedings, it is possible that we will be able to
exercise the related cleanup calls within our desired time frame, our ability to exercise such rights may be significantly delayed
or impaired by the applicable securitization trustee or bankruptcy estate or any additional steps required because of the bankruptcy
process. Finally, many of our call rights are not currently exercisable and may not become exercisable for a period of years. As a
result, our ability to realize the benefits from these rights will depend on a number of factors at the time they become exercisable
many of which are outside our control, including interest rates, conditions in the capital markets and conditions in the residential
mortgage market.
New Residential’s subsidiary New Residential Mortgage LLC is or may become subject to significant state and federal
regulations.
A subsidiary of NRZ, New Residential Mortgage LLC (“NRM”), is currently in the process of obtaining applicable qualifications,
licenses and approvals to own agency and non-agency MSRs in the United States and certain other jurisdictions. As a result of
NRM’s current and expected approvals, NRM is or may in the future become subject to extensive and comprehensive regulation
under federal, state and local laws in the United States. These laws and regulations may in the future significantly affect the way
that NRM does business, and may subject NRM and New Residential to additional costs and regulatory obligations, which could
impact our financial results.
NRM’s business may become subject to increasing regulatory oversight and scrutiny in the future as it continues seeking and
obtaining state and agency approvals to hold MSRs, which may lead to regulatory investigations or enforcement, including both
formal and informal inquiries, from various state and federal agencies as part of those agencies' oversight of the mortgage servicing
business. An adverse result in governmental investigations or examinations or private lawsuits, including purported class action
lawsuits, may adversely affect NRM’s and our financial results or result in serious reputational harm. In addition, a number of
participants in the mortgage servicing industry have been the subject of purported class action lawsuits and regulatory actions by
state regulators, and other industry participants have been the subject of actions by state Attorneys General.
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.
None of our officers or other senior individuals who perform services for us is an employee of New Residential. Instead, these
individuals are employees of our Manager. Accordingly, 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.
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There are conflicts of interest in our relationship with our Manager.
Our Management Agreement with our Manager was not negotiated between unaffiliated parties, and its terms, including fees
payable, although approved by the independent directors of New Residential as fair, may not be as favorable to us as if they 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 OneMain
—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. Fortress has two funds primarily focused on investing in Excess MSRs with approximately $0.7 billion in capital
commitments in aggregate. We have broad investment guidelines, and we have and 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 $70.5 billion of assets under management as of December 31, 2015.
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 and OneMain which may include,
but are not limited to, certain financing arrangements, purchases of debt, co-investments in Excess MSRs, consumer loans, servicer
advances 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.
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
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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.
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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
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
OneMain, 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 OneMain, 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. As we describe in more detail below, it affects our business in many ways but it is difficult
at this time to know exactly how or what the cumulative impact will be.
First, generally the Dodd-Frank Act strengthens the regulatory oversight of securities and capital markets activities by the SEC
and empowers the newly-created Consumer Financial Protection Bureau to enforce laws and regulations for consumer financial
products and services. It requires market participants to undertake additional record-keeping activities and imposes many additional
disclosure requirements for public companies.
Moreover, the Dodd-Frank Act contains a risk retention requirement for all asset-backed securities. We issue many asset-backed
securities. In October 2014, final rules were promulgated by a consortium of regulators implementing the final credit risk retention
requirements of Section 941(b) of the Dodd-Frank Act. Under these “Risk Retention Rules,” sponsors of both public and private
securitization transactions or one of their majority owned affiliates are required to retain at least 5% of the credit risk of the assets
collateralizing such securitization transactions. These regulations generally prohibit the sponsor or its affiliate from directly or
indirectly hedging or otherwise selling or transferring the retained interest for a specified period of time, depending on the type
of asset that is securitized. Beginning December 2015, sponsors securitizing residential mortgages must comply with the Risk
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Retention Rules beginning in December 2015, while sponsors securitizing other types of assets will be required to comply with
such rules beginning in December 2016. The Risk Retention Rules provide for limited exemptions for certain types of assets,
however, these exemptions may be of limited use under our current market practices. In any event, compliance with these new
Risk Retention Rules has increased and will likely continue to increase the administrative and operational costs of asset
securitization.
Further, 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
may 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.
Also, under the Dodd-Frank Act, financial regulators belonging to the Financial Stability Oversight Council are required to name
financial institutions that are deemed to be systemically important to the economy and which may require closer regulatory
supervision. Such systemically important financial institutions, or “SIFIs”, may be required to operate with greater safety margins,
such as higher levels of capital, and may face further limitations on their activities. The determination of what constitutes a SIFI
is evolving, and in time SIFIs may include large investment funds and even asset managers. There can be no assurance that we
will not be deemed to be a SIFI and thus subject to further regulation.
Even if certain of the new requirements of the Dodd-Frank Act 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. For instance, the 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.
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.
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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
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
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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, 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
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.
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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
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
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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 U.S. 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.
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
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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
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:
•
•
•
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.
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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
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.
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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 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:
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;
•
• 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.
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 an effective registration statement on file to sell common stock in public offerings.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-
Oxley Act of 2002 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 of 2002. 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
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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
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 relating to 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 relating to 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
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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
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:
•
•
•
•
•
•
•
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
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•
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.
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.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties.
None.
Item 3. Legal Proceedings.
Following the HLSS Acquisition (see Note 1 to our Consolidated Financial Statements), material potential claims, lawsuits,
regulatory inquiries or investigations, and other proceedings, of which we are currently aware, are as follows. We have not accrued
losses in connection with these legal contingencies because management does not believe there is a probable and reasonably
estimable loss. Furthermore, we cannot reasonably estimate the range of potential loss related to these legal contingencies at this
time. However, the ultimate outcomes of the proceedings described below may have a material adverse effect on our business,
financial position or results of operations.
In addition to the matters described below, from time to time, we are or may be involved in various disputes, litigation and regulatory
inquiry and investigation matters that arise in the ordinary course of business. Given the inherent unpredictability of these types
of proceedings, it is possible that future adverse outcomes could have a material adverse effect on our financial results.
Three putative class action lawsuits have been filed against HLSS and certain of its current and former officers and directors in
the United States District Court for the Southern District of New York entitled: (i) Oliveira v. Home Loan Servicing Solutions,
Ltd., et al., No. 15-CV-652 (S.D.N.Y.), filed on January 29, 2015; (ii) Berglan v. Home Loan Servicing Solutions, Ltd., et al., No.
15-CV-947 (S.D.N.Y.), filed on February 9, 2015; and (iii) W. Palm Beach Police Pension Fund v. Home Loan Servicing Solutions,
Ltd., et al., No. 15-CV-1063 (S.D.N.Y.), filed on February 13, 2015. On April 2, 2015, these lawsuits were consolidated into a
single action.” On April 28, 2015, lead plaintiffs, lead counsel and liaison counsel were appointed in the Securities Action. On
November 9, 2015, lead plaintiffs filed an amended class action complaint. On January 27, 2016, the Securities Action was
transferred to the United States District Court for the Southern District of Florida and given the Index No. 16-CV-60165 (S.D.
Fla.).
The Securities Action names as defendants HLSS, former HLSS Chairman William C. Erbey, HLSS Director, President, and Chief
Executive Officer John P. Van Vlack, and HLSS Chief Financial Officer James E. Lauter. The Securities Action asserts causes of
action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on certain public disclosures made by HLSS
relating to its relationship with Ocwen and HLSS’s risk management and internal controls. More specifically, the consolidated
class action complaint alleges that a series of statements in HLSS’s disclosures were materially false and misleading, including
statements about (i) Ocwen’s servicing capabilities; (ii) HLSS’s contingencies and legal proceedings; (iii) its risk management
and internal controls and (iv) certain related party transactions. The consolidated class action complaint also appears to allege
that HLSS’s financial statements for the years ended 2012 and 2013, and the first quarter ended March 30, 2014, were false and
misleading based on HLSS’s August 18, 2014 restatement. Lead plaintiffs in the Securities Action also allege that HLSS misled
investors by failing to disclose, among other things, information regarding governmental investigations of Ocwen’s business
practices. Lead plaintiffs seek money damages under the Securities Exchange Act in an amount to be proven at trial and reasonable
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costs, expenses, and fees. We intend to vigorously defend the Securities Action and consistent therewith on February 11, 2015,
defendants filed motions to dismiss the Securities Action in its entirety.
Two shareholder derivative actions have been filed purportedly on behalf of Ocwen naming as defendants HLSS and certain
current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey, entitled (i) Sokolowski
v. Erbey, et al., No. 9:14-CV-81601 (S.D. Fla.), filed on December 24, 2014, and (ii) Moncavage v. Faris, et al., No. 2015CA003244
(Fla. Palm Beach Cty. Ct.), filed on March 20, 2015. The original complaint in the Sokolowski Action named as defendants certain
current and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey. On February 11, 2015,
plaintiff in the Sokolowski Action filed an amended complaint naming additional defendants, including HLSS. On January 8,
2016, two related derivative actions – Hutt v. Erbey, et al., No. 9:15-CV-81709 (S.D. Fla.) and Lowinger v. Erbey, et al., No. 0:15-
CV-62628 (S.D. Fla.) – were consolidated with the Sokolowski Action. On February 17, 2016, the court appointed lead counsel
and ordered that lead counsel file a consolidated complaint on or before March 8, 2016. The Ocwen Derivative Actions assert a
cause of action for aiding and abetting certain alleged breaches of fiduciary duty under Florida law against HLSS and others, and
claim that HLSS (i) substantially assisted Ocwen’s alleged wrongful conduct by purchasing Ocwen’s MSRs and (ii) received
improper benefits as a result of its business dealings with Ocwen due to Mr. Erbey’s purported control over both HLSS and Ocwen.
Additionally, the Sokolowski Action asserts a cause of action for unjust enrichment against HLSS and others. The Ocwen Derivative
Actions seek money damages from HLSS in an amount to be proven at trial. We intend to vigorously defend these lawsuits.
On March 11, 2015, plaintiff David Rattner filed a shareholder derivative action purportedly on behalf of HLSS entitled Rattner
v. Van Vlack, et al., No. 2015CA002833 (Fla. Palm Beach Cty. Ct.). The lawsuit names as defendants HLSS directors, New
Residential Investment Corp., and Hexagon Merger Sub, Ltd. The HLSS Derivative Action alleges that the Director Defendants
breached their fiduciary duties of due care, diligence, loyalty, honesty and good faith and the duty to act in the best interests of
HLSS under Cayman law and claims that the Director Defendants approved a proposed merger with New Residential Investment
Corp. that (i) provided inadequate consideration to HLSS’s shareholders, (ii) included unfair deal protection devices, (iii) and was
the result of an inadequate process due to conflicts of interest. On July 8, 2015, the complaint was voluntarily dismissed without
prejudice.
On September 15, 2014, the SEC instituted an investigation into HLSS’s restatement of its consolidated financial statements for
the years ended December 31, 2013 and 2012 and for the quarter ended March 31, 2014 and disclosures concerning related party
transactions. HLSS agreed to resolve such matter by consenting to the entry of a Cease and Desist Order, without admitting or
denying that HLSS violated Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended,
and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder, and to a settlement payment of $1.5 million to the SEC. On October 5,
2015, the terms of the settlement were approved and accepted by the SEC. Pursuant to the HLSS Acquisition Agreement (See
Note 1 to our Consolidated Financial Statements), the Company acquired substantially all of the assets of HLSS and assumed
substantially all of the liabilities of HLSS, including the obligation for the aforementioned settlement payment. The matter giving
rise to the HLSS Investigation and related settlement is unrelated to any activities of the Company.
New Residential is, from time to time, subject to inquiries by government entities. New Residential currently does not believe any
of these inquiries would result in a material adverse effect on New Residential’s business.
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
100.00
S&P 500
100.00
5/16/2013
6/30/2013
9/30/2013
12/31/2013
3/31/2014
6/30/2014
9/30/2014
12/31/2014
3/31/2015
6/30/2015
9/30/2015
12/31/2015
Period Ending
100.00
97.34
98.17
102.76
102.25
103.53
98.62
111.19
134.18
139.61
120.01
119.90
97.72
99.41
96.13
97.55
95.39
95.68
109.56
119.12
94.28
94.42
102.66
113.45
103.89
120.45
104.96
115.50
111.12
122.92
111.17
121.55
108.20
113.87
106.40
122.92
121.66
124.95
111.31
128.98
126.59
130.34
113.92
130.21
115.28
130.89
105.64
130.57
116.16
115.29
102.51
122.17
124.44
119.43
101.43
130.77
59
Table of Contents
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.
2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2014
First Quarter
Second Quarter(A)
Third Quarter
Fourth Quarter
High
Low
Last Sale
Distributions
Declared
$
$
$
$
$
$
$
$
15.61
17.91
15.95
13.34
13.72
13.32
12.90
13.64
$
$
$
$
$
$
$
$
12.10
14.98
12.66
10.35
12.10
12.06
11.66
11.44
$
$
$
$
$
$
$
$
15.03
15.24
13.10
12.16
12.94
12.60
11.66
12.77
$
$
$
$
$
$
$
$
0.38
0.45
0.46
0.46
0.35
0.50
0.35
0.38
(A)
Includes a quarterly distribution of $0.35 per common share and a special cash distribution of $0.15 per common share.
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 18, 2016, the closing sale price for our common stock, as reported on the NYSE, was $10.83. As of February 18,
2016, 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 were 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.
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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, 2015.
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:
Number of
Securities to
be Issued
Upon
Exercise of
Outstanding
Options
Weighted
Average
Exercise
Price of
Outstanding
Options
Number of
Securities
Remaining
Available for
Future Issuance
Under the 2013
Equity
Compensation
Plan
$
9,985,039
9,985,039 (A) $
14.99
14.99
14,925,413
14,925,413 (B)
None
(A)
(B)
The number of securities to be issued upon exercise of outstanding options does not include 2,395,068 Converted Options
(with a weighted average exercise price of $14.63), of which 1,206,291 are held by an affiliate of our Manager and
1,188,777 were granted to our Manager and assigned to certain Fortress employees.
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 70,587 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, 2016 and 2015, 8,543,539 and 1,437,500 shares, respectively, were added to the number of securities
remaining available for future issuance; these numbers have been included in the table above.
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Item 6. Selected Financial Data.
The selected historical consolidated financial information set forth below as of December 31, 2015, 2014, 2013, 2012 and 2011
and for the years ended December 31, 2015, 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.”
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,
2015
2014
2013
2012
2011
$
645,072
$
346,857
$
87,567
$
33,759
$
274,013
371,059
24,384
346,675
42,029
117,823
270,881
(11,001)
281,882
13,246
268,636
1.34
1.32
$
$
$
$
$
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
200,739,809
136,472,865
126,539,024
126,512,823
126,512,823
202,907,605
139,565,709
128,684,128
126,512,823
126,512,823
$
1.75
$
1.58
$
0.99
$
— $
—
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Balance Sheet Data
Investments in:
2015
2014
2013
2012
2011
December 31,
Excess mortgage servicing rights, at fair value
$
1,581,517
$
417,733
$
324,151
$ 245,036
$
43,971
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)
217,221
7,426,794
2,501,881
330,178
776,681
50,574
—
249,936
15,192,722
11,292,622
12,206,142
2,795,933
190,647
330,876
3,270,839
2,463,163
47,838
1,126,439
61,933
—
212,985
8,089,244
6,057,853
6,239,319
1,596,089
253,836
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
247,225
—
—
289,756
—
—
—
—
—
534,876
150,922
156,520
378,356
—
—
—
—
—
—
—
—
—
43,971
—
4,163
39,808
—
2,986,580
1,849,925
1,513,075
378,356
39,808
230,471,202
141,434,905
126,598,987
$
$
12.13
388,756
$
$
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 under the debt incurred to finance our investments, (iii) our operating expenses and taxes 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 evaluate our 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; (iii) non-capitalized transaction-related expenses; and
(iv) deferred taxes, which are not representative of current operations.
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 transaction-related expenses, management does not view these costs as part of our core
operations. Non-capitalized transaction-related expenses are generally legal and valuation service costs, as well as other
professional service fees, incurred when we acquire certain investments, as well as costs associated with the acquisition
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and integration of acquired businesses. Non-capitalized transaction-related expenses for the year ended December 31,
2015 include a $9.1 million settlement which we agreed to pay in connection with HSART (Note 11 to our Consolidated
Financial Statements). These costs are recorded as “General and administrative expenses” in our Consolidated Statements
of Income. “Other (income) loss” set forth below excludes $14.5 million accrued during the year ended December 31,
2015 related to a reimbursement from Ocwen for certain increased costs resulting from further S&P servicer rating
downgrades of Ocwen (Note 1 to our Consolidated Financial Statements).
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 believe that it is appropriate to record a yield thereon. This modification had no
impact on core earnings in 2014 or any prior period. In the second quarter of 2015, we modified our definition of core
earnings to exclude all deferred taxes, rather than just deferred taxes related to unrealized gains or losses, because we
believe deferred taxes are not representative of current operations. This modification was applied prospectively due to
only immaterial impacts in prior periods. In the fourth quarter of 2015, we modified our definition of core earnings to
limit accreted interest income on RMBS where we receive par upon the exercise of associated call rights based on the
estimated value of the underlying collateral. We made the modification in order to be able to accrete to the lower of par
or the value of the underlying collateral, in instances where the value of the underlying collateral is lower than par. We
believe this amount represents the amount of accretion we would have expected to earn on such bonds had the call rights
not been exercised. This modification had no impact on core earnings in prior periods.
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), (ii) non-capitalized transaction-related expenses and (iii) deferred
taxes (other than those related to unrealized gains and losses). Each are excluded from core earnings and included in our
incentive compensation measure (either immediately or through amortization). In addition, our incentive compensation
measure does not include accretion on held-for-sale loans and the timing of recognition of income from consumer loans
is different. Unlike core earnings, our incentive compensation measure is intended to reflect all realized results of
operations.
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Core earnings does not represent and should not be considered as a substitute for, or superior to, net income or as a
substitute for, or superior to, cash flow from operating activities, each as determined in accordance with U.S. GAAP, and
our calculation of this measure may not be comparable to similarly entitled measures reported by other companies. 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.” Set
forth below is a reconciliation of core earnings to the most directly comparable GAAP financial measure (in thousands):
Year Ended December 31,
December 8
through
December 31,
2015
2014
2013
2012
2011
Net income (loss) attributable to common stockholders
$ 268,636
$ 352,877
$ 265,949
41,247
$
24,384
11,282
5,454
—
714
—
Impairment
Other Income adjustments:
Other Income
Change in fair value of investments in excess
mortgage servicing rights
Change in fair value of investments in excess
(38,643)
(41,615)
(53,332)
(9,023)
(367)
mortgage servicing rights, equity method investees
(31,160)
(57,280)
(50,343)
Change in fair value of investments in servicer
advances
Earnings from investments in consumer loans, equity
method investees
Gain on consumer loans investment
(Gain) loss on settlement of investments, net
Unrealized (gain) loss on derivative instruments
57,491
(84,217)
—
—
(43,954)
17,207
5,957
(53,840)
(92,020)
(35,487)
13,037
(82,856)
—
(52,657)
(1,820)
(Gain) loss on transfer of loans to REO
(2,065)
(17,489)
Unrealized gain on other ABS
Gain on Excess MSR recapture agreements
Fee earned on deal termination
Other (income) loss
(879)
(2,999)
—
6,219
—
(1,157)
(5,000)
(20)
Other Income attributable to non-controlling interests
(22,102)
44,961
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(8,400)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Total Other Income Adjustments
(54,928)
(330,127)
(241,008)
(17,423)
(367)
Incentive compensation to affiliate
Non-capitalized transaction-related expenses
Deferred taxes
Interest income on residential mortgage loans, held-for sale
Limit on RMBS discount accretion related to called deals
Core earnings of equity method investees:
Excess mortgage servicing rights
Consumer loans
Core Earnings
16,017
31,002
(6,633)
22,484
(9,129)
25,853
71,070
54,334
10,281
16,421
—
—
33,799
70,394
16,847
5,698
—
5,230
—
—
—
23,361
53,696
—
—
—
—
—
—
785
—
—
—
—
—
$ 388,756
$ 219,261
$ 129,997
$ 29,054
$
1,132
65
Table of Contents
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 primarily target investments in mortgage servicing related assets and related opportunistic
investments. We are externally managed by an affiliate of Fortress pursuant to the Management Agreement. Our goal is to drive
strong risk-adjusted returns primarily through our investments, and our 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.
Our portfolio is currently composed of mortgage servicing related assets, Non-Agency RMBS (and associated call rights),
residential mortgage loans and other opportunistic investments. Our asset allocation and target assets may change over time,
depending on our 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.
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.
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 and Ocwen, 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 $3 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. As of the third quarter of 2015, the top 100
mortgage servicers serviced $10 trillion of mortgages, according to Inside Mortgage Finance. Of the $10 trillion, approximately
74% of these MSRs were serviced by banks as of the third quarter of 2015, 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
an elevated volume of MSR sales is likely 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 billion 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 MSRs, Excess MSRs or other servicing assets, such as advances. In addition,
approximately $1.5 trillion of new loans are expected to be originated in 2016, 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 $2 trillion of
MSRs could be sold or available over the next few years. While increased competition and market conditions for more recently
originated MSRs have driven prices higher recently, we believe MSRs continue to offer attractive returns. 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.
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Interest rates have been volatile. In periods of rising interest rates, the rates of prepayments and delinquencies with respect to
mortgage loans generally decline. Conversely, in periods of declining interest rates, the rates of prepayments and delinquencies
with respect to mortgage loans generally increase. Generally, the value of our Agency 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. Moreover, the value of our Excess
MSRs is subject to a variety of factors, as described under “Risk Factors.” In the fourth quarter of 2015, the fair value of our direct
investments in Excess MSRs and our share of the fair value of the Excess MSRs held through equity method investees increased
by approximately $44.4 million in the aggregate and the weighted average discount rate of the portfolio remained unchanged at
9.8%, primarily as a result of a change in accounting estimate on the HLSS portfolio, an increase in servicing fees, and slower
projected prepayment speeds and delinquencies on some pools.
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 more recently originated 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
2015, 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, and the balance was
Non-Agency RMBS.
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 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 continue
to pursue opportunities in structured transactions that enable us to realize this difference, particularly through the acquisition and
execution 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 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, credit spreads and market
liquidity.
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, or are economically hedged with respect to interest rates. 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, 2015 was 2.15%, compared to 1.87% as of December 31, 2014. The net interest
spread on our Non-Agency RMBS portfolio as of December 31, 2015 was 3.31%, compared to 1.85% as of December 31, 2014.
These spreads changed primarily as a result of higher yields from new securities purchased during 2015 offset by increased funding
costs.
We control call rights on Non-Agency residential mortgage securitizations which become exercisable once the remaining collateral
balance reduces below a certain threshold of the original balance. We believe a call right is profitable when the aggregate underlying
loan value is greater than the sum of par on the loans minus any discount from acquired bonds plus expenses, including outstanding
advances, related to such exercise. Specifically, profit with respect to our call rights is generated by:
•
•
•
acquiring bonds issued by the securitization at a discount, prior to initiating the call, such that the portion of the payment
we make to the trust which is returned to us as bondholders when the call is exercised exceeds our purchase price for
the bonds;
re-securitizing or selling performing loans for a gain; and
retaining distressed loans to modify or liquidate over time at a premium to our basis.
We continue to evaluate the call rights we acquired from our servicers, and our ability to exercise such rights and realize the
benefits therefrom are subject to a number of risks. See “Risk Factors—Risks Related to Our Business—Our ability to exercise
our cleanup call rights may be limited or delayed if a third party also possessing such cleanup call rights exercises such rights, if
the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy
proceedings.” As interest rates increase, we expect the value of our call rights could decrease.
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In November 2013, we made our first investment in non-performing loans. During 2015, we continued to invest in the non-
performing loan sector, while also opportunistically selling assets. In 2015, we made our first direct investment in real estate owned
assets. The scope of our involvement will fluctuate depending on our assessment of relative value compared with alternative
investment opportunities, as well as the volume of non-performing loans acquired as a result of calling Non-Agency residential
mortgage securitizations.
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 collateral 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.
Corporate credit spreads generally tightened during the fourth quarter of 2015, which would generally have a favorable impact
on the value of yield driven financial instruments, such as our mortgage securities and loan portfolio; however, they were generally
wider than in the fourth quarter of 2014. Corporate credit spreads, while a useful market proxy, are not necessarily indicative or
directly correlated to mortgage credit spreads. Collateral performance, market liquidity and other factors related specifically to
certain investments within our mortgage securities and loan portfolio paralleled the corporate credit spread tightening during the
fourth quarter of 2015 and caused the overall same store value of this portfolio to remain stable. 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.
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 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(B)
Servicer Advances(B)
Agency RMBS(C)
Non-Agency RMBS(C)
Residential Mortgage Loans
Real Estate Owned
Consumer Loans(B)
Total/Weighted Average
Reconciliation to GAAP total assets:
Cash and restricted cash
Derivative assets
Trade receivable
Deferred tax asset, net
Other assets
GAAP total assets
Outstanding
Face Amount
Amortized
Cost Basis
$ 402,426,021
7,578,110
884,578
3,533,974
1,365,849
N/A
2,094,904
$ 417,883,436
1,593,734
7,400,068
918,633
1,579,445
1,122,602
50,574
N/A
$ 12,665,056
Percentage of
Total
Amortized
Cost Basis
Carrying Value
Weighted
Average Life
(years)(A)
6.3
4.4
6.6
6.8
3.3
N/A
3.1
5.0
12.5% $
58.4%
7.3%
12.5%
8.9%
0.4%
N/A
1,798,738
7,426,794
917,598
1,584,283
1,106,859
50,574
—
100.0% $ 12,884,846
344,638
2,689
1,538,481
185,311
236,757
$ 15,192,722
(A)
Weighted average life is based on the timing of expected principal reduction on the asset.
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(B)
(C)
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.
Amortized cost basis is net of impairment.
Servicing Related Assets
Excess MSRs
As of December 31, 2015, we had approximately $1,798.7 million estimated carrying value of Excess MSRs (held directly and
through joint ventures). As of December 31, 2015, our completed investments represent an effective 32.5% to 100.0% interest in
the Excess MSRs (held either directly or through joint ventures) on pools of mortgage loans with an aggregate UPB of approximately
$402.4 billion. 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.
Nationstar is the servicer of $259.1 billion UPB of the loans underlying our investments in Excess MSRs through December 31,
2015, 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 20.0% to 35.0% interest in the Excess MSRs and all ancillary income associated with the
portfolios.
In December 2014, we agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs and all of the Servicer Advances and
related basic fee portion of the MSR (the “SLS 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 the SLS 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 the SLS 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 “SLS Incentive Fee”)
which is based on the ratio of the outstanding servicer advances to the UPB of the underlying loans.
On April 6, 2015, we acquired Excess MSRs in connection with the HLSS Acquisition (Note 1 to our Consolidated Financial
Statements).
Each of our Excess MSR investments serviced by Nationstar and SLS is subject to a recapture agreement with Nationstar. Under
such 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. We have a similar recapture agreement with Ocwen; however, this
agreement allows for Ocwen to retain the Excess MSR on recaptured loans up to a threshold and no payments have been made to
us under such arrangement to date.
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Table of Contents
The tables below summarize the terms of our investments in Excess MSRs completed as of December 31, 2015.
Summary of Direct Excess MSR Investments as of December 31, 2015
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)
Agency
Original and Recaptured Pools
$
118.6
$
Recapture Agreements
Non-Agency(C)
Nationstar and SLS Serviced:
—
118.6
Original and Recaptured Pools
$
148.8
$
Recapture Agreements
Ocwen Serviced Pools
—
156.4
305.2
Total/Weighted Average
$
423.8
$
93.4
—
93.4
94.9
—
141.0
235.9
329.3
29 bps
21 bps
32.5% - 66.7%
$
457.7
$
33
29
35
26
43
41
24
21
14
20
14
14
32.5% - 66.7%
—
457.7
33.3% - 80.0%
$
328.8
$
33.3% - 80.0%
100.0%
—
917.1
1,245.9
378.1
59.1
437.2
250.7
15.7
877.9
1,144.3
38 bps
16 bps
$
1,703.6
$
1,581.5
(A)
(B)
(C)
The MSR is a weighted average as of December 31, 2015, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant).
As of December 31, 2015.
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, 2015 (Note 6 to our Consolidated Financial Statements).
Summary of Excess MSR Investments Through Equity Method Investees as of December 31, 2015
MSR Component(A)
Initial
UPB
(bn)
Current
UPB (bn)(B)
Weighted
Average
MSR
(bps)
Weighted
Average
Excess
MSR
(bps)
New
Residential
Interest in
Investee (%)
Investee
Interest in
Excess MSR
(%)
New
Residential
Effective
Ownership
(%)
Investee
Carrying
Value (mm)
Agency
Original and Recaptured Pools
Recapture Agreements
Total/Weighted Average
$
125.2
—
$
125.2
$
$
73.1
—
73.1
32 bps
19 bps
32
23
32 bps
19 bps
50.0%
50.0%
66.7 %
66.7 %
33.3% $
351.3
33.3%
$
70.7
422.0
(A)
(B)
The MSR is a weighted average as of December 31, 2015, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant).
As of December 31, 2015.
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The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of
December 31, 2015 (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)
Three
Month
Average
CPR(C)
Three
Month
Average
CRR(D)
Three
Month
Average
CDR(E)
Three
Month
Average
Recapture
Rate
Collateral Characteristics
Agency
Original Pools
$
339,362
$ 118,585,641
$ 85,738,456
533,345
38,721
59,118
—
—
7,703,240
44,952
—
—
$
437,201
$ 118,585,641
$ 93,441,696
578,297
Recaptured
Loans
Recapture
Agreement
Non-Agency(F)
Nationstar and
SLS Serviced:
Original Pools
243,502
148,839,262
93,296,580
487,018
Recaptured
Loans
Recapture
Agreement
Ocwen Serviced
Pools(H)
Total/Weighted
Average
7,160
15,748
—
—
1,627,395
7,166
—
—
877,906
156,374,134
141,002,300
939,916
$ 1,144,316
$ 305,213,396
$ 235,926,275
1,434,100
$ 1,581,517
$ 423,799,037
$ 329,367,971
2,012,397
703
722
—
705
669
742
—
641
649
660
4.3%
4.4%
—%
4.3%
4.3%
4.2%
—%
4.7%
4.6%
4.5%
288
300
—
289
273
293
—
251
257
263
80
20
—
74
11.1%
13.9%
12.9%
1.3%
24.1%
0.3%
6.5%
6.2%
0.4%
14.3%
—%
—%
—%
10.2%
13.3%
12.4%
—%
1.2%
—%
23.7%
119
45.4%
13.7%
9.3%
4.7%
8.5%
14
—
123
121
112
3.2%
11.0%
11.0%
—%
24.4%
—%
—%
—%
—%
20.6%
30.3%
9.2%
10.4%
5.9%
6.8%
3.5%
3.8%
24.6%
10.9%
7.9%
3.3%
—%
—%
2.4%
7.8%
Delinquency
30 Days(G)
Delinquency
60 Days(G)
Collateral Characteristics
Loans in
Delinquency
90+ Days(G)
Foreclosure
Real Estate
Owned
Loans in
Bankruptcy
Agency
Original Pools
Recaptured Loans
Recapture Agreement
Non-Agency(F)
Nationstar and SLS Serviced:
Original Pools
Recaptured Loans
Recapture Agreement
Ocwen Serviced Pools(H)
Total/Weighted Average
4.2%
1.4%
—%
3.9%
8.4%
0.8%
—%
7.8%
7.9%
7.1%
1.2%
0.2%
—%
1.1%
2.2%
0.1%
—%
4.2%
3.7%
3.2%
1.2%
0.3%
—%
1.1%
3.5%
0.1%
—%
6.0%
5.4%
4.5%
1.7%
0.4%
—%
1.6%
10.2%
—%
—%
9.4%
9.6%
8.0%
0.4%
0.1%
—%
0.4%
2.1%
—%
—%
2.1%
2.1%
1.8%
0.4%
—%
—%
0.3%
2.6%
—%
—%
2.3%
2.4%
2.0%
(A)
(B)
(C)
(D)
(E)
(F)
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.
Three Month Average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during
the quarter as a percentage of the total principal balance of the pool.
Three Month Average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments
during the quarter as a percentage of the total principal balance of the pool.
Three Month Average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary
prepayments (defaults) during the quarter 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, 2015 (Note 6 to our Consolidated Financial Statements).
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(G)
(H)
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.
Collateral characteristics related to approximately $3.6 billion of UPB are as of November 30, 2015.
The following table summarizes the collateral characteristics as of December 31, 2015 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 66.7% interest in the Excess MSRs.
Current
Carrying
Amount
Original
Principal
Balance
Current
Principal
Balance
New
Residential
Effective
Ownership
(%)
Number
of
Loans
WA
FICO
Score(A)
WA
Coupon
WA
Maturity
(months)
Average
Loan
Age
(months)
Adjustable
Rate
Mortgage
%(B)
Three
Month
Average
CPR(C)
Three
Month
Average
CRR(D)
Three
Month
Average
CDR(E)
Three
Month
Average
Recapture
Rate
Collateral Characteristics
Agency
Original Pools
$ 266,476
$125,191,420
$ 60,582,939
33.3 % 481,844
84,799
70,724
—
—
12,475,111
33.3 %
80,427
—
33.3 %
—
684
699
—
4.9 %
4.4 %
— %
283
301
—
Recaptured
Loans
Recapture
Agreement
Total/
Weighted
Average
$ 421,999
$125,191,420
$ 73,058,050
562,271
687
4.9 %
286
93
23
—
81
10.5%
19.2%
16.8%
2.8%
28.5%
0.6%
7.9%
7.7%
0.3%
31.4%
—%
—%
—%
—%
—%
8.8%
17.5%
15.4%
2.4%
28.7%
Delinquency
30 Days(F)
Delinquency
60 Days(F)
Collateral Characteristics
Loans in
Delinquency
90+ Days(F)
Foreclosure
Real Estate
Owned
Loans in
Bankruptcy
Agency
Original Pools
Recaptured Loans
Recapture Agreement
Total/Weighted Average
5.4%
3.0%
—%
5.0%
1.6%
0.8%
—%
1.5%
1.2%
0.5%
—%
1.1%
3.7%
0.6%
—%
3.2%
1.3%
—%
—%
1.0%
0.7%
0.1%
—%
0.6%
(A)
(B)
(C)
(D)
(E)
(F)
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.
Three Month Average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during
the quarter as a percentage of the total principal balance of the pool.
Three Month Average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments
during the quarter as a percentage of the total principal balance of the pool.
Three Month Average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary
prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool.
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. We made the investment through the Buyer, a joint venture
entity capitalized by us and certain third-party co-investors. The Buyer acquired from Nationstar a pool of outstanding servicer
advances (including deferred servicing fees) and the basic fee component of the related MSRs on Non-Agency mortgage loans.
In exchange, the Buyer (i) paid the initial purchase price, and (ii) agreed to purchase future servicer advances related to the loans
at par. The initial purchase price was 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.”
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 Nationstar Servicing Fee”) and, in the event that the aggregate cash flows
from the advances and the basic fee generate a 14% return (“the Buyer Targeted Return”) on the Buyer’s invested equity, a
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Table of Contents
performance fee (“the Nationstar 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.
On April 6, 2015, we acquired servicer advances in connection with the HLSS Acquisition (Note 1 to our Consolidated Financial
Statements).
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):
December 31, 2015
Amortized
Cost Basis
Carrying
Value(A)
Weighted
Average
Discount Rate
Weighted
Average Life
(Years)(B)
Year Ended
December 31, 2015
Change in Fair
Value Recorded in
Other Income
Servicer advances(C)
$
7,400,068
$
7,426,794
5.6%
4.4
$
(57,491)
(A)
(B)
(C)
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.
Excludes asset-backed securities collateralized by servicer advances with an aggregate face amount of $431.0 million
and an aggregate carrying value of $430.3 million as of December 31, 2015.
The following is additional information regarding our servicer advances, and related financing, as of December 31, 2015 (dollars
in thousands):
UPB of
Underlying
Residential
Mortgage
Loans
Outstanding
Servicer
Advances
Servicer
Advances to
UPB of
Underlying
Residential
Mortgage
Loans
Face
Amount of
Notes
Payable
Loan-to-Value(A)
Cost of Funds(C)
Gross
Net(B)
Gross
Net
December 31, 2015
Servicer advances(D)
$ 220,256,804
$ 7,578,110
3.4% $ 7,058,094
91.2% 90.2%
3.4%
2.6%
(A)
(B)
(C)
(D)
Based on outstanding Servicer Advances, excluding purchased but unsettled Servicer Advances and certain deferred
servicing fees (“DSF”) which New Residential receives financing on. If New Residential were to include these DSF in
the servicer advance balance, gross and net LTV as of December 31, 2015 would be 86.9% and 85.9%, respectively. Also
excludes retained non-agency bonds with a current face amount of $175.8 million from the outstanding servicer advances
debt. If New Residential were to sell these bonds, gross and net LTV as of December 31, 2015 would be 93.4% and
92.4%, respectively.
Ratio of face amount of borrowings to par amount of Servicer Advance collateral, net of any general 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
$
$
2,229,468
3,687,559
1,661,083
7,578,110
December 31, 2015
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The Buyer
We, through a wholly owned subsidiary, are the managing member of the Buyer. As of December 31, 2015, we owned approximately
44.5% of the Buyer.
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, SLS and Ocwen remain the named servicers under the applicable servicing agreements and will continue to perform
all servicing duties for the related mortgage loans. The Buyer, or the related New Residential subsidiary, as applicable, 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 and, with respect to Ocwen, after April 6, 2017. In exchange for
their services, we pay Nationstar, SLS and Ocwen 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, 2015 is equal to approximately 9.3%, 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, 2015. The SLS
servicing fee is equal to 10.75 bps, based on the servicing fee collections of the underlying loans. The Ocwen servicing fee is
equal to 5.6 bps, based on the servicing fee collections of the underlying loans.
Targeted Return/Incentive Fee
The Buyer Targeted Return and the Nationstar Performance Fee, with respect to Nationstar, 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 Buyer Targeted Return implements these objectives by allocating payments in respect of the
purchased basic fee between the Buyer and Nationstar. The SLS Incentive Fee functions in the same fashion with respect to the
SLS Transaction. Ocwen also receives a performance-based incentive fee (the “Ocwen Incentive Fee”) based on the ratio of the
outstanding servicer advances to the UPB of the underlying loans.
The amount available to satisfy the Buyer Targeted Return is equal to: (i) the amounts from the purchased basic fee, minus (ii) the
Nationstar Servicing Fee (“Nationstar Net Collections”). The Buyer will retain the amount of Nationstar Net Collections necessary
to achieve the Buyer Targeted Return. Amounts in excess of the Buyer Targeted Return will be used to pay the Nationstar
Performance Fee.
The Buyer 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 Buyer 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 Buyer Targeted Return.
The Nationstar Performance Fee is calculated as follows. Pursuant to a Master Servicing Rights Purchase Agreement and related
Sale Supplements, Nationstar Net Collections is divided into two subsets: the “Retained Amount” and the “Surplus Amount.” If
the amount necessary to achieve the Buyer 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 Nationstar Performance Fee. If the amount
necessary to achieve the Buyer Targeted Return is greater than the Retained Amount but less than Nationstar Net Collections, then
100% of the excess Surplus Amount is paid to Nationstar as a Nationstar Performance Fee. Nationstar Performance Fee payments
were made to Nationstar in the amounts of $48.4 million and $25.3 million during the years ended December 31, 2015 and 2014,
respectively.
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Table of Contents
The SLS Incentive Fee 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.
The Ocwen Incentive Fee payable in any month is reduced if the advance ratio exceeds a predetermined level for that month. If
the advance ratio is exceeded in any month, any performance-based incentive fee payable for such month will be reduced by 1-
month LIBOR plus 2.75% (or 275 basis points) per annum of the amount of any such excess servicer advances.
A further discussion of the sensitivity of incentive fees to changes in LIBOR is included below under “Quantitative and
Qualitative Disclosures About Market Risk”
Residential Securities and Loans
Real Estate Securities
As of December 31, 2015, we had approximately $4.4 billion face amount of real estate securities, including $884.6 million of
Agency RMBS and $3.5 billion of Non-Agency RMBS. These investments were financed with repurchase agreements with an
aggregate face amount of approximately $187.9 million for Agency RMBS and approximately $1.3 billion for Non-Agency RMBS.
As of December 31, 2015, a total face amount of $2.4 billion of our Non-Agency portfolio and approximately $35.3 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 $9.5 billion as of December 31, 2015. We hold a limited right to cleanup call options with
respect to certain securitization trusts serviced or master serviced by Nationstar whereby, when the outstanding balance of the
underlying mortgage loans falls below a pre-determined threshold, we can effectively purchase the underlying mortgage loans at
par, plus unreimbursed servicer advances, and repay all of the outstanding securitization financing at par, in exchange for a 0.75%
(of UPB) fee paid to Nationstar. We similarly hold a limited right to cleanup call options with respect to certain securitization
trusts master serviced by SLS for no fee. We similarly hold a limited right to cleanup call options with respect to certain securitization
trusts serviced or master serviced by Ocwen subject to a 0.5% (of UPB) fee paid to Ocwen. The aggregate UPB of the underlying
mortgage loans within these various securitization trusts is approximately $200 billion.
We have exercised our call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing
residential mortgage loans, including REO, contained in such trusts prior to their termination. In certain cases, we sold portions
of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, we received par on
the securities issued by the called trusts which we owned prior to such trusts’ termination. Refer to Note 8 in our Consolidated
Financial Statements for further details on these transactions.
Agency RMBS
The following table summarizes our Agency RMBS portfolio as of December 31, 2015 (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
$
$
184,540
700,038
884,578
$
$
196,207
722,426
918,633
$
$
45
$ (1,218) $
195,034
138
183
—
722,564
$ (1,218) $
917,598
$
$
187,911
—
187,911
(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, 2015 (dollars in thousands):
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
26
$
184,540
$
196,207
100.0% $
195,034
2.4%
1.7%
N/A
2.0%
8.9%
4
Weighted Average
Periodic Cap
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Table of Contents
(A)
(B)
(C)
(D)
(E)
Of these investments, 95.2% reset based on 12 month LIBOR index, 2.9% reset based on 1 month LIBOR, and 1.9%
reset based on the 1 year Treasury Constant Maturity Rate. After the initial fixed period, 97.1% of these securities will
reset annually and 2.9% will reset semi-annually.
Represents the maximum change in the coupon at the end of the fixed rate period. All securities in this category 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, 2015 (dollars in thousands):
Agency RMBS Characteristics
Collateral
Characteristics
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)
Vintage(A)
Pre-2006
2006
2007
2008
2009
2010
2011
2012 and later
Total/Weighted
Average
3
1
3
3
3
10
1
4
$
10,117
$
10,785
1.2% $
10,658
2,323
5,003
6,675
15,162
89,496
4,462
2,481
5,251
7,157
16,249
95,397
4,462
751,340
776,851
0.2%
0.6%
0.8%
1.8%
10.4%
0.4%
84.6%
2,455
5,197
7,074
15,907
94,956
4,478
776,873
28
$
884,578
$
918,633
100.0% $
917,598
5.4
4.9
5.1
5.1
4.9
5.1
6.1
6.9
6.6
(A)
(B)
The year in which the securities were issued.
Three month average constant prepayment rate.
The following table summarizes the net interest spread of our Agency RMBS portfolio as of December 31, 2015:
Net Interest Spread(A)
Weighted Average Asset Yield
Weighted Average Funding Cost
Net Interest Spread
(A)
The Agency RMBS portfolio consists of 21.4% floating rate securities and 78.6% fixed rate securities (based on amortized
cost basis). 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, 2015 (dollars in thousands):
Asset Type
Non-Agency RMBS
Outstanding
Face
Amount
Amortized
Cost Basis
Gross Unrealized
Gains
Losses
Carrying
Value(A)
Outstanding
Repurchase
Agreements
$ 3,533,974
$ 1,579,445
$ 22,964
$ (18,126) $ 1,584,283
$ 1,333,852
(A)
Fair value, which is equal to carrying value for all securities.
76
1.0%
0.3%
13.3%
0.4%
34.8%
16.3%
14.0%
0.8%
3.1%
2.75%
0.60%
2.15%
Table of Contents
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, 2015 (dollars in thousands):
Non- Agency RMBS Characteristics(A)
Average
Minimum
Rating(C)
Number
of
Securities
Outstanding
Face
Amount
Amortized
Cost Basis
Percentage
of Total
Amortized
Cost Basis
Carrying
Value
Principal
Subordination(D)
Excess
Spread(E)
B-
CCC
CCC
B+
102
$
225,588
$
152,000
13.2% $
154,234
43
36
54
240,277
384,512
2,252,597
183,686
285,292
527,516
16.1%
24.8%
45.9%
188,045
283,656
528,058
9.4%
16.9%
14.7%
9.4%
0.8%
2.2%
2.8%
1.7%
B-
235
$ 3,102,974
$ 1,148,494
100.0% $ 1,153,993
12.1%
2.5%
Weighted
Average
Life
(Years)
Weighted
Average
Coupon(F)
6.8
9.2
10.2
8.7
8.9
2.0%
1.7%
0.8%
1.0%
1.1%
Vintage(B)
Pre 2004
2004
2005
2006 and later
Total/Weighted
Average
Vintage(B)
Pre 2004
2004
2005
2006 and later
Total/Weighted Average
Collateral Characteristics(A) (G)
Average
Loan Age
(years)
16.7
11.6
10.7
9.5
11.1
Collateral
Factor(H)
0.08
0.13
0.11
0.54
0.31
3 month
CPR(I)
2.6%
7.6%
3.8%
4.6%
4.6%
Delinquency(J)
11.2%
15.5%
16.4%
13.2%
14.1%
Cumulative
Losses to
Date
6.2%
6.5%
15.2%
17.3%
13.6%
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
Excludes $431.0 million face amount of bonds backed by servicer advances.
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 89 bonds with a
carrying value of $333.0 million which either have never been rated or for which rating information is no longer provided.
We had two assets that were on negative watch for possible downgrade by at least one rating agency as of December 31,
2015.
The percentage of amortized cost basis 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, 2015.
Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $227.4 million and $0.0 million,
respectively, for which no coupon payment is expected.
The weighted average loan size of the underlying collateral is $260.0 thousand.
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 summarizes the net interest spread of our Non-Agency RMBS portfolio as of December 31, 2015:
Net Interest Spread(A)
Weighted Average Asset Yield
Weighted Average Funding Cost
Net Interest Spread
5.03%
1.72%
3.31%
(A)
The Non-Agency RMBS portfolio consists of 53.3% floating rate securities and 46.7% fixed rate securities (based on
amortized cost basis).
Residential Mortgage Loans
As of December 31, 2015, we had approximately $1.4 billion outstanding face amount of residential mortgage loans. These
investments were financed with repurchase agreements with an aggregate face amount of approximately $908.8 million and notes
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Table of Contents
payable with an aggregate face amount of approximately $19.5 million. We acquired these loans through open market purchases,
as well as through the exercise of call rights, as described below.
We have exercised our call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing
residential mortgage loans, including REO, contained in such trusts prior to their termination. In certain cases, we sold portions
of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, we received par on
the securities issued by the called trusts which we owned prior to such trusts’ termination. Refer to Note 8 in our Consolidated
Financial Statements for further details on these transactions.
The following table presents the total residential mortgage loans outstanding by loan type at December 31, 2015 (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)
Loan Type
Reverse Mortgage Loans(F)(G)
Performing Loans(H)
Purchased Credit Deteriorated ("PCD") Loans (I)
Total Residential Mortgage Loans, held-for-
investment
Performing Loans, held-for-sale(H)
Non-Performing Loans, held-for-sale(I) (J)
Residential Mortgage Loans, held- for-sale
$
34,423
$
19,560
21,483
19,964
136
671
450,229
290,654
2,118
10.0 %
9.1 %
5.5 %
$
$
$
506,135
$ 330,178
2,925
6.0 %
270,585
$ 277,084
589,129
499,597
859,714
$ 776,681
1,838
3,428
5,266
4.6 %
5.9 %
5.5 %
4.2
6.7
2.5
2.8
4.9
2.9
3.5
21.8%
17.1%
18.7%
112.9%
77.4%
115.4%
71.3%
7.5%
97.6%
18.8%
113.6%
92.0%
4.6%
14.5%
11.4%
57.0%
104.5%
89.6%
—%
81.1%
55.6%
N/A
626
578
580
702
580
619
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
Includes residential mortgage loans with a United States federal income tax basis of $1,204.2 million and $1,159.1 million
as of December 31, 2015 and 2014, 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.
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
was $0.4 million and $0.3 million at December 31, 2015 and 2014, respectively, and 71% and 77% 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 premiums of $12.0 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. As of December 31, 2015, we have placed all of these loans on
nonaccrual status, except as described in (J) below.
Includes $246.3 million UPB of Ginnie Mae EBO non-performing loans on accrual status as contractual cash flows are
guaranteed by the FHA.
We consider the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as our credit quality
indicators.
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. The portfolio included 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 acquired 30% membership interests in each of the Consumer Loan Companies. Of the
remaining 70% of the membership interests, OneMain, which is majority-owned by Fortress funds managed by our Manager,
acquired 47% and an affiliate of Blackstone Tactical Opportunities Advisors LLC acquired 23%. OneMain acts as the managing
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member of the Consumer Loan Companies. After a servicing transition period, OneMain became the servicer of the loans and
provides all servicing and advancing functions for the portfolio. The Consumer Loan Companies initially financed approximately
73% of the original purchase price with asset-backed notes. In September 2013, the Consumer Loan Companies issued and sold
additional asset-backed notes that were subordinate to the debt issued in April 2013. 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. 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.
The table below summarizes the collateral characteristics of the consumer loans as of December 31, 2015 (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)
$ 2,094,904
67.4%
32.6% 235,851
635
18.2%
10.9%
127
3.1
3.0%
1.6%
2.6%
14.1%
5.5%
As of November 30, 2015.
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)
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. We believe that the estimates and assumptions utilized in the preparation of the Consolidated Financial Statements are
prudent and reasonable. Actual results historically have generally been in line with our 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. We validate 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, we engage an independent valuation firm to separately
measure the fair value of our 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. We compare the range included in the opinion to the values
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generated by our 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.
The following table summarizes the estimated change in fair value of our interests in the Excess MSRs owned directly as of
December 31, 2015 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars
in thousands):
Fair value at December 31, 2015
$ 1,581,517
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%
$ 1,713,778
-10%
$ 1,644,881
10%
$ 1,523,079
20%
$ 1,469,042
$
132,261
$
63,364
$
(58,438)
$
(112,475)
8.4 %
4.0 %
(3.7)%
(7.1)%
-20%
$ 1,717,398
-10%
$ 1,646,922
10%
$ 1,520,698
20%
$ 1,464,037
$
135,881
$
65,405
$
(60,819)
$
(117,480)
8.6 %
4.1 %
(3.8)%
(7.4)%
-20%
$ 1,586,818
-10%
$ 1,584,168
10%
$ 1,578,865
20%
$ 1,576,213
$
5,301
$
2,651
$
(2,652)
$
(5,304)
0.3 %
0.2 %
(0.2)%
(0.3)%
-20%
$ 1,565,741
-10%
$ 1,573,575
10%
$ 1,589,566
20%
$ 1,597,726
$
(15,776)
$
(7,942)
$
8,049
$
16,209
(1.0)%
(0.5)%
0.5 %
1.0 %
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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, 2015 given several parallel shifts in the discount rate, prepayment rate, delinquency rate
and recapture rate (dollars in thousands):
Fair value at December 31, 2015
$
217,221
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%
236,162
18,941
8.7 %
-20%
233,893
16,672
7.7 %
-20%
221,439
4,218
1.9 %
-20%
209,793
(7,428)
(3.4)%
$
$
$
$
$
$
$
$
-10%
226,275
9,054
4.2 %
-10%
225,307
8,086
3.7 %
-10%
219,330
2,109
1.0 %
-10%
213,484
(3,737)
(1.7)%
$
$
$
$
$
$
$
$
10%
208,905
(8,316)
(3.8)%
10%
209,605
(7,616)
(3.5)%
10%
215,112
(2,109)
(1.0)%
10%
221,007
3,786
1.7 %
$
$
$
$
$
$
$
$
20%
201,244
(15,977)
(7.4)%
20%
202,428
(14,793)
(6.8)%
20%
213,002
(4,219)
(1.9)%
20%
224,841
7,620
3.5 %
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 because 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 our fair value
determinations, we engage an independent valuation firm to separately measure the fair value of our servicer advances investment.
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The 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 $1.0 billion per year on average over the weighted average life of the investment held as of
December 31, 2015, (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 our servicers 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 fees owed to our servicers.
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. We validate 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
Accounting Standards Codification (“ASC”) No. 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 No.
310-30, as opposed to ASC No. 325-40. All of our other Non-Agency RMBS, those not acquired with evidence of deteriorated
credit quality, fall within the scope of ASC No. 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 PCD 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 PCD 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 Deteriorated (PCD) 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 PCD loans. Recognition of income and accrual status on PCD loans is dependent on having
a reasonable expectation about the timing and amount of cash flows to be collected. At acquisition, we aggregate PCD 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 PCD 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 PCD loans is subject to significant judgment and uncertainty. Actual cash flows could be
materially different than our estimates.
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The liquidation of PCD 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 PCD 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 PCD 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 PCD pool’s allowance for loan losses.
Real Estate Owned (REO)
REO assets are those individual properties where the lender receives 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 previously
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 (Loss)” in the Consolidated Statements of Income. The assets underlying linked transactions included 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 Nationstar serviced servicer advances, including the basic fee component of the related MSRs, 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, 2015, we owned an approximately 44.5% interest in the Buyer, and the
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third-party 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
See Note 2 to our Consolidated Financial Statements.
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RESULTS OF OPERATIONS
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 comparable to other historical periods.
The following tables summarize the changes in our results of operations from year-to-year (dollars in thousands). Our results of
operations are not necessarily indicative of our future performance.
Comparison of Results of Operations for the years ended December 31, 2015 and 2014
Interest income
Interest expense
Net Interest Income
Impairment
Other-than-temporary impairment (OTTI) on securities
Valuation provision (reversal) 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 (loss) on settlement of investments, net
Other income (loss), net
Operating Expenses
General and administrative expenses
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
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
Interest Income
Year Ended December 31,
Increase (Decrease)
2015
2014
Amount
%
$
645,072
$
346,857
$
298,215
274,013
371,059
5,788
18,596
24,384
346,675
140,708
206,149
1,391
9,891
11,282
194,867
133,305
164,910
4,397
8,705
13,102
151,808
86.0 %
94.7 %
80.0 %
316.1 %
88.0 %
116.1 %
77.9 %
38,643
41,615
(2,972)
(7.1)%
31,160
(57,491)
—
43,954
(17,207)
2,970
42,029
61,862
33,475
16,017
6,469
117,823
270,881
(11,001)
281,882
13,246
268,636
$
$
$
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
$
$
$
(26,120)
(141,708)
(53,840)
(48,066)
(52,694)
(7,659)
(333,059)
34,861
13,824
(38,317)
2,556
12,924
(194,175)
(33,958)
(160,217)
(75,976)
(84,241)
$
$
$
(45.6)%
(168.3)%
(100.0)%
(52.2)%
(148.5)%
(72.1)%
(88.8)%
129.1 %
70.3 %
(70.5)%
65.3 %
12.3 %
(41.8)%
(147.9)%
(36.2)%
(85.2)%
(23.9)%
Interest income increased by $298.2 million primarily attributable to incremental interest income of (i) $85.4 million from Excess
MSR investments, in which we made additional investments subsequent to December 31, 2014, primarily through the HLSS
Acquisition discussed in Note 1 to our Consolidated Financial Statements, as well as through the restructuring of two Excess MSR
joint ventures into directly owned assets discussed in Note 5, and (ii) $162.2 million from servicer advance investments, in which
we made additional investments subsequent to December 31, 2014, also primarily through the HLSS Acquisition discussed in
Note 1. Interest income further increased by (iii) $52.1 million, largely due to both additional investments and accelerated accretion
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on real estate securities owned in Non-Agency RMBS trusts that were terminated upon the exercise of call rights, (iv) $13.8 million
related to interest income on EBO loans acquired in the HLSS Acquisition, (v) $2.6 million related to interest income on GNMA
EBO servicer advances funded by HLSS and accounted for as a financing transaction, partially offset by a $17.3 million decrease
from real estate loans as a result of the decrease in size of the portfolio during the first six months of 2015, particularly due to the
sale of several performing loan pools.
Interest Expense
Interest expense increased by $133.3 million primarily attributable to increases of (i) $104.9 million of interest on financings
related to servicer advances acquired primarily through the HLSS Acquisition discussed in Note 1 to our Consolidated Financial
Statements, (ii) $15.3 million of interest on secured corporate loans issued in January and May 2015, (iii) $10.4 million and (iv)
$6.5 million of interest on repurchase agreements and financings of real estate loans, including EBO loans and real estate securities,
respectively, in which we made additional levered investments subsequent to December 31, 2014, partially offset by a $2.6 million
decrease in interest on repurchase agreements on our consumer loans portfolio that we paid off subsequent to December 31, 2014.
Other than Temporary Impairment (OTTI) on Securities
The other-than-temporary impairment on securities increased by $4.4 million primarily resulting from a decline in fair values on
a greater portion of our Non-Agency RMBS, which we purchased with existing credit impairment, below their amortized cost
basis as of December 31, 2015.
Valuation Provision (Reversal) on Loans and Real Estate Owned
The $8.7 million increase in the valuation provision on residential mortgage loans, held-for-sale and real estate owned resulted
from a net increase in the average carrying values of assets we owned which were subject to valuation allowances during the year
ended December 31, 2015 when compared to the year ended December 31, 2014.
Change in Fair Value of Investments in Excess Mortgage Servicing Rights
The change in fair value of investments in excess mortgage servicing rights decreased by $3.0 million during the year ended
December 31, 2015 compared to the year ended December 31, 2014. This decrease relates to mark-to-market fair value adjustments
of $38.6 million during the year ended December 31, 2015, compared to fair value adjustments of $41.6 million during the year
ended December 31, 2014. The mark-to-market fair value adjustments during the year ended December 31, 2015 consisted
primarily of an increase in value on the Excess MSR pools acquired through the HLSS Acquisition. The mark-to-market adjustments
during the year ended December 31, 2014 were driven by a decrease in the weighted average discount rate from 12.8% to 10.0%
and slower prepayment speeds
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 decreased by $26.1 million
during the year ended December 31, 2015 compared to the year ended December 31, 2014. This decrease relates to mark-to-market
fair value adjustments of $31.2 million during the year ended December 31, 2015, compared to fair value adjustments of $57.3
million during the year ended December 31, 2014. The mark-to-market fair value adjustments during the year ended December
31, 2015 consist of an increase due to increased servicing fees, and a cumulative positive adjustment resulting from changes to
certain modeling assumptions. The mark-to-market adjustments during the year ended December 31, 2014 were driven by a
decrease in the weighted average discount rate from 12.8% to 10.0% and slower prepayment speeds. Additionally, two Excess
MSR joint ventures were restructured into directly owned assets during the first quarter of the year ended December 31, 2015, as
discussed in Note 5.
Change in Fair Value of Investments in Servicer Advances
The change in fair value of investments in servicer advances decreased $141.7 million during the year ended December 31, 2015
compared to the year ended December 31, 2014. This decrease relates to asset mark-downs of $57.5 million during the year ended
December 31, 2015 compared to mark-ups of $84.2 million during the year ended December 31, 2014. The change in fair value
of investments in servicer advances for the year ended December 31, 2015 was due to the acquisition of servicer advances through
the HLSS Acquisition discussed in Note 1 to our Consolidated Financial Statements and subsequent increases in discount rate
assumptions across all servicer advances portfolios. The change in fair value of investments in servicer advances for the year
ended December 31, 2014 was primarily due to a decrease in the servicer advance-to-UPB ratio.
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Earnings from Investments in Consumer Loans, Equity Method Investees
Earnings from investments in consumer loans, equity method investees decreased $53.8 million as 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, which resulted in a distribution to us in excess of our investment basis.
Gain on Consumer Loans Investment
The gain on consumer loans investment decreased $48.1 million during the year ended December 31, 2015 compared to the year
ended December 31, 2014. This decrease is primarily due to a gain recorded in the prior year related to the October 3, 2014
distribution of refinancing proceeds.
Gain (Loss) on Settlement of Investments, net
Gain (loss) on settlement of investments, net decreased by $52.7 million, primarily related to (i) decreased net gains of $52.6
million on real estate securities sold, (ii) increased loss of $8.4 million on settlement of derivatives, (iii) increased loss of $7.1
million on sale of REO, (iv) $7.3 million loss on extinguishment of debt, and (v) $3.1 million write-off of financing fees, partially
offset by (vi) increased net gains of $25.7 million related to residential mortgage loans and real estate owned, including gains on
sales, loan liquidations and securitizations.
Other Income (Loss), net
Other income (loss), net decreased by $7.7 million, primarily attributable to (i) a $15.6 million decrease in gains on transfer of
loans to REO, (ii) a $7 million increase in servicer advance expenses, (iii) a non-recurring fee earned on deal termination of $5
million during the year ended December 31, 2014, and (iv) an increase in REO expense of $3.3 million, partially offset by (v) a
$7.1 million net decrease in unrealized losses on non-hedge derivative instruments, (vi) a $1.8 million increase in realized gain
from MSR investments, and (vii) a $14.5 million reimbursement from a servicer during 2015.
General and Administrative Expenses
General and administrative expenses increased by $34.9 million, partially attributable to $8.2 million in payroll and benefits,
retention bonus, and severance related to HLSS employees, triggered by our acquisition of HLSS. Legal deal expenses increased
$14.0 million, primarily as a result of the HLSS Acquisition and the settlement agreement with certain HSART Bondholders as
discussed in Note 14 to our Consolidated Financial Statements. Deal expense, legal fees, and D&O insurance expense increased
$5.3 million, $2.1 million, and $1.3 million, respectively, primarily as a result of the HLSS Acquisition, and $4.0 million of
increased professional fees and other expenses were incurred to maintain and monitor our increasing asset base.
Management Fee to Affiliate
Management fee to affiliate increased by $13.8 million as a result of increases to our gross equity subsequent to December 31,
2014, primarily attributable to the equity issuances discussed in Note 13 to our Consolidated Financial Statements.
Incentive Compensation to Affiliate
Incentive compensation to affiliate decreased by $38.3 million due to a decrease in our incentive compensation earnings measure
resulting from the changes in the income and expense items described above, excluding any unrealized gains or losses from mark-
to-market valuation changes on investments and debt.
Loan Servicing Expense
Loan servicing expense increased by $2.6 million due to the acquisition of additional non-performing residential mortgage loans
subsequent to December 31, 2014.
Income Tax Expense (Benefit)
Income tax expense (benefit) increased by $34.0 million, from $23.0 million of income tax expense for the year ended December
31, 2014 to $11.0 million of income tax benefit for the year ended December 31, 2015, relating to certain of our taxable subsidiaries.
This change is primarily due to $5.7 million, $3.4 million, and $2.0 million of income tax benefit on Advance Sub LLC, MBN
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Issuers, and the Buyer, respectively, and approximately $23.0 million of increase in the net deferred tax benefit due to the impact
of changes in mark-to-market fair value adjustments on investments in servicer advances from Advance Sub LLC and HLSS.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Noncontrolling interests in income (loss) of consolidated subsidiaries decreased by $76.0 million primarily due to (i) a decrease
in net interest income earned on the Buyer’s levered assets as they are repaid over time, (ii) a decrease in the change in fair value
of the Buyer’s assets, (iii) a loss on extinguishment of debt at the Buyer, and (iv) HLSS shareholders’ interests in the net loss of
HLSS Ltd., partially offset by (v) an increase in the income tax benefit due to the reduction in the reserve for unrecognized tax
benefits during the year ended December 31, 2015 in the Buyer.
Comparison of Results of Operations for the years ended December 31, 2014 and 2013
Year Ended December 31,
Increase (Decrease)
2014
2013
Amount
%
$
346,857
$
87,567
$
259,290
140,708
206,149
1,391
9,891
11,282
194,867
15,024
72,543
4,993
461
5,454
125,684
133,606
(3,602)
9,430
5,828
67,089
127,778
296.1 %
836.6 %
184.2 %
(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
—
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
$
$
$
265,623
$
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 expense
Net Interest Income
Impairment
Other-than-temporary impairment (OTTI) on securities
Valuation provision (reversal) 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 (loss) on settlement of investments, net
Other income (loss), 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 (benefit)
Net Income (Loss)
Noncontrolling Interests in Income (Loss) of Consolidated
Subsidiaries
Net Income (Loss) Attributable to Common Stockholders
$
$
$
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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
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 Provision (Reversal) on Loans and Real Estate Owned
The valuation provision (reversal) 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
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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 (Loss) on Settlement of Investments, net
Gain (loss) 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
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 (Loss), net
Other income (loss), net 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.
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Income Tax Expense (Benefit)
Income tax expense (benefit) 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.
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 have in the past and may
in the future also pursue one or more other sources of financing such as securitizations and other secured and unsecured forms of
borrowing. As of December 31, 2015, we had outstanding repurchase agreements with an aggregate face amount of approximately
$4.0 billion to finance residential mortgage loans, real estate owned, consumer loans, Non-Agency RMBS and 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, 10%-50% for Non-Agency RMBS, and
5%-43% 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. We continually monitor market conditions for financing opportunities and at any given time may be
entering or pursuing one or more of the transactions described above. 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 and servicer advance financings 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 such a shortfall may occur rapidly and with little
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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 recorded impairments, if any, (iv) deferred taxes, and (v) principal cash flows related to
held-for-sale loans, which are characterized as operating cash flows under GAAP.
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):
Month
Issued
Outstanding
Face
Amount
Carrying
Value(A)
Final
Stated
Maturity(B)
December 31, 2015
Weighted
Average
Funding
Cost
Weighted
Average
Life
(Years)
Collateral
Outstanding
Face
Amortized
Cost Basis
Carrying
Value
December
31, 2014
Weighted
Average
Life
(Years)
Carrying
Value(A)
Various
$
1,683,305
$ 1,683,305
Jan-16
0.60%
0.1
$
1,673,125
$
1,731,758
$
1,730,586
0.6
$ 1,707,602
Debt Obligations/
Collateral
Repurchase Agreements(C)
Agency RMBS(D)
Non-Agency RMBS(E)
Various
1,333,852
1,333,852
Residential Mortgage
Loans(F)
Various
908,811
907,993
Real Estate Owned(G) (H)
Various
77,528
77,458
Jan-16 to
May-16
May-16 to
Jan-17
Feb-16 to
Jan-17
Consumer Loan
Investment(I)
Total Repurchase
Agreements
Notes Payable
Secured Corporate
Note(J)
Servicer Advances(K)
Residential Mortgage
Loans(L)
Real Estate Owned
Total Notes Payable
Apr-15
40,446
40,446
Apr-16
4,043,942
4,043,054
May-15
184,433
182,978
Apr-17
Various
7,058,094
7,047,061
Apr-16 to
Aug-18
Oct-15
—
19,529
19,529
Oct-16
—
—
—
7,262,056
7,249,568
Total/Weighted Average
$
11,305,998
$11,292,622
1.72%
2.80%
3.05%
3.83%
1.54%
5.67%
3.39%
3.08%
—%
3.45%
2.77%
0.1
0.8
0.9
0.3
0.2
1.3
1.4
0.8
—
1.3
1.0
3,233,171
1,535,350
1,538,703
1,318,603
1,091,523
1,075,816
7.0
3.2
539,049
867,334
N/A
N/A
N/A
N/A
86,911
N/A
35,105
—
3.1
—
92,619,325
217,517
261,102
7,578,110
7,400,068
7,426,794
34,423
N/A
21,113
N/A
19,560
—
5.1
4.4
4.2
N/A
3,149,090
—
2,885,784
22,194
785
2,908,763
$ 6,057,853
(A)
(B)
(C)
(D)
Net of deferred financing costs associated with the adoption of ASU No. 2015-03 (Note 2 to our Consolidated Financial
Statements).
All debt obligations with a stated maturity of January or February 2016 were refinanced, extended or repaid.
These repurchase agreements had approximately $4.8 million of associated accrued interest payable as of December 31,
2015.
All of the Agency RMBS repurchase agreements have a fixed rate. Collateral amounts include approximately $1.5 billion
of related trade and other receivables.
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(E)
(F)
(G)
(H)
(I)
(J)
(K)
(L)
All of the Non-Agency RMBS repurchase agreements have LIBOR-based floating interest rates. This includes repurchase
agreements of $145.8 million on retained servicer advance bonds.
All of these repurchase agreements have LIBOR-based floating interest rates.
All of these repurchase agreements have LIBOR-based floating interest rates.
Includes financing collateralized by receivables including claims from FHA on Ginnie Mae EBO loans for which
foreclosure has been completed and for which we have made or intend to make a claim on the FHA guarantee.
The repurchase agreement bears interest equal to three-month LIBOR plus 3.50% and is collateralized by our interest in
consumer loans (Note 9 to our Consolidated Financial Statements).
The loan bears interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 5.25%.
The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the Excess
MSRs that secure this corporate note.
$2.7 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
1.7% to 2.2%.
The note is payable to Nationstar and bears interest equal to one-month LIBOR plus 2.875%.
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.
We have margin exposure on $4.0 billion of repurchase agreements. To the extent that the value of the collateral underlying these
repurchase agreements declines, we may be required to post margin, which could significantly impact our liquidity.
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
Consumer Loans
Notes Payable
Servicer Advances
Residential Mortgage Loans
Total/Weighted Average
Year Ended December 31, 2015
Outstanding
Balance at
December 31,
2015
Average Daily
Amount
Outstanding(A)
Maximum
Amount
Outstanding
Weighted
Average Daily
Interest Rate
$
$
1,683,305
1,333,852
689,975
17,891
40,446
2,693,316
19,529
6,478,314
$
$
$
1,506,923
738,107
455,988
56,204
41,287
3,250,356
21,687
6,070,552
2,156,448
1,407,632
915,999
86,652
42,976
6,398,283
24,006
0.41%
1.70%
2.75%
3.06%
3.79%
2.01%
3.08%
1.62%
(A)
Represents the average for the period the debt was outstanding.
Repurchase Agreements
Agency RMBS
Non-Agency RMBS
Residential Mortgage Loans
Real Estate Owned
Consumer Loans
Average Daily Amount Outstanding(A)
Three Months Ended
March 31, 2015
June 30, 2015
September 30,
2015
December 31,
2015
$
$
1,262,870
521,272
359,567
2,935
—
$
1,380,052
512,100
464,283
84,582
42,976
$
1,618,026
738,564
424,992
72,869
40,472
1,760,060
1,173,321
597,299
70,900
40,444
(A)
Represents the average for the period the debt was outstanding.
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For additional information on our debt activities, see Note 11 to our Consolidated Financial Statements.
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 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 (the “Servicer Advance Notes”)
Following their revolving period, principal will be paid on the Servicer Advance Notes to the extent of available funds and in
accordance with the priorities of payments set forth in the related transaction documents. The revolving period for $268.8 million
of the Servicer Advance Notes ends on the earlier of April 2016 and the occurrence of an early amortization event or a target
amortization event. The revolving period for $773.0 million of the Servicer Advance Notes ends on the earlier of August 2016
and the occurrence of an early amortization event or a target amortization event. The revolving period for $171.5 million of the
Servicer Advance 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 $1.5 billion of the Servicer Advance Notes ends on the earlier of November 2016
and the occurrence of an early amortization event or a target amortization event. The revolving period for $518.2 million of the
Servicer Advance Notes ends on the earlier of March 2017 and the occurrence of an early amortization event or a target amortization
event. The revolving period for $914.3 million of the Servicer Advance Notes ends on the earlier of April 2017 and the occurrence
of an early amortization event or a target amortization event. The revolving period for $1.4 billion of the Servicer Advance Notes
ends on the earlier of October 2017 and the occurrence of an early amortization event or a target amortization event. The revolving
period for $342.4 million of the Servicer Advance Notes ends on the earlier of November 2017 and the occurrence of an early
amortization event or a target amortization event. The revolving period for $728.9 million of the Servicer Advance Notes ends on
the earlier of December 2017 and the occurrence of an early amortization event or a target amortization event. The revolving
period for $368.4 million of the Servicer Advance Notes ends on the earlier of August 2018 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 Servicer Advance Notes, a rapid amortization of the Servicer Advance Notes
or an acceleration of principal repayment, or all of the foregoing.
The early amortization and target amortization events under the Servicer Advance 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 Servicer Advance Notes, failure to satisfy minimum tangible net worth requirements for the applicable servicer, the Buyer
or New Residential; (vi) for certain Servicer Advance Notes, failure to satisfy minimum liquidity requirements for the applicable
servicer and the Buyer, (vii) for certain Servicer Advance Notes, failure to satisfy leverage tests for the applicable servicer, the
Buyer or New Residential; (viii) for certain Servicer Advance Notes, a change of control of the Buyer or New Residential; (ix) for
certain Servicer Advance Notes, a change of control of the applicable servicer, (x) for certain Servicer Advance Notes, the failure
of the applicable servicer to maintain minimum servicer ratings, (xi) for certain Servicer Advance Notes, certain judgments against
the Buyer or certain other subsidiaries of New Residential in excess of certain thresholds; (xii) for certain Servicer Advance Notes,
payment default under, or an acceleration of, other debt of the Buyer or certain other subsidiaries of New Residential; (xiii) failure
to deliver certain reports; and (xiv) material breaches of any of the transaction documents.
The definitive documents related to the Servicer Advance 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 Servicer Advance Notes also contain customary events of default, including, among others,
(i) non-payment of principal, interest or other amounts when due, (ii) insolvency of the applicable servicer, the Buyer, or certain
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other related subsidiaries of New Residential; (iii) the applicable issuer becoming subject to registration as an “investment
company” within the meaning of the 1940 Act; (iv) the applicable servicer or New Residential subsidiary fails to comply with the
deposit and remittance requirements set forth in any pooling and servicing agreement or such definitive documents; and (v) the
related servicer’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 Servicer Advance 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 Servicer Advance 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 certain of the Servicer Advance 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 Servicer Advance 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 Servicer Advance Notes. This could result
in a partial or total loss on our investment.
HLSS Servicer Advance Receivables Trust
On October 1, 2015, an event of default (the “Specified Default”) occurred under the indenture related to certain notes issued by
HSART, a wholly-owned subsidiary of ours. The Specified Default occurred as a result of (and solely as a result of) Ocwen’s
master servicer rating downgrade to “Below Average”, announced by S&P on September 29, 2015. After giving effect to such
downgrade, Ocwen ceased to be an “Eligible Subservicer” under the indenture causing the “Collateral Test” under the indenture
to not be satisfied. The continuing failure of the Collateral Test as of close of business on October 1, 2015 resulted in the occurrence
of the Specified Default. The Specified Default caused $2.5 billion of term notes issued by HSART to become immediately due
and payable, without premium or penalty, as of the close of business on October 1, 2015, in accordance with the terms of HSART’s
indenture.
We had previously secured approximately $4.0 billion of surplus servicer advance financing commitments from HSART’s lenders.
HSART repaid all $2.5 billion of the term notes on October 2, 2015 in full with the proceeds of draws by HSART on variable
funding notes previously issued by HSART. The holders of the variable funding notes issued by HSART previously agreed that
the Specified Default would not be deemed an “event of default” under HSART’s indenture for purposes of their variable funding
notes. After giving effect to the repayment of the term notes issued by HSART, the only outstanding notes issued by HSART are
variable funding notes. No other material obligation of HSART arises, increases or accelerates as a result of the transactions
described herein.
During the first three quarters of 2015, through their investment manager, certain bondholders (the “HSART Bondholders”) alleged
that events of default had occurred under HSART and that, as a result, the HSART Bondholders were due additional interest under
the related agreements. In February 2015, in response to such allegations, instead of releasing such amounts to our subsidiary that
sponsors the HSART transaction entitled thereto, the trustee of HSART began to withhold, monthly, such interest (the “Withheld
Funds”) so that such amounts were reserved in the event that it was determined that any of the alleged events of default had
occurred. On August 28, 2015, the trustee commenced a legal proceeding requesting instruction from the court regarding the
alleged defaults and the disposition of the Withheld Funds.
On October 2, 2015, as described above, the notes held by the HSART Bondholders were repaid in full. On October 14, 2015, the
court ruled that no event of default had occurred under HSART, authorized the trustee to release the Withheld Funds and dismissed
the legal proceeding. As a result of this ruling, $92.7 million was released from restricted cash accounts related to HSART and
became available for unrestricted use by us.
On October 13, 2015, we entered into a settlement agreement in connection with which a subsidiary of ours was liable for a $9.1
million payment to certain HSART Bondholders, which was recorded within General and Administrative Expenses; this agreement
did not impact other former or existing bondholders of HSART.
Federal Home Loan Bank of Cincinnati Membership
In November 2015, our wholly-owned captive insurance subsidiary, NRZ Insurance Holdings LLC ("NRZ Insurance"), was granted
membership to the Federal Home Loan Bank of Cincinnati (“FHLBC”). The 12 regional Federal Home Loan Banks (“FHLBs”)
provide long-term and short-term secured loans, called “advances,” to their members, provided the member meets certain
creditworthiness standards, pledges sufficient eligible collateral and complies with its agreements with FHLB. Each advance
requires approval by the FHLB and is secured by collateral in accordance with the FHLB’s credit and collateral guidelines, as
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may be revised from time to time by the FHLB. FHLB members may use a variety of real estate related assets, including residential
mortgage loans, Agency RMBS and certain Non-Agency RMBS, as collateral for advances. In January 2016, however, FHFA
announced a final rule that will terminate the FHLB memberships of captive insurance companies. Absent the final rule being
overturned, or the passage of an amendment to the Federal Home Loan Bank Act permitting captive insurance companies to be
members of FHLBs, we do not expect NRZ Insurance to borrow from FHLBC, and NRZ Insurance’s FHLBC membership will
terminate in February 2017.
Maturities
Our debt obligations as of December 31, 2015, as summarized in Note 11 to our Consolidated Financial Statements, had contractual
maturities as follows (in thousands):
Year
2016
2017
2018
Nonrecourse(A)
2,754,360
$
3,996,400
368,380
Recourse(B)
Total
$
3,723,952
$
6,478,312
462,906
—
4,459,306
368,380
$
7,119,140
$
4,186,858
$
11,305,998
(A)
(B)
Includes repurchase agreements and notes payable of $61.0 million and $7,058.1 million, respectively.
Includes repurchase agreements and notes payable of $3,982.9 million and $204.0 million, respectively.
The weighted average differences between the fair value of the assets and the face amount of available financing for the Agency
RMBS repurchase agreements (including amounts related to Trade Receivable) and Non-Agency RMBS repurchase agreements
were 2.7% and 13.3%, respectively, and for Residential Mortgage Loans and Real Estate Owned were 19.5% and 11.5%,
respectively, during the year ended December 31, 2015.
Borrowing Capacity
The following table represents our borrowing capacity as of December 31, 2015 (in thousands):
Debt Obligations/ Collateral
Repurchase Agreements
Collateral Type
Borrowing
Capacity
Balance
Outstanding
Available
Financing
Residential Mortgage Loans
Real Estate Loans
Notes Payable
Servicer Advances(A)
Servicer Advances
$
$
2,495,000
$
986,339
$
1,508,661
8,524,183
11,019,183
$
7,058,094
8,044,433
$
1,466,089
2,974,750
(A)
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 0.5%
fee on the unused borrowing capacity. Excludes borrowing capacity and outstanding debt for retained non-agency bonds
with a current face amount of $175.8 million.
Covenants
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, as of a quarter
end, and a 4:1 indebtedness to tangible net worth provision. We were in compliance with all of our debt covenants as of December 31,
2015.
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
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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 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, 2015.
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 relating to 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.
In April 2015, we issued the New Residential Acquisition Common Stock in connection with the HLSS Acquisition (Note 1 to
our Consolidated Financial Statements).
In addition, in April 2015, we issued 29,213,020 shares of our common stock in a public offering at a price to the public of $15.25
per share for net proceeds of approximately $436.1 million. One of our executive officers participated in this offering and purchased
250,000 shares at the public offering price. For the purpose of compensating the Manager for its successful efforts in raising capital
for us, in connection with this offering and the New Residential Acquisition Common Stock issued in the HLSS Acquisition, we
granted options to the Manager relating to 5,750,000 shares of our common stock at a price of $15.25, which had a fair value of
approximately $8.9 million as of the grant date. The assumptions used in valuing the options were: a 2.02% risk-free rate, a 6.71%
dividend yield, 24.04% volatility and a 10-year term.
In June 2015, we issued 27.9 million shares of our common stock in a public offering at a price to the public of $15.88 per share
for net proceeds of approximately $442.6 million. One of our executive officers participated in this offering and purchased 9,100
shares at the public offering price. 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 relating to 2.8 million shares of our common stock at the
public offering price, which had a fair value of approximately $3.7 million as of the grant date. The assumptions used in valuing
the options were: a 2.61% risk-free rate, a 7.81% dividend yield, 23.73% volatility and a 10-year term. In addition, the Manager
and its employees exercised an aggregate of 6.7 million options and were issued an aggregate of 3.6 million shares of our common
stock in a cashless exercise, which were sold to third parties in a simultaneous secondary offering.
On January 19, 2016, we announced that our board of directors had authorized the repurchase of up to $200 million of our common
stock over the next 12 months. Repurchases may be made at any time and from time to time through open market purchases or
privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by
means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual
requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of
our shares, trading volume, capital availability, our performance and general economic and market conditions. The share repurchase
program may be suspended or discontinued at any time. No share repurchases have been made as of the filing of this report.
Repurchases may impact our financial results, including fees paid to our Manager.
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As of December 31, 2015, our outstanding options corresponding to Newcastle options issued prior to 2011 had a weighted average
exercise price of $31.36 and our outstanding options corresponding to Newcastle options issued in 2011, 2012 and 2013, as well
as options issued by us in 2013 and thereafter, had a weighted average exercise price of $14.32. Our outstanding options as of
December 31, 2015 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
Accumulated Other Comprehensive Income (Loss)
Issued Prior to
2011
December 31, 2015
Issued in
2011 - 2015
Total
345,720
10,582,860
10,928,580
88,280
—
1,359,247
1,447,527
4,000
4,000
434,000
11,946,107
12,380,107
During the year ended December 31, 2015, our accumulated other comprehensive income (loss) changed due to the following
factors (in thousands):
Accumulated other comprehensive income, December 31, 2014
Net unrealized gain (loss) on securities
Reclassification of net realized (gain) loss on securities into earnings
Accumulated other comprehensive income, December 31, 2015
Total Accumulated
Other Comprehensive
Income
$
$
28,319
(17,075)
(7,308)
3,936
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, 2015, we
recorded unrealized losses on our real estate securities primarily caused by a net widening of credit spreads. We recorded OTTI
charges of $5.8 million with respect to real estate securities and realized gains of $13.1 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.
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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
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
Paid
July 2013
October 2013
January 2014
April 2014
July 2014
October 2014
January 2015
April 2015
July 2015
October 2015
January 2016
Amount Per Share
0.14
$
0.35
$
0.50 (A)
$
0.35
$
0.50 (A)
$
0.35
$
0.38
$
0.38
$
0.45
$
0.46
$
0.46
$
(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
2015 vs. 2014
Net cash flows provided by operating activities increased approximately $488.9 million for the year ended December 31, 2015
as compared to the year ended December 31, 2014. Operating cash flows of $320.8 million for the year ended December 31, 2015
primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of $1.3
billion, collections on receivables primarily acquired through the HLSS Acquisition of $215.2 million, net interest income received
of $190.4 million, decreased restricted cash of $14.3 million, distributions of earnings from equity method investees of $37.9
million, and distributions from equity method investees in excess of our basis of $44.0 million. Operating cash outflows primarily
consisted of purchases of residential mortgage loans, held-for-sale of $1.3 billion, incentive compensation and management fees
paid to the Manager of $82.8 million, income taxes paid of $0.5 million and other outflows of approximately $88.5 million that
primarily consisted of general and administrative costs.
2014 vs. 2013
Net cash flows provided by operating activities decreased approximately $325.0 million for the year ended December 31, 2014
as compared to the year ended December 31, 2013. Cash flows used in operating activities of $168.1 million for the year ended
December 31, 2014 primarily consisted of purchases of residential mortgage loans, held-for-sale of $1,577.9 million, 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. These amounts were partially offset
by net interest income received of $108.5 million, proceeds from sales and principal repayments of purchased residential mortgage
loans, held-for-sale of $1,247.8 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.
Investing Activities
Cash flows used in investing activities were $312.7 million, $1.7 billion and $1.0 billion for the years ended December 31, 2015,
2014 and 2013, respectively. No cash flows from investing activities were 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 servicer advances and
Excess MSRs, including those acquired through the HLSS Acquisition, and real estate securities and loans, net of principal
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repayments from servicer advances, Excess MSRs, Agency RMBS, Non-Agency RMBS and loans 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 $28.9 million, $1.8 billion and $1.1 billion during the years ended
December 31, 2015, 2014 and 2013, respectively. No cash flows from financing activities were 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, equity offerings, capital contributions by Newcastle (prior to spin-off), capital contributions
net of distributions from noncontrolling interests in the equity of a consolidated subsidiary, and payment of 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 approximately 73% of the original purchase price with asset-backed notes. In
September 2013, the Consumer Loan Companies issued and sold additional asset-backed notes. These notes were subordinate to
the 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. 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 have 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 losses related to these non-recourse, off-balance sheet financings is limited
to $77.3 million. As of December 31, 2015, there was $1,477.0 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, 2015. 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, 2015, 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
Described under Note 11 to our Consolidated Financial Statements.
Other Contractual Obligations
Management Agreement
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.
Interest Rate Swaps
Described under Note 10 to our Consolidated Financial Statements.
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Contract
Debt Obligations
Repurchase Agreements(A)
Notes Payable(A)
Other Contractual Obligations
Management Agreement(B)
Interest rate swaps(C)
Total
Fixed and Determinable Payments Due by Period
2016
2017-2018
2019-2020
Thereafter
Total
$ 3,794,640
$
279,334
$
2,906,124
4,663,088
— $
—
— $ 4,073,974
—
7,569,212
56,547
995
81,060
3,494
81,060
2,773
1,013,251
1,231,918
4,123
11,385
$ 6,758,306
$ 5,026,976
$
83,833
$ 1,017,374
$ 12,886,489
(A)
(B)
(C)
Interest is included based on the expected LIBOR curve that existed at December 31, 2015 and the scheduled maturities
of our debt obligations.
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, 2015.
The amounts reflected assume that these agreements are terminated at their December 31, 2015 fair value and paid at the
contractual maturity of the related interest rate swap agreements, to the extent that they represent liabilities.
See Notes 14 and 18 to our Consolidated Financial Statements for information regarding commitments and contracts entered into
subsequent to December 31, 2015. As described in Note 14, we have committed to purchase certain future servicer advances from
our servicer counterparties. The actual amount of future advances is subject to significant uncertainty. However, we currently
expect that net recoveries of servicer advances will exceed net fundings for the foreseeable future. This expectation is based on
judgments, estimates and assumptions, all of which are subject to significant uncertainty as further described in “—Application
of Critical Accounting Policies—Servicer Advances.”
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.”
CORE EARNINGS
We have four primary variables that impact our operating performance: (i) the current yield earned on our investments, (ii) the
interest expense under the debt incurred to finance our investments, (iii) our operating expenses and taxes 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 evaluate our 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; (iii) non-
capitalized transaction-related expenses; and (iv) deferred taxes, which are not representative of current operations.
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
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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 transaction-related expenses, management does not view these costs as part of our core operations.
Non-capitalized transaction-related expenses are generally legal and valuation service costs, as well as other professional service
fees, incurred when we acquire certain investments, as well as costs associated with the acquisition and integration of acquired
businesses. Non-capitalized transaction-related expenses for the year ended December 31, 2015 include a $9.1 million settlement
which we agreed to pay in connection with HSART (Note 11 to our Consolidated Financial Statements). These costs are recorded
as “General and administrative expenses” in our Consolidated Statements of Income. “Other (income) loss” set forth below excludes
$14.5 million accrued during the year ended December 31, 2015 related to a reimbursement from Ocwen for certain increased
costs resulting from further S&P servicer rating downgrades of Ocwen (Note 1 to our Consolidated Financial Statements).
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 believe that it is appropriate to record a yield thereon. This modification had no impact on core earnings in 2014 or any
prior period. In the second quarter of 2015, we modified our definition of core earnings to exclude all deferred taxes, rather than
just deferred taxes related to unrealized gains or losses, because we believe deferred taxes are not representative of current
operations. This modification was applied prospectively due to only immaterial impacts in prior periods. In the fourth quarter of
2015, we modified our definition of core earnings to limit accreted interest income on RMBS where we receive par upon the
exercise of associated call rights based on the estimated value of the underlying collateral. We made the modification in order to
be able to accrete to the lower of par or the value of the underlying collateral, in instances where the value of the underlying
collateral is lower than par. We believe this amount represents the amount of accretion we would have expected to earn on such
bonds had the call rights not been exercised. This modification had no impact on core earnings in prior periods.
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), (ii) non-capitalized transaction-related expenses and (iii) deferred taxes (other than those
related to unrealized gains and losses). Each are excluded from core earnings and included in our incentive compensation measure
(either immediately or through amortization). In addition, our incentive compensation measure does not include accretion on held-
for-sale loans and the timing of recognition of income from consumer loans is different. Unlike core earnings, our incentive
compensation measure is intended to reflect all realized results of operations.
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Core earnings does not represent and should not be considered as a substitute for, or superior to, net income. or as a substitute for,
or superior to, cash flows from operating activities, each as determined in accordance with U.S. GAAP, and our calculation of this
measure may not be comparable to similarly entitled measures reported by other companies. For a further description of the
difference between cash flow provided by operations and net income, see “—Liquidity and Capital Resources” above. 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
Impairment
Other Income adjustments:
Other Income
Year Ended December 31,
2015
2014
2013
$
268,636
$
352,877
$
265,949
24,384
11,282
5,454
Change in fair value of investments in excess mortgage servicing rights
(38,643)
(41,615)
(53,332)
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) loss on settlement of investments, net
Unrealized (gain) loss on derivative instruments
(Gain) loss on transfer of loans to REO
Unrealized gain on other ABS
Gain on Excess MSR recapture agreements
Fee earned on deal termination
Other (income) loss
Other Income attributable to non-controlling interests
Total Other Income Adjustments
Incentive compensation to affiliate
Non-capitalized transaction-related expenses
Deferred taxes
Interest income on residential mortgage loans, held-for sale
Limit on RMBS discount accretion related to called deals
Core earnings of equity method investees:
Excess mortgage servicing rights
Consumer loans
Core Earnings
(31,160)
57,491
—
(43,954)
17,207
5,957
(2,065)
(879)
(2,999)
—
6,219
(22,102)
(54,928)
16,017
31,002
(6,633)
22,484
(9,129)
25,853
71,070
(57,280)
(84,217)
(53,840)
(92,020)
(35,487)
13,037
(17,489)
—
(1,157)
(5,000)
(20)
44,961
(50,343)
—
(82,856)
—
(52,657)
(1,820)
—
—
—
—
—
—
(330,127)
(241,008)
54,334
10,281
16,421
—
—
33,799
70,394
16,847
5,698
—
—
—
23,361
53,696
$
388,756
$
219,261
$
129,997
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 (other than TBAs) are for non-trading purposes
only. For a further discussion 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.
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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
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.
We are exposed to fluctuations in forward LIBOR rates across our portfolio. For our investments in Servicer Advances, forward
LIBOR rates have a direct impact on current period income recognition. Performance-based incentive fees paid to both Nationstar
and Ocwen as part of our MSR purchase agreements are impacted by changes in LIBOR.
Ocwen’s performance-based incentive fee is reduced by a LIBOR-based factor if the advance ratio exceeds a predetermined level
for that month. Shifts upward in projected LIBOR will increase any projected reduction in Ocwen’s incentive fee, thus increasing
our share of the servicing fee. Shifts downward in projected LIBOR will decrease the projected reduction in Ocwen’s incentive
fee, thus decreasing our share of the servicing fee.
Nationstar’s performance-based incentive fee is based on our target equity return. Changes in LIBOR impact Nationstar’s expected
ability to reach our target return. Shifts downward in projected LIBOR will decrease our projected cost of borrowings thus decreasing
the share of the servicing fee we need to receive in order to obtain our target return. Shifts upward in projected LIBOR will increase
our projected cost of borrowings thus increasing the share of the servicing fee we need to receive in order to obtain our target
return.
We have elected to record our investments in servicer advances, including the right to the basic fee component of the related MSRs,
at fair value. Therefore, any changes to our projected payments to/from Nationstar and Ocwen can impact the estimated future
cash flows used to value the investments and the unrealized gains/losses on the investment. Changes to estimated future cash flows
will also impact interest income recognized in the current period.
We may project net cash flow increases in connection with decreases in projected LIBOR as a result of estimated savings on our
future cost of borrowings outweighing estimated reductions of future retained servicing fees. However, only the asset impact
would be reflected in our current period income statement.
As of December 31, 2015, an immediate 50 basis point increase in short term interest rates, based on a shift in the yield curve,
would increase our cash flows by approximately $5.0 million in 2016, and a 50 basis point decrease in short term interest rates
would increase our cash flows by approximately $1.3 million in 2016, 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,
2015 and assuming a LIBOR floor of 0.0%). As of December 31, 2014, an immediate 100 basis point increase in interest rates
would have decreased our cash flows over the next year by approximately $14.8 million, and an immediate 100 basis point decrease
in interest rates would have increased our cash flows over the next year by approximately $20.3 million.
As of December 31, 2015, an immediate 50 basis point increase in short term interest rates, based on a shift in the yield curve,
would increase our net book value by approximately $135.9 million, and a 50 basis point decrease in short term interest rates
would decrease our net book value by approximately $144.3 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. As of December 31, 2014, an immediate 100 basis point increase in interest rates
would have increased our net book value by approximately $138.3 million, and an immediate 100 basis point decrease in interest
rates would have decreased our net book value by approximately $116.8 million.
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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 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 investments are generally 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, our investments 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.
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, the basic fee component of MSRs (which we own as part of
our investments in servicer advances) 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 our right to the basic fee component of MSRs, 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.
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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 financial instruments combined with reduced
demand will generally cause the market to require a higher yield on such financial instruments, 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, 2015, a 25 basis point increase in credit spreads would decrease our net book value by approximately $81.5
million, and a 25 basis point decrease in credit spreads would increase our net book value by approximately $83.3 million, based
on a static portfolio of investments, but would not directly affect our earnings or cash flow. As of December 31, 2014, a similar
increase in credit spreads would have decreased our net book value by approximately $42.5 million, and a similar decrease in
credit spreads would have increased our net book value by approximately $46.0 million.
In an environment where spreads are tightening, if spreads tighten on the assets we purchase to a greater degree than they tighten
on 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,
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.
107
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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, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
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.
108
Table of Contents
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 as of
December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, stockholders’ equity
and cash flows for the years ended December 31, 2015, 2014 and 2013. 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 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 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for the years
ended December 31, 2015, 2014 and 2013, 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, 2015, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework), and our report dated February 25, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
February 25, 2016
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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,
2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (2013 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, 2015 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, 2015 and 2014, and the
related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for the three years ended
December 31, 2015, 2014 and 2013 of New Residential Investment Corp. and Subsidiaries and our report dated February 25, 2016
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
New York, New York
February 25, 2016
110
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
December 31,
2015
2014
Assets
Investments in:
Excess mortgage servicing rights, at fair value
$
1,581,517
$
Excess mortgage servicing rights, equity method investees, at fair value
Servicer advances, at fair value(A)
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(A)
Restricted cash
Derivative assets
Trade receivable
Deferred tax asset, net
Other assets
Liabilities and Equity
Liabilities
Repurchase agreements
Notes payable(A)
Trades payable
Due to affiliates
Dividends payable
Deferred tax liability
Accrued expenses and other liabilities
Commitments and Contingencies
Equity
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 230,471,202 and 141,434,905
issued and outstanding at December 31, 2015 and December 31, 2014, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total New Residential stockholders’ equity
Noncontrolling interests in equity of consolidated subsidiaries
Total Equity
217,221
7,426,794
2,501,881
330,178
776,681
50,574
—
249,936
94,702
2,689
1,538,481
185,311
236,757
417,733
330,876
3,270,839
2,463,163
47,838
1,126,439
61,933
—
212,985
29,418
32,597
—
—
95,423
$
15,192,722
$
8,089,244
$
4,043,054
$
3,149,090
7,249,568
2,908,763
725,672
23,785
106,017
—
58,046
2,678
57,424
53,745
15,114
52,505
12,206,142
6,239,319
2,304
1,414
2,640,893
1,328,587
148,800
3,936
2,795,933
190,647
2,986,580
237,769
28,319
1,596,089
253,836
1,849,925
$
15,192,722
$
8,089,244
(A)
New Residential’s Consolidated Balance Sheets include the assets and liabilities of a consolidated VIE, the Buyer (Note
6), which primarily holds investments in servicer advances financed with notes payable. The Buyer’s balance sheet is
included in Note 6. The creditors of the Buyer do not have recourse to the general credit of New Residential and the
assets of the Buyer are not directly available to satisfy New Residential’s obligations.
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)
Year Ended December 31,
2014
2013
2015
Interest income
Interest expense
Net Interest Income
Impairment
Other-than-temporary impairment (OTTI) on securities
Valuation provision on loans and real estate owned
$
645,072
$
346,857
$
274,013
371,059
140,708
206,149
5,788
18,596
24,384
1,391
9,891
11,282
87,567
15,024
72,543
4,993
461
5,454
Net interest income after impairment
346,675
194,867
67,089
Other Income
Change in fair value of investments in excess mortgage servicing rights
38,643
41,615
53,332
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 (loss) on settlement of investments, net
Other income (loss), net
Operating Expenses
General and administrative expenses
Management fee allocated by Newcastle
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
Income Before Income Taxes
Income tax expense (benefit)
Net Income
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Net Income Attributable to Common Stockholders
Net Income Per Share of Common Stock
Basic
Diluted
Weighted Average Number of Shares of Common Stock Outstanding
31,160
(57,491)
—
43,954
(17,207)
2,970
42,029
61,862
—
33,475
16,017
6,469
57,280
84,217
53,840
92,020
35,487
10,629
375,088
27,001
—
19,651
54,334
3,913
117,823
104,899
270,881
(11,001)
281,882
13,246
268,636
1.34
1.32
$
$
$
$
$
465,056
22,957
442,099
89,222
352,877
2.59
2.53
$
$
$
$
$
$
$
$
$
$
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
2.10
2.07
Basic
Diluted
200,739,809
136,472,865
126,539,024
202,907,605
139,565,709
128,684,128
Dividends Declared per Share of Common Stock
$
1.75
$
1.58
$
0.99
See notes to consolidated financial statements.
112
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
Comprehensive income (loss), net of tax
Net income
Other comprehensive income (loss)
Net unrealized gain (loss) on securities
Reclassification of net realized (gain) loss on securities into earnings
Total comprehensive income
Comprehensive income (loss) attributable to noncontrolling interests
Comprehensive income attributable to common stockholders
See notes to consolidated financial statements.
2015
December 31,
2014
2013
$
281,882
$
442,099
$
265,623
(17,075)
(7,308)
(24,383)
257,499
13,246
244,253
$
$
$
89,415
(64,310)
25,105
467,204
89,222
377,982
$
$
$
35,352
(47,664)
(12,312)
253,311
(326)
253,637
$
$
$
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 and 2013
(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, 2012
— $
— $
362,830
$
— $
15,526
$
378,356
$
— $
378,356
Dividends declared
Capital contributions
Contributions in-kind
Capital distributions
—
—
—
—
—
—
—
—
Issuance of common stock
126,512,823
1,265
(1,265)
Option exercise
Director share grant
Comprehensive income (loss)
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
—
(125,317)
247,551
1,141,017
—
—
—
—
—
(326)
—
—
1,093,684
(1,228,054)
—
—
78
265,623
35,352
(47,664)
(326)
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
14,375,000
144
169,761
Option exercise
Dilution impact of distributions from
consolidated subsidiaries
Director share grant
Comprehensive income (loss)
Net income (loss)
Net unrealized gain (loss) on securities
Reclassification of net realized (gain)
loss on securities into earnings
Total comprehensive income (loss)
426,102
—
34,816
—
—
—
4
—
—
—
—
—
905
(916)
453
—
—
—
(218,094)
—
—
—
—
—
—
352,877
—
—
—
—
—
—
—
—
—
—
89,415
(64,310)
(218,094)
—
(218,094)
—
—
169,905
909
(916)
453
352,877
89,415
(64,310)
377,982
142,082
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
Dividends declared
Capital contributions
Capital distributions
Issuance of common stock
Option exercises
Director share grants
Modified retrospective adjustment for the
adoption of ASU No. 2014-11
Comprehensive income (loss)
Net income (loss)
Net unrealized gain (loss) on securities
Reclassification of net realized (gain)
loss on securities into earnings
Total comprehensive income (loss)
—
—
—
85,435,389
3,570,984
29,924
—
—
—
—
—
—
—
—
—
—
854
1,311,892
36
—
—
—
—
—
(36)
450
—
—
—
—
(355,295)
—
—
—
—
—
(2,310)
268,636
—
—
—
—
—
—
—
—
—
—
(17,075)
(7,308)
(355,295)
—
—
1,312,746
—
450
(2,310)
268,636
(17,075)
(7,308)
244,253
—
5,161
(355,295)
5,161
(81,596)
(81,596)
—
—
—
—
13,246
—
—
1,312,746
—
450
(2,310)
281,882
(17,075)
(7,308)
13,246
257,499
Equity - December 31, 2015
230,471,202
$
2,304
$ 2,640,893
$ 148,800
$
3,936
$
2,795,933
$
190,647
$ 2,986,580
See notes to consolidated financial statements.
114
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
2014
2015
2013
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
$
281,882
$
442,099
265,623
Change in fair value of investments in excess mortgage servicing rights
(38,643)
(41,615)
(53,332)
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
Unrealized (gain) / loss on derivative instruments
Accretion and other amortization
(Gain) / loss on settlement of investments (net)
(Gain) / loss on transfer of loans to REO
(Gain) / loss on Excess MSR recapture agreements
(Gain) / loss on consumer loans investment
Other-than-temporary impairment
Valuation provision on loans and real estate owned
Unrealized (gain) / loss on other ABS
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 Non-Agency RMBS
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
Purchases of residential mortgage loans, held-for-sale
Proceeds from sales of purchased residential mortgage loans, held-for-
sale
Principal repayments from purchased residential mortgage loans, held-
for-sale
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
115
(31,160)
57,491
—
5,957
(525,298)
17,207
(2,065)
(2,999)
—
5,788
18,596
(879)
450
(6,633)
14,270
217,468
(33,639)
(42,494)
—
127,131
172,711
43,824
—
(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
6,660
7,969
37,874
53,427
—
(1,278,322)
53,840
(1,577,933)
1,226,442
1,245,352
55,804
—
—
320,763
2,413
—
—
(168,135)
(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
—
3,988
2,212
44,454
82,856
—
—
—
41,435
(36,149)
156,928
Table of Contents
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Year Ended December 31,
2014
2015
2013
Cash Flows From Investing Activities
Acquisition of investments in excess mortgage servicing rights
(252,127)
(94,113)
(63,434)
Acquisition of investments in excess mortgage servicing rights, equity
method investees
Acquisition of HLSS, net of cash acquired
Purchase of servicer advance investments
Purchase of Agency RMBS
Purchase of Non-Agency RMBS
Purchase of residential mortgage loans, held-for-investment
Purchase of derivative instruments
Purchase of real estate owned
Payments 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
Proceeds from sale of residential mortgage loans
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 real estate owned
Net cash provided by (used in) investing activities
—
(960,719)
(14,945,858)
(4,610,680)
(1,252,516)
(290,652)
(5,830)
(26,208)
(85,493)
154,777
—
—
(6,828,135)
(1,437,952)
(1,690,770)
(884,557)
(70,218)
(10,690)
(43,133)
42,603
8,683
25,743
16,008,741
6,389,154
129,112
135,948
46,496
643,788
—
4,468,398
425,761
37,938
57,699
(312,742)
271,673
103,934
40,358
—
306,473
796,392
1,288,980
87,645
16,502
(1,690,111)
(233,764)
—
(670,820)
(605,114)
(407,689)
—
(70,227)
—
—
24,735
4,018
103,394
302,920
62,507
3,809
—
30,359
—
521,865
—
—
(997,441)
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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
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
Year Ended December 31,
2015
2014
2013
(8,798,578)
(387,143)
(7,286,860)
(45,654)
(303,023)
9,607,475
391,705
6,053,950
882,166
(3,512)
—
—
(81,596)
28,930
(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
Net Increase (Decrease) in Cash and Cash Equivalents
36,951
(59,009)
271,994
Cash and Cash Equivalents, Beginning of Period
212,985
271,994
—
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
$
$
249,936
$
212,985
$
271,994
244,188
$
127,998
$
535
14,115
10,212
—
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
Acquisition of real estate securities
Acquisition of investments in excess mortgage servicing rights, equity method investees
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
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
Reclassification resulting from the application of ASU No. 2014-11
Purchase of investments, primarily Agency RMBS, settled after quarter end
Sale of Agency RMBS settled after quarter end
Transfer from residential mortgage loans to real estate owned and other assets
Transfer from residential mortgage loans, held-for-investment to residential mortgage loans, held-for-
sale
Non-cash distribution from Consumer Loan Companies
Portion of HLSS Acquisition (Note 1) paid in common stock
Capital contributions by HLSS Ltd.
Real estate securities retained from loan securitizations
See notes to consolidated financial statements.
$
— $
— $
—
—
106,017
85,955
725,672
1,538,481
90,414
—
585
434,092
5,161
36,967
—
—
53,745
—
—
—
21,842
846,904
609
—
—
54,395
117
41,435
242,750
125,099
35,138
245,121
1,179,068
3,902
648,408
1,093,684
1,228,054
30,548
2,093,704
2,124,252
63,297
—
—
—
—
—
—
—
—
—
Table of Contents
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(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. 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 New York Stock Exchange (“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 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 OneMain
Holdings, Inc. (together with its subsidiaries, including SpringCastle Acquisition LLC, “OneMain”), managing member of the
Consumer Loan Companies (Note 9).
As of December 31, 2015, New Residential conducted its business through the following segments: (i) investments in excess
mortgage servicing rights (“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, 2015. In addition, Fortress, through its affiliates, held options relating to approximately 10.9 million shares
of New Residential’s common stock as of December 31, 2015.
Acquisition of HLSS Assets and Liabilities
On February 22, 2015, New Residential entered into an Agreement and Plan of Merger (the “HLSS Initial 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 a wholly owned subsidiary of New Residential (“HLSS Merger Sub”). HLSS was listed
on the NASDAQ Stock Market LLC under the symbol “HLSS” until April 29, 2015, when its shares were delisted. On April 6,
2015, with the approval of their respective Boards of Directors, New Residential and HLSS, together with certain of their respective
subsidiaries, entered into a termination agreement (providing for the termination of the HLSS Initial Merger Agreement) and
simultaneously entered into a Share and Asset Purchase Agreement (the “HLSS Acquisition Agreement”).
The parties to the HLSS Acquisition Agreement included New Residential, HLSS, HLSS Advances Acquisition Corp., a Delaware
corporation and wholly owned subsidiary of New Residential (“HLSS Advances Sub”), and HLSS MSR-EBO Acquisition LLC,
a Delaware limited liability company and wholly owned subsidiary of New Residential (together with HLSS Advances Sub, the
“HLSS Buyers”). Pursuant to the HLSS Acquisition Agreement, the HLSS Buyers acquired from HLSS substantially all of the
assets of HLSS (including all of the issued share capital of HLSS’s first-tier subsidiaries) and assumed (and agreed to indemnify
HLSS for) the liabilities of HLSS (together, the “HLSS Acquisition”), other than post-closing liabilities in an amount up to the
Retained Balance (as defined below), for aggregate consideration (net of certain transaction expenses being reimbursed by HLSS),
consisting of approximately $1.0 billion in cash and 28,286,980 shares of common stock, par value $0.01 per share (“New
Residential Acquisition Common Stock”), of New Residential delivered to HLSS in a private placement. The closing of the HLSS
Acquisition (the “HLSS Acquisition Closing”) occurred simultaneously with the execution of the HLSS Acquisition Agreement.
118
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The HLSS Acquisition Agreement includes certain customary post-closing covenants of New Residential, the HLSS Buyers and
HLSS. In addition, the Board of Directors of HLSS also approved a wind down plan (the “Distribution and Liquidation Plan”),
pursuant to which HLSS sold the shares of New Residential Acquisition Common Stock received in the HLSS Acquisition on
April 8, 2015 and distributed to HLSS shareholders the cash consideration from the HLSS Acquisition and the cash proceeds from
the sale of shares of New Residential Acquisition Common Stock; provided that under the terms of the Distribution and Liquidation
Plan, HLSS retained $50.0 million of cash (the “Retained Balance”) for wind down costs, of which $45.1 million was received
by New Residential at the HLSS New Merger Effective Time (as defined below).
At the HLSS Acquisition Closing, HLSS Advances Sub entered into a services agreement, dated as of April 6, 2015, with HLSS
(the “HLSS Services Agreement”). Pursuant to the HLSS Services Agreement, HLSS Advances Sub agreed to manage the assets
and affairs of HLSS in accordance with terms and conditions set forth therein and, in all cases, in accordance with the Distribution
and Liquidation Plan. The HLSS Services Agreement provided that HLSS Advances Sub was responsible for the operations of
HLSS and performed (or caused to be performed) such services and activities relating to the assets and operations of HLSS as
may have been appropriate, including, among other things, administering the Distribution and Liquidation Plan and handling all
claims, disputes or controversies in which HLSS was a party or may otherwise have been involved, through the consummation of
the HLSS New Merger (as defined below). HLSS Advances Sub was not compensated by HLSS for its services under the HLSS
Services Agreement but was reimbursed by HLSS for expenses incurred on behalf of HLSS.
At the HLSS Acquisition Closing, New Residential and HLSS Merger Sub entered into an Agreement and Plan of Merger, dated
April 6, 2015, with HLSS (the “HLSS New Merger Agreement”), pursuant to which, upon the terms and subject to the conditions
set forth therein (including the approval of HLSS’s shareholders), HLSS (which at the time of the HLSS New Merger (as defined
below) had substantially wound-down its operations) merged with and into HLSS Merger Sub, with HLSS Merger Sub continuing
as the surviving company and a wholly owned subsidiary of New Residential (the “HLSS New Merger”). Following the HLSS
New Merger, references to HLSS refer to HLSS Merger Sub.
Pursuant to the HLSS New Merger Agreement, and upon the terms and conditions set forth therein, at the effective time of the
HLSS New Merger (the “HLSS New Merger Effective Time”), each ordinary share of HLSS, par value $0.01 per share, issued
and outstanding immediately prior to the HLSS New Merger Effective Time (other than those shares of HLSS owned by New
Residential or any direct or indirect wholly-owned subsidiary of New Residential and shares of HLSS as to which dissenters’ rights
have been properly exercised), was automatically converted into the right to receive $0.704059 per share in cash, without interest.
The HLSS New Merger Effective Time occurred on October 23, 2015, at which time New Residential paid $50.0 million to HLSS
shareholders and the HLSS New Merger was completed.
The HLSS New Merger did not require the approval of New Residential’s shareholders. However, consummation of the HLSS
New Merger was subject to, among other things: (i) approval of the HLSS New Merger by the requisite vote of HLSS’s shareholders;
(ii) not more than 10% of HLSS’s issued and outstanding shares properly exercising appraisal rights as of the time immediately
before the closing of the HLSS New Merger; and (iii) certain other customary closing conditions. Moreover, each party’s obligation
to consummate the HLSS New Merger was 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 HLSS New Merger Agreement (in each case subject to customary materiality qualifiers). In addition, the obligations of New
Residential and HLSS Merger Sub to consummate the HLSS New Merger were subject to the absence of any Company Material
Adverse Effect (as defined in the HLSS New Merger Agreement).
119
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The purchase price for the HLSS Acquisition included the fair value of the common stock issued of $434.1 million, cash
consideration paid of $622.0 million, HLSS seller financing of $385.2 million, and contingent cash consideration of $50.0 million.
The total consideration is summarized as follows:
Total Consideration
Share Issuance Consideration
New Residential's 4/6/2015 share price
Dollar Value of Share Issuance(A)
Cash Consideration
HLSS Seller Financing(B)
HLSS New Merger Payment (71,016,771 @ $0.704059)(C)
Total Consideration
Amount
28,286,980
15.3460
434,092
621,982
385,174
50,000
1,491,248
$
$
$
(A)
(B)
(C)
Share Issuance Consideration
The share issuance consideration consists of 28.3 million newly issued shares of New Residential common stock with a
par value $0.01 per share. The fair value of the common stock at the date of the acquisition was $15.3460 per share, which
was New Residential’s volume weighted average share price on April 6, 2015.
HLSS Seller Financing
New Residential agreed to deliver $1.0 billion of cash purchase price, including a promise to pay an amount of $385.2
million immediately after closing from the proceeds of financing that was committed in anticipation of the HLSS
Acquisition and is collateralized by certain of the HLSS assets acquired.
HLSS New Merger Payment
The HLSS New Merger Agreement, and the $50.0 million consideration related thereto, is included as a part of the business
combination in conjunction with the Share and Asset Purchase Agreement. The range of outcomes for this contingent
consideration was from $0.0 million to $50.0 million, dependent on whether the HLSS New Merger was approved by
HLSS shareholders and other factors. As of the HLSS New Merger Effective Time, the net contingent consideration paid
was fixed at $5.1 million.
New Residential has performed a preliminary allocation of the purchase price to HLSS’s assets and liabilities, as set forth below.
The final allocation of purchase price may differ from the amounts included herein. The preliminary allocation of the total
consideration, following reclassifications to conform to New Residential’s presentation, is as follows:
Total Consideration ($ in millions)
Assets
Cash and cash equivalents
Servicer advances, at fair value
Excess mortgage servicing rights, at fair value
Residential mortgage loans, held-for-sale(A)
Deferred tax asset(B)
Investment in HLSS Ltd.
Other assets(C)
Total Assets Acquired
Liabilities
Notes payable
Accrued expenses and other liabilities(D)(E)
Total Liabilities Assumed
Net Assets
120
$
$
1,491.2
51.4
5,096.7
917.1
416.8
195.1
44.9
402.4
$
7,124.4
5,580.3
52.9
5,633.2
1,491.2
$
$
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
(A)
(B)
(C)
(D)
(E)
Represents $424.3 million unpaid principal balance (“UPB”) of Government National Mortgage Association (“Ginnie
Mae”) early buy-out (“EBO”) residential mortgage loans not subject to Accounting Standards Codification (“ASC”) No.
310-30 as the contractual cash flows are guaranteed by the Federal Housing Administration (“FHA”).
Due primarily to the difference between carryover historical tax basis and acquisition date fair value of one of HLSS’s
first tier subsidiaries.
Includes restricted cash and receivables not subject to ASC No. 310-30 which New Residential has deemed fully collectible.
Includes liabilities arising from contingencies regarding ongoing HLSS matters (Note 14).
Contingencies for HLSS class action law suits had not been recognized at the acquisition date as the criteria in ASC No.
450 had not been met (Note 14).
The acquisition of HLSS resulted in no goodwill as the total consideration transferred was equal to the fair value of the net assets
acquired.
Separately Recognized Transactions
Certain transactions were recognized separately from New Residential’s acquisition of assets and assumption of liabilities in the
business combination. These separately recognized transactions include 1) contingent payments to the acquiree’s employees and
2) debt issuance costs.
Contingent Payment to the Acquiree’s Employees
New Residential identified both retention bonus and severance arrangements for the HLSS employees. Retention bonus payments
are triggered by a change in control and continued employment for a specified period post-acquisition. As future service is required,
retention bonus payments totaling approximately $3.2 million have been recognized in General and administrative expenses in
New Residential’s statement of income for the year ended December 31, 2015.
Severance is triggered by a change in control and termination without cause by New Residential within a specified period post-
acquisition. As the second trigger represents an action by New Residential as the acquirer, a total amount of approximately $2.8
million has been recognized in General and administrative expenses in New Residential’s statement of income for the year ended
December 31, 2015.
Debt Issuance Costs
New Residential entered into new financing arrangements in connection with the HLSS Acquisition. Such arrangements resulted
in New Residential incurring various commitment fees. Commitment fees are treated as a cost of financing and accounted for as
debt issuance costs that are not considered a direct cost of the acquisition. Therefore, debt issuance costs totaling approximately
$27.0 million have been recorded on the post-acquisition balance sheet of New Residential.
Unaudited Supplemental Pro Forma Financial Information - The following table presents unaudited pro forma combined Interest
income and Income Before Income Taxes for the years ended December 31, 2015 and 2014 prepared as if the HLSS Acquisition
had been consummated on January 1, 2014.
Pro Forma
Interest income
Income Before Income Taxes
Year Ended December 31,
2015
(unaudited)
2014
(unaudited)
$
731,660
$
322,365
744,363
647,058
The 2015 unaudited supplemental pro forma financial information has been adjusted to exclude, and the 2014 unaudited
supplemental pro forma financial information has been adjusted to include, approximately $26.1 million of acquisition-related
costs incurred by New Residential and HLSS in 2015. The unaudited supplemental pro forma financial information has not been
adjusted for transactions other than the HLSS Acquisition, or for the conforming of accounting policies. The unaudited supplemental
pro forma financial information does not include any anticipated synergies or other anticipated benefits of the HLSS Acquisition
121
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results
of operations or results that might have been achieved had the HLSS Acquisition occurred on January 1, 2014.
New Residential’s Consolidated Statements of Income include interest income and income before income taxes of HLSS since
the April 6, 2015 acquisition of $282.3 million and $131.5 million, respectively.
Relationship with Ocwen
HLSS and HLSS Holdings, LLC (a subsidiary of HLSS acquired by New Residential in the HLSS Acquisition) entered into a
mortgage servicing rights purchase agreement (the “Ocwen Purchase Agreement”) with Ocwen Loan Servicing LLC, a subsidiary
of Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), which remains
in effect following the HLSS Acquisition. Pursuant to the Ocwen Purchase Agreement, HLSS and HLSS Holdings purchased,
among other things, the rights to certain servicing fees under MSRs in respect of private label securitization transactions, associated
servicer advances and other related assets from Ocwen from time to time. The specific terms of any acquisition of such assets are
documented pursuant to separate sale supplements to the Ocwen Purchase Agreement executed by the parties from time to time
(each a “Sale Supplement” and together, the “Sale Supplements”). As of March 31, 2015, the UPB of the mortgage loans in respect
of the related MSRs equaled $156.4 billion. Ocwen consented to HLSS’s assignment of its rights and interests in connection with
the HLSS Acquisition.
Because Ocwen is the servicer of the loans underlying the MSRs related to the transactions contemplated by the Ocwen Purchase
Agreement, New Residential pays Ocwen a monthly base fee pursuant to the applicable Sale Supplement relating to the applicable
MSRs equal to 12% of the servicing fees collected thereon in any given month. This monthly base fee payable to Ocwen is expressed
as a percentage of the servicing fees actually collected in any given month, which varies from month to month based on the level
of collections of principal and interest for the mortgage loans serviced. Ocwen also receives a performance-based incentive fee to
the extent the servicing fee revenue that it collects for any given month exceeds the sum of the monthly base fee and a portion of
the servicing fee economics retained by New Residential. The performance-based incentive fee payable in any month is reduced
if the advance ratio exceeds a predetermined level for that month. If the advance ratio is exceeded in any month, any performance-
based incentive fee payable for such month will be reduced by 1-month LIBOR plus 2.75% (or 275 basis points) per annum of
the amount of any such excess servicer advances.
The specific terms of the fee arrangements with respect to each pool of mortgage loans may be documented pursuant to the Sale
Supplements in each case having an initial term of up to eight years (commencing on the date of the applicable Sale Supplement).
If Ocwen and New Residential do not agree to revised fee arrangements at the end of such term, New Residential may direct
Ocwen to transfer servicing to a third party, and New Residential may keep any proceeds of such transfer.
The Ocwen Purchase Agreement provides that New Residential will purchase from Ocwen servicer advances arising under specified
servicing agreements as the servicer advances arise. The purchase price payable by New Residential for such servicer advances
is equal to the outstanding balance thereof. As of April 6, 2015, the outstanding balance of servicer advances acquired from Ocwen
equaled $5.6 billion.
In addition, the Ocwen Purchase Agreement contemplates that New Residential may cause Ocwen to use commercially reasonable
efforts to transfer servicing of the related mortgage loans to a third-party servicer upon the occurrence of various termination
events. Certain termination events may have occurred under the Ocwen Purchase Agreement because of downgrades in certain of
Ocwen’s servicer ratings but New Residential has agreed, subject to certain limitations, not to cause Ocwen to use commercially
reasonable efforts to transfer servicing of the related mortgage loans to a third-party servicer with respect to such downgrades
before April 6, 2017.
The Ocwen Purchase Agreement and Sale Supplements include various Ocwen warranties, representations and indemnifications
relating to Ocwen’s performance of its duties as servicer.
Pursuant to an amendment to the Ocwen Purchase Agreement executed in connection with the consummation of the HLSS
Acquisition, such Ocwen Purchase Agreement and the related Sale Supplements were amended, among other things, to (i) obtain
Ocwen’s consent to the assignment by HLSS of its interest under the Ocwen Purchase Agreement and each Sale Supplement
thereto, (ii) provide that HLSS Holdings will not direct the replacement of Ocwen as servicer before April 6, 2017 except under
the circumstances described in the amendment, (iii) extend the scheduled term of Ocwen’s servicing appointment under each Sale
122
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Supplement until the earlier of eight years from the date of the related Sale Supplement and April 30, 2020 (subject to an agreement
to commence negotiating in good faith for an extension of the contract term no later than six months prior to the end of the applicable
term) unless certain servicer ratings thresholds are not met on the six year anniversary of the related Sale Supplement, in which
case the related term would expire on such anniversary, and (iv) provide that Ocwen will reimburse HLSS Holdings, subject to
specified limits, for certain increased costs resulting from further Standard & Poor’s Rating Services (S&P) servicer rating
downgrades of Ocwen. Through December 31, 2015, New Residential has accrued $14.5 million in connection with clause (iv),
which is included in Other Income, and which was received in October 2015. In addition, pursuant to such amendment Ocwen
agreed to sell to New Residential the economic beneficial rights to any right of optional termination or “clean-up call” of any trust
related to any servicing agreement in respect of certain servicing fees New Residential acquired from HLSS and to exercise such
rights only at New Residential’s direction. New Residential agreed to pay to Ocwen a fee in an amount equal to 0.50% of the
outstanding balance of the performing mortgage loans purchased in connection with any such exercise and to pay costs and expenses
of Ocwen in connection with any such exercise. Optional termination or clean up call rights generally may not be exercised until
the outstanding principal balance of securitized loans is reduced to a specified balance.
HLSS Management, LLC (a subsidiary of HLSS acquired by New Residential in the HLSS Acquisition) has a professional services
agreement with Ocwen that enables HLSS to provide certain services to Ocwen and for Ocwen to provide certain services to HLSS
Management, LLC which remains in effect following the HLSS Acquisition. Services provided by New Residential under this
agreement may include valuation and analysis of MSRs, capital markets activities, advance financing management, treasury
management, legal services and other similar services. Services provided by Ocwen under this agreement may include business
strategy, legal, tax, licensing and regulatory compliance support services, risk management services and other similar services.
The services provided by the parties under this agreement are on an as-needed basis, and the fees represent actual costs incurred
plus an additional markup of 15%.
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. 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.
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.
To assess whether New Residential has the power to direct the activities of a VIE that most significantly impact the VIE’s economic
performance, New Residential considers all the facts and circumstances, including its role in establishing the VIE and its ongoing
rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s
economic performance; and second, identifying which party, if any, has power over those activities. To assess whether New
Residential has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be
significant to the VIE, New Residential considers all of its economic interests and applies judgment in determining whether these
interests, in the aggregate, are considered potentially significant to the VIE.
New Residential has determined that, under the ASU 2015-02, Consolidation, the Buyer (Note 6) should be evaluated for
consolidation under the VIE model rather than the voting interest entity model as the equity holders as a group do not have the
right to direct activities that most significantly impact the entity’s economic performance. Under the VIE model, New Residential’s
consolidated subsidiary, as the managing member, has both 1) the power to direct the activities of the Buyer and 2) holds a significant
variable interest through its equity investment and therefore, meets the primary beneficiary criterion and continues to consolidate
the Buyer. The Buyer’s summary balance sheet is included in Note 6.
123
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
New Residential’s investments in Non-Agency RMBS (Note 7) 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.
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.
Correction of the Financial Statements
New Residential determined during the second quarter of 2015 that purchases and sales of residential mortgage loans classified
as held-for-sale upon acquisition that had been reported on the consolidated statements of cash flows as cash flows from investing
activities should have been reported as operating activities.
New Residential has corrected the previously presented consolidated statement of cash flows for these loans. The effects of the
adjustment on the presentation for the years ended December 31, 2014 and 2013 was to move $1.3 billion and $0.0 million,
respectively, of gross cash inflows and $1.6 billion and $0.0 million, respectively, of gross cash outflows from investing activities
to operating activities. New Residential has evaluated the effect of the incorrect presentation, both qualitatively and quantitatively,
and concluded that it did not materially misstate the previously issued financial statements.
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
124
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
terminated. New Residential is similarly dependent on OneMain as the servicer of the loans underlying its investment in the
Consumer Loan Companies (Note 9) and on Ocwen subsequent to the HLSS Acquisition (Note 1).
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.
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
125
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 Deteriorated (“PCD “) loans. At acquisition, New Residential aggregates PCD 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 PCD 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.
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 acquired by New Residential or 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 or impairment, as applicable.
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 PCD 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
126
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 PCD 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 PCD 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.
Accretion 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
Amortization of discount on notes payable
(A)
Includes accretion of the accretable yield on PCD loans.
Other Income (Loss), Net — This item is comprised of the following:
Unrealized gain (loss) on derivative instruments
Unrealized gain (loss) on other ABS
Gain (loss) on transfer of loans to REO
Fee earned on deal termination
Gain on Excess MSR recapture agreements
Other income (loss)
Year Ended December 31,
2014
2013
2015
352,316
134,565
65,925
(26,036)
(1,472)
525,298
$
$
190,206
49,180
47,793
(8,771)
—
278,408
$
$
4,421
40,921
14,676
(768)
—
59,250
Year Ended December 31,
2014
2013
2015
(5,957) $
879
2,065
—
2,999
2,984
2,970
$
(13,037) $
—
17,489
5,000
1,157
20
10,629
$
1,820
—
—
—
—
—
1,820
$
$
$
$
127
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Gain (loss) on settlement of investments, net — This item is comprised of the following:
Gain (loss) on sale of real estate securities, net
$
13,096
$
65,701
$
52,657
Year Ended December 31,
2015
2014
2013
Gain (loss) on sale of residential mortgage loans, net
Gain (loss) on settlement of derivatives
Gain (loss) on liquidated residential mortgage loans
Gain (loss) on sale of REO
Other gains (losses)
EXPENSE RECOGNITION
33,335
(44,563)
(360)
(10,742)
(7,973)
(17,207) $
—
(36,210)
3,645
(3,686)
6,037
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
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. PCD loans held-for-investment are
initially recorded at their purchase price 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
128
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
institutions exceed insured limits. As of December 31, 2015 and 2014, New Residential held $93.8 million and $29.4 million,
respectively, 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. As of December 31, 2015, New Residential also held $0.9 million of restricted cash related to financing
requirements of the Secured Corporate Note.
Derivatives — New Residential financed certain investments with the same counterparty from which it purchased those investments,
and accounted for the contemporaneous purchase of the investments and the associated financings as “linked transactions” prior
to January 1, 2015. 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. In the Consolidated Statement of Cash
Flows, New Residential presented 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.
Other Assets and Other Liabilities — Other assets and liabilities are comprised of the following:
Margin receivable, net
Other receivables(A)
Principal paydown receivable
Receivable from government agency(B)
Call rights
Interest receivable
Ginnie Mae EBO servicer advance
receivable, net(C)
Other assets(D)
$
$
Other Assets
December 31,
2015
2014
54,459
10,893
795
68,833
414
36,963
$
Interest payable
59,021
1,797 Accounts payable
3,595 Derivative liabilities
9,108 Current taxes payable
3,728 Other liabilities
8,658
Accrued Expenses and
Other Liabilities
December 31,
2015
2014
$
$
18,268
18,650
13,443
1,573
6,112
58,046
$
$
7,857
28,059
14,220
2,349
20
52,505
49,725
14,675
236,757
$
—
9,516
95,423
(A)
(B)
Primarily includes a receivable from Ocwen related to their servicer rating downgrade, claims receivable related to
reverse mortgage loans and receivables related to residual securities owned.
Represents claims receivable from FHA on EBO and reverse mortgage loans for which foreclosure has been
completed and for which New Residential has made or intends to make a claim on the FHA guarantee.
129
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
(C)
(D)
Represents an HLSS loan to a counterparty collateralized by servicer advances on Ginnie Mae EBO loans.
Primarily includes prepaid taxes and other prepaid expenses.
New Residential’s subsidiary, NRZ Insurance (Note 11), is a member of FHLBC. As a condition of its FHLBC membership, NRZ
Insurance is required to maintain a FHLBC stock investment, both for membership and for the level of advances, if any, from the
FHLB to NRZ Insurance. New Residential accounts for its $2.8 thousand investment in FHLBC stock as a cost method investment
included in Other Assets. This stock can only be redeemed or sold at its par value, and only to the FHLBC.
Repurchase Agreements and Notes Payable — New Residential’s repurchase agreements 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 was effective for New Residential in the first quarter of 2015. New
Residential has adopted the new guidance and has determined there was no impact on its consolidated financial statements.
In May 2014, the FASB issued ASU No. 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 effect, companies
will be required to exercise further judgment and make more estimates prospectively. 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. ASU No. 2014-09 is effective for New Residential in the first quarter
of 2018. Early adoption is not permitted. Entities have the option of using either a full retrospective or a modified approach to
adopt the guidance in ASU No. 2014-09. 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, Transfers and Servicing (Topic 860): 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. ASU No. 2014-11 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.
ASU No. 2014-11 was effective for New Residential in the first quarter of 2015. 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) are accounted for as secured borrowings.
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. ASU No. 2014-15 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
130
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 was 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 No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis.
The standard amends the consolidation considerations when evaluating certain limited partnerships, variable interest entities and
investment funds. ASU No. 2015-02 is effective for New Residential in the first quarter of 2016. Early adoption was permitted.
New Residential adopted this new guidance in the fourth quarter of 2015 and it did not have an impact on its consolidated financial
statements, other than the addition of certain disclosures.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest. The standard amends the balance sheet
presentation requirements for debt issuance costs such that they are no longer recognized as deferred charges but are rather presented
in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.
ASU No. 2015-03 is effective for New Residential in the first quarter of 2016. Early adoption is permitted. New Residential has
adopted ASU No. 2015-03 in June 2015 and has determined that the adoption of ASU No. 2015-03 resulted in an immaterial
reclassification of its Deferred Financing Costs, Net to an offset of its Notes Payable (Note 11).
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) - Simplifying the Accounting for
Measurement-Period Adjustments. The standard requires that an acquirer in a business combination recognize adjustments to
provisional amounts in the purchase price allocation that are identified during the measurement period in the reporting period in
which the adjustment amounts are determined. ASU No. 2015-16 is effective for New Residential in the first quarter of 2016.
Early adoption was permitted. New Residential adopted this new guidance in the fourth quarter of 2015 and applied it prospectively.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and
Measurement of Financial Assets and Financial Liabilities. The standard: (i) requires that certain equity investments be measured
at fair value, and modifies the assessment of impairment for certain other equity investments, (ii) changes certain disclosure
requirements related to the fair value of financial instruments measured at amortized cost, (iii) changes certain disclosure
requirements related to liabilities measured at fair value, (iv) requires separate presentation of financial assets and financial liabilities
by measurement category and form of financial asset, and (v) clarifies that an entity should evaluate the need for a valuation
allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.
ASU No. 2016-01 is effective for New Residential in the first quarter of 2018. Early adoption is generally not permitted. An entity
should apply ASU No. 2016-01 by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal
year of adoption. New Residential is currently evaluating the new guidance to determine the impact it may have 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.
131
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 related
to the Management Agreement, (iv) corporate cash and related interest income and (v) secured corporate loans and related interest
expense during the periods outstanding. Securities owned by New Residential (Note 7) that are collateralized by servicer advances
are included in the Servicer Advances segment.
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:
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, 2015
Interest income
Interest expense
Net interest income (expense)
Impairment
Other income
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
$
$
$
$
134,565
11,625
122,940
—
72,802
1,101
194,641
—
194,641
$ 354,616
216,837
137,779
—
(53,426)
14,316
70,037
(8,127)
78,164
$
$ 110,123
18,230
91,893
5,788
(33,604)
1,227
51,274
—
51,274
$
$
$
43,180
21,510
21,670
18,596
15,405
13,415
5,064
(3,199)
8,263
$
$
1
1,615
(1,614)
—
43,954
228
42,112
325
41,787
$
2,587
4,196
(1,609)
—
(3,102)
87,536
(92,247)
—
$ 645,072
274,013
371,059
24,384
42,029
117,823
270,881
(11,001)
$ (92,247) $ 281,882
— $
18,407
194,641
$
59,757
$
$
— $
— $
— $
(5,161) $
13,246
51,274
$
8,263
$
41,787
$ (87,086) $ 268,636
December 31, 2015
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
Servicer
Advances
Excess MSRs
Residential Securities
and Loans
Real Estate
Securities
Real Estate
Loans
Consumer
Loans
Corporate
Total
$
1,798,738
$ 7,857,841
$ 2,070,834
$ 1,157,433
$
— $
— $ 12,884,846
18,507
878
—
34
95,686
93,824
2,689
42,984
13,262
6,359
73,138
249,936
—
—
—
—
—
—
—
—
94,702
2,689
$
$
$
$
198,962
1,600,091
106,330
1,818,157
$ 8,249,002
$ 3,713,909
$ 1,277,025
182,978
$ 7,550,680
$ 2,513,538
$ 1,004,980
1,767
8,126
40,446
$
$
$
$
53,365
1,960,549
126,503
$ 15,192,722
— $ 11,292,622
2,277
18,153
740,392
14,382
459
137,857
913,520
185,255
7,568,833
3,253,930
1,019,362
40,905
137,857
12,206,142
1,632,902
680,169
459,979
257,663
(32,779)
(11,354)
2,986,580
—
190,647
—
—
—
—
190,647
1,632,902
$ 489,522
$
459,979
$
257,663
$
(32,779) $
(11,354) $ 2,795,933
217,221
$
— $
— $
— $
— $
— $
217,221
132
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(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
$
49,180
$ 190,206
$
60,208
$
47,262
$
— $
1
$ 346,857
Year Ended December 31, 2014
Interest income
Interest expense
Net interest income (expense)
Impairment
Other income
Operating expenses
1,294
47,886
—
100,052
713
110,968
79,238
—
83,828
2,183
Income (Loss) Before Income Taxes
147,225
160,883
Income tax expense
Net Income (Loss)
Noncontrolling interests in income (loss)
of consolidated subsidiaries
Net income (loss) attributable to
common stockholders
—
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
December 31, 2014
Investments
Cash and restricted cash
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
Servicer
Advances
Excess MSRs
Residential Securities
and Loans
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
10,206
43,728
—
32,091
69,980
7,757
—
312
14,159
748,609
$ 3,370,040
$ 2,608,962
$ 1,258,438
— $ 2,885,784
$ 2,246,651
$
925,418
215
215
25,467
17,511
2,911,251
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
95,423
$
102,586
$ 8,089,244
— $
— $ 6,057,853
195
195
414
—
113,937
181,466
113,937
6,239,319
(11,351)
1,849,925
—
253,836
748,394
330,876
$
$
204,953
$
344,800
$
308,879
$
414
$
(11,351) $ 1,596,089
— $
— $
— $
— $
— $
330,876
$
$
$
$
133
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Year Ended December 31, 2013
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
$
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
— $
(326) $
— $
— $
— $
— $
(326)
144,381
$
(1,231) $
75,997
$
3,664
$
80,780
$ (37,642) $ 265,949
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:
Balance as of December 31, 2013
Purchases
Interest income
Other income
Proceeds from repayments
Change in fair value
Balance as of December 31, 2014
Transfers from indirect ownership
Purchases
Interest income
Other income
Proceeds from repayments
Change in fair value(C) (D)
Balance as of December 31, 2015
Servicer
Nationstar
SLS(A)
Ocwen(B)
Total
$
324,151
$
— $
— $
324,151
85,735
49,143
1,157
(92,483)
41,373
409,076
98,258
254,149
66,039
8,378
37
—
—
242
8,657
—
—
180
2,999
(131,621)
(596)
698,304
$
$
—
(1,291)
(2,239)
5,307
—
—
—
—
—
—
—
94,113
49,180
1,157
(92,483)
41,615
417,733
98,258
917,078
1,171,227
68,346
—
(148,996)
41,478
134,565
2,999
(281,908)
38,643
$
877,906
$ 1,581,517
(A)
(B)
(C)
(D)
Specialized Loan Servicing LLC (“SLS”). See Note 6 for a description of the SLS Transaction.
Ocwen services the loans underlying the Excess MSRs and Servicer Advances acquired from HLSS (Note1).
In 2015, New Residential recorded a cumulative positive prior period adjustment of $4.2 million on its Excess MSR
investments serviced by Nationstar resulting from adjustments to certain modeling assumptions.
In the fourth quarter of 2015, New Residential recorded a change in estimate in the calculation of fair value of $41.5
million on its Excess MSR investments serviced by Ocwen resulting from adjustments to certain modeling
assumptions.
Nationstar, SLS, or Ocwen, as applicable, as servicer, performs all servicing and advancing functions, and retains the ancillary
income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.
134
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
New Residential has entered into a “recapture agreement” in each of the Excess MSR investments serviced by Nationstar and SLS,
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. New Residential has a similar recapture agreement with Ocwen; however, this agreement allows
for Ocwen to retain the Excess MSR on recaptured loans up to a threshold and no payments have been made to New Residential
under such arrangement to date. These recapture agreements do not apply to New Residential’s investments in Servicer Advances
(Note 6).
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial
instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk
and other market factors on the Excess MSRs.
The following is a summary of New Residential’s direct investments in Excess MSRs:
UPB of
Underlying
Mortgages
December 31, 2015
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
$
93,441,696
32.5% - 66.7%
0.0% - 40.0% 20.0% - 35.0%
5.8
$
335,478
$
378,083
Recapture Agreements
— 32.5% - 66.7%
0.0% - 40.0% 20.0% - 35.0%
93,441,696
12.0
6.4
36,627
372,105
59,118
437,201
Non-Agency(D)
Nationstar and SLS Serviced:
Original and Recaptured Pools $
94,923,975
33.3% - 80.0%
0.0% - 50.0%
0.0% - 33.3%
5.2
$
210,691
$
250,662
Recapture Agreements
Ocwen Serviced Pools
Total
— 33.3% - 80.0%
0.0% - 50.0%
0.0% - 33.3%
100.0%
—%
—%
12.3
6.2
6.1
6.2
14,130
836,428
15,748
877,906
1,061,249
1,144,316
$
1,433,354
$ 1,581,517
December 31, 2014
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%
11.9
5.5
5.8
11,291
164,054
10,402
200,214
$
313,396
$
417,733
54,263,857
$
102,481,758
Total
(A)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this
investment.
135
141,002,300
235,926,275
$
329,367,971
UPB of
Underlying
Mortgages
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
(B)
(C)
(D)
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, 2015 (Note 6).
Changes in fair value recorded in other income is comprised of the following:
Original and Recaptured Pools
Recapture Agreements
Year Ended December 31,
2015
2014
2013
$
$
34,936
3,707
38,643
$
$
35,000
6,615
41,615
$
$
37,692
15,640
53,332
As of December 31, 2015 and 2014, weighted average discount rates of 9.8% and 9.6%, 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
New Jersey
Maryland
Illinois
Virginia
Washington
Massachusetts
Other U.S.
Percentage of Total
Outstanding Unpaid
Principal Amount
December 31,
2015
2014
26.7%
8.9%
7.8%
4.3%
4.1%
3.8%
3.4%
3.1%
2.7%
2.7%
32.5%
100.0%
31.5%
7.7%
4.3%
4.2%
3.2%
4.0%
3.2%
3.3%
3.6%
2.1%
32.9%
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.
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.
During the first quarter of 2015, New Residential and the Fortress-managed funds restructured their investments in two of the
Excess MSR joint ventures and now each directly owns its share of the underlying assets of the joint ventures.
136
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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
Interest income
Other income (loss)
Expenses
Net income
December 31,
2015
421,999
12,442
—
434,441
217,221
2014
653,293
8,472
(13)
661,752
330,876
$
$
$
$
$
$
50.0%
50.0%
Year Ended December 31,
2014
2013
2015
$
$
51,811
10,615
(107)
62,319
$
$
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, 2015 and 2014 as follows:
Balance at beginning of period
Contributions to equity method investees
Transfers to direct ownership
Distributions of earnings from equity method investees
Distributions of capital from equity method investees
Change in fair value of investments in equity method investees(A)
Balance at end of period
2015
2014
330,876
—
(98,258)
(37,874)
(8,683)
31,160
217,221
$
$
352,766
—
—
(53,427)
(25,743)
57,280
330,876
$
$
(A)
In 2015, New Residential recorded a cumulative positive prior period adjustment of $2.7 million resulting from adjustments
to certain modeling assumptions.
The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
Agency
Original and Recaptured Pools
Recapture Agreements
Total
December 31, 2015
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)
$ 73,058,050
—
$ 73,058,050
66.7%
66.7%
50.0%
50.0%
$
$
275,338
45,421
320,759
$
$
351,275
70,724
421,999
5.7
11.9
6.6
137
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Agency
Original and Recaptured Pools
Recapture Agreements
Non-Agency(E)
Original and Recaptured Pools
Recapture Agreements
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)
$ 87,584,677
—
87,584,677
66.7%
66.7%
58,673,144
66.7%-77.0%
— 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
173,784
12,325
186,109
86,756
456,815
181,368
15,110
196,478
$
552,310
$
653,293
5.6
11.7
6.7
5.1
12.4
5.6
6.3
Total
(A)
(B)
(C)
(D)
(E)
The remaining interests are held by Nationstar.
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, 2015 (Note 6).
As of December 31, 2015 and 2014, weighted average discount rates of 9.6% and 9.6%, 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
Texas
New York
Georgia
New Jersey
Illinois
Maryland
Virginia
Pennsylvania
Other U.S.
Percentage of Total
Outstanding Unpaid
Principal Amount
December 31,
2015
2014
12.9%
23.5%
7.4%
6.1%
5.8%
5.7%
4.3%
4.0%
3.2%
3.2%
3.1%
8.9%
4.8%
5.6%
4.1%
3.9%
3.5%
3.3%
3.2%
2.3%
44.3%
100.0%
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.
138
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
6. INVESTMENTS IN SERVICER ADVANCES
In December 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 the 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. 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, 2015. As of December 31, 2015,
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, 2015, the third-party co-investors and New Residential had previously
funded their commitments, however the Buyer may recall $253.2 million and $203.2 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.
The Buyer has purchased Servicer Advances from Nationstar, is required to purchase all future Servicer Advances made with
respect to certain residential loan 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, 2015 was approximately 9.3% 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.
As discussed in Note 2, New Residential early adopted the guidance in ASU 2015-02 and, as a result, determined that the Buyer
is a VIE. The following table presents information on the assets and liabilities related to this consolidated VIE.
Assets
Servicer advance investments, at fair value
Cash and cash equivalents
All other assets
Total assets(A)
Liabilities
Notes payable
All other liabilities
Total liabilities(A)
As of December 31,
2015
2014
$
2,344,245
$
3,186,830
40,761
25,092
2,410,098
2,060,347
6,111
2,066,458
$
$
$
58,983
31,092
3,276,905
2,811,371
7,990
2,819,361
$
$
$
(A)
The creditors of the Buyer do not have recourse to the general credit of New Residential and the assets of the Buyer are
not directly available to satisfy New Residential’s obligations.
In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs and all of the Servicer
Advances and related basic fee portion of the MSR (the “SLS Advance Fee”) which is serviced by SLS. New Residential continues
to evaluate the call rights it purchased from SLS, and its ability to exercise such rights and realize the benefits therefrom are subject
to a number of risks. The actual UPB of the mortgage loans on which New Residential can successfully exercise call rights and
realize the benefits therefrom may differ materially from its initial assumptions. 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 was $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 the SLS 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 the SLS 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
139
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 “SLS Incentive Fee”) which is based on the ratio of the outstanding Servicer Advances
to the UPB of the underlying loans.
On April 6, 2015, New Residential acquired Servicer Advances in connection with the HLSS Acquisition (Note 1).
In April 2015, New Residential acquired the call rights related to an underlying pool of residential mortgage loans from Ocwen.
The pool of underlying mortgage loans represents the mortgage loans underlying the Excess MSR and Servicer Advances
investments acquired from HLSS (Note 1). New Residential continues to evaluate the call rights it acquired from Ocwen, and its
ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. The actual UPB of the mortgage
loans on which New Residential can successfully exercise call rights and realize the benefits therefrom may differ materially from
its initial assumptions.
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:
Amortized
Cost Basis
Carrying
Value(A)
$ 7,400,068
$ 7,426,794
December 31, 2015
Servicer Advances(C)
December 31, 2014
Servicer Advances
$ 3,186,622
$ 3,270,839
Weighted
Average
Discount
Rate
Weighted
Average
Yield
Weighted
Average Life
(Years)(B)
Change in Fair
Value Recorded
in Other
Income for Year
then Ended
5.6%
5.4%
5.5%
5.8%
4.4
$
(57,491)
4.0
$
84,217
(A)
(B)
(C)
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.
Excludes asset-backed securities collateralized by Servicer Advances with an aggregate face amount of $431.0 million
and an aggregate carrying value of $430.3 million as of December 31, 2015. See Note 7 for details related to these
securities.
The following is additional information regarding the Servicer Advances and related financing:
Loan-to-Value(A)
Cost of Funds(C)
UPB of
Underlying
Residential
Mortgage
Loans
Outstanding
Servicer
Advances
Servicer
Advances to
UPB of
Underlying
Residential
Mortgage
Loans
Face
Amount of
Notes
Payable
Gross
Net(B)
Gross
Net
December 31, 2015
Servicer Advances(D) $ 220,256,804
December 31, 2014
Servicer Advances(D) $ 96,547,773
$ 7,578,110
3.4% $ 7,058,094
91.2%
90.2%
3.4%
2.6%
$ 3,102,492
3.2% $ 2,890,230
91.4%
90.4%
3.0%
2.3%
(A)
Based on outstanding Servicer Advances, excluding purchased but unsettled Servicer Advances and certain deferred
servicing fees (“DSF”) which New Residential receives financing on. If New Residential were to include these DSF in
140
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
the servicer advance balance, gross and net LTV as of December 31, 2015 would be 86.9% and 85.9%, respectively. Also
excludes retained non-agency bonds with a current face amount of $175.8 million from the outstanding servicer advances
debt. If New Residential were to sell these bonds, gross and net LTV as of December 31, 2015 would be 93.4% and 92.4%,
respectively.
Ratio of face amount of borrowings to par amount of Servicer Advance collateral, net of any general 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 investments in Servicer Advances:
(B)
(C)
(D)
Principal and interest advances
Escrow advances (taxes and insurance advances)
Foreclosure advances
Total
$
$
December 31,
2015
2,229,468
3,687,559
1,661,083
7,578,110
$
$
2014
729,713
1,600,713
772,066
3,102,492
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
Others’ interests in the Buyer’s net income (loss) is computed as follows:
Year Ended December 31,
2014
2013
2015
$
$
754,717
(97,351)
(305,050)
352,316
$
$
290,309
(26,092)
(74,011)
190,206
$
$
6,708
(2,287)
—
4,421
December 31,
2015
343,640
55.5%
190,647
$
$
2014
457,545
55.5%
253,836
$
$
Net Advance Purchaser LLC income (loss)
Others’ ownership interest as a percent of total(A)
Others’ interest in net income (loss) of consolidated subsidiaries(B)
Year Ended December 31,
2014
2013
2015
$
$
33,180
55.5%
18,407
$
$
159,374
$
56.0%
89,222
(517)
63.1%
(326)
(A)
(B)
As a result, New Residential owned 44.5%, 44.0% and 36.9% of the Buyer, on average during the years ended December 31,
2015, 2014 and 2013, respectively.
Excludes HLSS shareholders’ interests in the net income (loss) of HLSS of $5.2 million during the year ended December 31,
2015.
See Note 11 regarding the financing of Servicer Advances.
141
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
7. INVESTMENTS IN REAL ESTATE SECURITIES
Agency residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as the
Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).
Non-Agency RMBS are issued by either public trusts or private label securitization entities.
Activities related to New Residential’s investments in real estate securities were as follows:
Purchases
Face
Purchase Price
Sales
Face
Amortized Cost
Sale Price
Gain on Sale
Year Ended December 31, 2015 Year Ended December 31, 2014
(in millions)
(in millions)
Agency
Non Agency(A)
Agency
Non Agency
$
$
$
$
$
$
5,140.1
5,333.7
5,772.5
5,997.5
6,007.6
10.1
$
$
$
$
$
$
2,397.9
1,288.9
476.4
422.7
425.7
3.0
$
$
$
$
$
$
1,341.0
1,399.0
746.9
791.3
796.4
5.1
$
$
$
$
$
$
3,187.5
1,455.8
2,004.3
1,228.4
1,289.0
60.6
(A)
Purchases include $431.0 million face of servicer advance bonds for a purchase price of $431.0 million.
On December 31, 2015, New Residential sold and purchased $1.5 billion and $0.7 billion face amount of Agency RMBS for $1.5
billion and $0.7 billion, respectively. These unsettled sales and purchases were recorded on the balance sheet on trade date as Trade
Receivable and Trades Payable.
New Residential has exercised its call rights with respect to Non-Agency RMBS trusts and purchased performing and non-
performing residential mortgage loans, including REO, contained in such trusts prior to their termination. In certain cases, New
Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In
addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination.
Refer to Note 8 for further details on these transactions.
On March 6, 2014, New Residential agreed to purchase approximately $625.0 million face amount of Non-Agency RMBS for
approximately $553.0 million. The purchased securities represented 75% of the mezzanine and subordinate tranches (the “2009-1
Retained Certificates”) of a securitization sponsored by Third Street Funding LLC, an affiliate of OneMain. 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. The purchase and sale of the 2009-1 Retained Certificates is included in the table above.
See Note 10 for a discussion of transactions formerly accounted for as linked transactions.
142
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following is a summary of New Residential’s real estate securities, all of which are classified as available-for-sale and are,
therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are
other-than-temporarily impaired and except for securities which New Residential elected to carry at fair value and record changes
to valuation through the income statement.
Gross Unrealized
Weighted Average
Outstanding
Face Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value(A)
Number
of
Securities
Rating(B)
Coupon(C)
Yield
Life
(Years)(D)
Principal
Subordination(E)
$
$
$
$
884,578
$
918,633
$
183
$ (1,218)
$
917,598
3,533,974
1,579,445
22,964
(18,126)
1,584,283
4,418,552
$ 2,498,078
$ 23,147
$ (19,344)
$ 2,501,881
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
28
240
268
104
142
246
AAA
BB+
A-
AAA
CCC
A
3.28% 2.75%
1.63% 5.03%
2.69% 4.19%
3.22% 2.22%
1.98% 3.37%
2.86% 2.83%
6.6
6.8
6.7
5.0
6.4
5.7
N/A
12.1%
N/A
17.3%
Asset Type
December 31, 2015
Agency RMBS(F)(G)
Non-Agency RMBS(H) (I)
Total/Weighted Average
December 31, 2014
Agency RMBS(F)(G)
Non-Agency RMBS(H)
Total/Weighted Average
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
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 89 bonds with a carrying value of $333.0 million which either have
never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies,
the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were
determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date
and may not be current.
Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $227.4 million and $0.0 million,
respectively, for which no coupon payment is expected.
The weighted average life is based on the timing of expected principal reduction on the assets.
Percentage of the amortized cost basis of securities that is subordinate to New Residential’s investments, excluding
interest-only bonds and servicer advance bonds.
Includes securities issued or guaranteed by U.S. Government agencies such as Fannie Mae or Freddie Mac.
The total outstanding face amount was $0.7 billion and $1.0 billion for fixed rate securities and $0.2 billion and $0.6
billion for floating rate securities as of December 31, 2015 and 2014, respectively.
The total outstanding face amount was $2.3 billion (including $1.7 billion of residual and interest-only notional amount)
and $1.0 billion (including $959.1 million of interest-only notional amount) for fixed rate securities and $1.3 billion
(including $164.4 million of residual and interest-only notional amount) and $882.4 million (including $130.6 million
of residual and interest-only notional amount) for floating rate securities as of December 31, 2015 and 2014, respectively.
Includes Other ABS consisting primarily of (i) interest-only securities which New Residential elected to carry at fair
value and record changes to valuation through the income statement and representing 5.2% of the carrying value of the
Non-Agency RMBS portfolio and (ii) bonds backed by servicer advances representing 27.2% of the carrying value of
the Non-Agency RMBS portfolio.
Gross Unrealized
Weighted Average
Asset Type
Other ABS
Servicer
Advance
Bonds
Outstanding
Face Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value
Number of
Securities
$
$
1,522,256
$
82,101
$
5,227
$
(4,348)
$
82,980
431,000
$
430,951
$
— $
(661)
$
430,290
12
5
Rating
Coupon
Yield
AA+
1.84%
7.11%
AA+
2.69%
2.70%
Life
(Years)
Principal
Subordination
4.0
1.1
N/A
N/A
Unrealized losses that are considered other than temporary are recognized currently in earnings. During the year ended December
31, 2015, New Residential recorded OTTI charges of $5.8 million with respect to real estate securities. During the year ended
December 31, 2014, New Residential recorded OTTI of $1.4 million. 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’s analysis of these securities, Newcastle determined it did not have the intent to hold the
securities past May 15, 2013. New Residential 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
143
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 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, 2015.
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)
$
1,697,478
$
1,028,088
$
(5,028)
$
1,023,060
$
(14,508)
$ 1,008,552
766,444
192,699
—
192,699
(4,836)
187,863
127
25
BBB
2.14%
4.25%
AA+
2.30%
1.72%
$
2,463,922
$
1,220,787
$
(5,028)
$
1,215,759
$
(19,344)
$ 1,196,415
152
BBB+
2.17%
3.85%
5.9
5.1
5.7
(A)
(B)
This amount represents other-than-temporary impairment recorded on securities that are in an unrealized loss position as
of December 31, 2015.
The weighted average rating of securities in an unrealized loss position for less than twelve months excludes the rating
of 51 bonds which either have never been rated or for which rating information is no longer provided.
New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss
position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the
following:
December 31, 2015
Unrealized Losses
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:
Fair Value
Amortized Cost
Basis After
Impairment
Credit(A)
$
19,875
$
19,875
$
(224) $
Non-Credit(B)
—
—
—
—
N/A
Credit impaired securities
Non-credit impaired securities
172,114
1,004,426
174,049
1,021,835
Total debt securities in an unrealized loss position
$
1,196,415
$
1,215,759
$
(4,804)
—
(5,028) $
(1,935)
(17,409)
(19,344)
(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, 2015.
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,
144
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may
differ materially from actual future sales.
The following table summarizes the activity related to credit losses on debt securities:
Year Ended December 31,
2015
2014
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in
other comprehensive income
$
1,127
$
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
5
5,782
—
—
(675)
568
823
—
(401)
(1,934)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in
other comprehensive income
$
6,239
$
1,127
The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:
Geographic Location(A)
Western U.S.
Southeastern U.S.
Northeastern U.S.
Midwestern U.S.
Southwestern U.S.
Other(B)
December 31,
2015
2014
Outstanding
Face Amount
$
1,097,609
758,167
583,366
335,406
309,236
19,189
Percentage of
Total
Outstanding
Outstanding
Face Amount
Percentage of
Total
Outstanding
35.3% $
24.4%
18.8%
10.8%
10.0%
0.7%
779,930
409,755
344,716
190,480
170,829
440
41.1%
21.6%
18.2%
10.0%
9.0%
0.1%
$
3,102,973
100.0% $
1,896,150
100.0%
(A)
(B)
Excludes $431.0 million face amount of bonds backed by servicer advances.
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, 2015, the face amount of these real estate securities was $583.6 million, with total expected cash flows
of $502.3 million and a fair value of $329.5 million on the dates that New Residential purchased the respective securities. For
those securities acquired during the year ended December 31, 2014, the face amount was $754.6 million, the total expected cash
flows were $734.9 million and the fair value was $552.1 million on the dates that New Residential purchased the respective
securities.
145
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable
that New Residential would be unable to collect all contractually required payments, excluding residual and interest-only securities:
December 31, 2015
December 31, 2014
The following is a summary of the changes in accretable yield for these securities:
Beginning Balance
Adoption of ASU No. 2014-11 (Note 2)
Additions
Accretion
Reclassifications from (to) non-accretable difference
Disposals
Ending Balance
See Note 11 regarding the financing of real estate securities.
8. INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
Outstanding
Face Amount
873,763
$
536,342
$
Carrying
Value
$
$
504,659
414,298
Year Ended December 31,
2015
2014
$
$
181,671
146,741
172,828
(42,800)
(36,326)
(105,593)
316,521
$
$
143,067
—
189,252
(14,035)
20,385
(156,998)
181,671
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:
• Loans Held-for-Investment:
Reverse Mortgage Loans
Performing Loans
PCD Loans
• Loans Held-for-Sale (“HFS”)
• Real Estate Owned (REO)
The following table presents certain information regarding New Residential’s residential mortgage loans outstanding by loan type,
excluding REO:
See Note 10 for a discussion of transactions formerly accounted for as linked transactions.
146
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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)
330,178
2,925
6.0%
December 31, 2015
Loan Type
Reverse Mortgage Loans(F)(G)
Performing Loans(H)
$
34,423
$
19,560
21,483
19,964
136
671
Purchased Credit Deteriorated Loans (I)
450,229
290,654
2,118
Total Residential Mortgage Loans, held-for-
investment
Performing Loans, held-for-sale(H)
Non-Performing Loans, held-for-sale(I) (J)
Total Residential Mortgage Loans, held-for-sale
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)
Non-Performing Loans, held-for-sale(I)
$
$
$
$
$
$
$
$
506,135
270,585
589,129
277,084
499,597
859,714
$
776,681
45,182
$
24,965
24,399
22,873
69,581
403,992
960,224
$
$
47,838
388,485
737,954
1,838
3,428
5,266
198
731
929
5,809
5,025
Total Residential Mortgage Loans, held-for-sale
$ 1,364,216
$ 1,126,439
10,834
10.0%
9.1%
5.5%
4.6%
5.9%
5.5%
10.2%
7.9%
9.4%
5.6%
5.9%
5.8%
4.2
6.7
2.5
2.8
4.9
2.9
3.5
3.9
5.9
4.6
7.2
2.6
4.0
21.8%
17.1%
18.7%
112.9%
77.4%
115.4%
71.3%
7.5%
97.6%
18.8%
113.6%
92.0%
4.6%
14.5%
11.4%
57.0%
104.5%
89.6%
—%
81.1%
55.6%
21.4%
17.4%
108.2%
72.0%
82.6%
—%
20.0%
95.5%
53.6%
23.0%
3.7%
9.4%
85.0%
104.0%
98.4%
5.0%
90.0%
64.8%
N/A
626
578
580
702
580
619
N/A
628
628
626
571
587
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
Includes residential mortgage loans with a United States federal income tax basis of $1,204.2 million and $1,159.1 million
as of December 31, 2015 and 2014, 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.
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 was $0.4 million and $0.3 million at December 31, 2015 and 2014, respectively, and 71% and 77% 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 premiums of $12.0 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. As of December 31, 2015, New Residential has placed
all of these loans on nonaccrual status, except as described in (J) below.
Includes $246.3 million UPB of Ginnie Mae EBO non-performing loans on accrual status as contractual cash flows are
guaranteed by the FHA.
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.
147
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The table below summarizes the geographic distribution of the underlying residential mortgage loans:
State Concentration
New York
New Jersey
California
Florida
Illinois
Maryland
Massachusetts
Texas
Washington
Pennsylvania
Other U.S.
Percentage of Total
Outstanding Unpaid
Principal Amount
December 31,
2015
2014
14.5 %
13.1 %
12.3 %
10.7 %
4.3 %
3.5 %
3.3 %
3.3 %
3.2 %
2.8 %
12.2 %
7.0 %
15.0 %
6.3 %
4.4 %
3.4 %
2.4 %
4.1 %
3.0 %
3.9 %
29.0 %
100.0%
38.3 %
100.0%
See Note 11 regarding the financing of residential mortgage loans.
New Residential has exercised its call rights with respect to the following Non-Agency RMBS trusts and purchased performing
and non-performing residential mortgage loans, including REO, contained in such trusts prior to their termination. In certain cases,
New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations.
In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination.
The following table summarizes these transactions (dollars in millions).
Date of Call (A)
May 27, 2014
August 25, 2014
December 26, 2014
June 25, 2015
September 25, 2015
November 25, 2015
December 23, 2015
Securities Owned Prior
Assets Acquired
Loans Sold (C)
Retained Bonds
Retained Assets (C)
Number
of Trusts
Called
Face
Amount
Amortized
Cost Basis
Loan
UPB
Loan
Price (B)
REO &
Other
Price (B)
UPB
Gain
(Loss)
Basis
Type
Loan
UPB
Loan
Price
REO &
Other
Price
16
$
17.4
$
12.0
$ 282.2
$ 289.4
$ — $ 233.8
$
3.5
N/A
N/A $
48.4
$
40.1
$
1.3
19
25
18
7
14
14
15.4
27.9
13.7
7.4
3.9
61.4
13.1
530.1
536.3
24.0
597.1
623.7
9.1
4.5
3.0
48.0
369.0
216.3
345.4
309.1
388.8
223.1
351.7
315.1
3.0
—
—
1.5
1.2
3.1
463.0
7.0
$
25.8
516.1
0.7
28.9
334.5
N/A(C)
511.8
N/A(C)
(2.8)
N/A(C)
2.4
N/A(C)
15.0
N/A(C)
22.0
N/A(C)
Interest-
Only
Interest-
Only
Interest-
Only
N/A(C)
Interest-
Only
N/A(C)
66.4
81.0
34.5
19.4
46.3
71.7
31.7
17.2
3.0
4.3
1.3
1.5
29.8
N/A(C)
23.4
N/A(C)
1.2
N/A(C)
(A)
(B)
(C)
Any related securitization may occur on the same or a subsequent date, depending on market conditions and other factors.
Except as otherwise noted in (C) below, there was one securitization associated with each call.
Price includes par amount paid for all underlying mortgage loans of the trusts, plus the basis of the exercised call rights,
plus advances and costs incurred (including MSR Fund Payments, as defined in Note 15) in exercising such call rights.
Loans were sold through a securitization which was treated as a sale for accounting purposes. The securitization that
occurred in November 2015 primarily included loans from the September 25, 2015 and November 25, 2015 calls, but
also included previously acquired loans. The retained assets disclosed for the September 25, 2015 call are net of the related
loans sold in the November 2015 securitization. No loans from the December 23, 2015 call had been securitized by
December 31, 2015.
148
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Reverse Mortgage Loans
In February 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in reverse mortgage loans. New
Residential acquired 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, 2015
Days Past Due
Current
30-59
60-89
90-119(B)
120+(C)
Delinquency Status(A)
93.5%
5.9%
0.3%
0.1%
0.2%
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 interest because they are generally placed on nonaccrual status at
120 days or more past due.
Represents nonaccrual loans.
Activities related to the carrying value of reverse mortgage loans and performing loans held-for-investment were as follows:
Balance at December 31, 2013
Purchases/additional fundings
Proceeds from repayments
Accretion of loan discount and other amortization(A)
Provision 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
Purchases/additional fundings
Proceeds from repayments
Accretion of loan discount and other amortization(A)
Provision for loan losses
Transfer of loans to other assets
Transfer of loans to real estate owned
Balance at December 31, 2015
Reverse
Mortgage
Loans
Performing
Loans
$
33,539
$
—
—
(2,810)
6,501
(1,111)
(10,261)
(947)
—
54
24,965
988
(687)
5,904
(35)
(11,574)
(1)
19,560
134,818
(10,381)
2,994
(651)
—
—
(103,907)
—
22,873
—
(2,918)
52
(43)
—
—
$
19,964
$
(A)
Includes accelerated accretion of discount on loans paid in full and on loans transferred to other assets.
149
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Activities related to the valuation provision on reverse mortgage loans and allowance for loan losses on performing loans held-
for-investment were as follows:
Balance at December 31, 2013
Provision for loan losses(A)
Charge-offs(B)
Reversal of valuation provision on loans transferred to other assets
Balance at December 31, 2014
Provision for loan losses(A)
Charge-offs(B)
Balance at December 31, 2015
Reverse
Mortgage
Loans
Performing
Loans
$
$
461
1,111
—
(54)
1,518
35
—
1,553
$
$
—
1,811
(364)
—
1,447
43
(1,371)
119
(A)
(B)
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 PCD 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.
Purchased Credit Deteriorated Loans
New Residential determined at acquisition that the PCD loans acquired would be aggregated into pools based on common risk
characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio). 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.
Activities related to the carrying value of PCD 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
Purchases/additional fundings
Sales
Proceeds from repayments
Accretion of loan discount and other amortization
Transfer of loans to real estate owned
Balance at December 31, 2015
$
—
749,739
—
(20,431)
30,361
(21,842)
(737,827)
—
289,664
—
—
990
—
$
$
290,654
New Residential’s PCD loans were classified as held-for-sale at December 31, 2014 and, therefore, were not subject to the
accounting in ASC No. 310-30.
150
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following is the contractually required payments receivable, cash flows expected to be collected, and fair value at acquisition
date for PCD loans acquired during the year ended December 31, 2015:
Contractually
Required Payments
Receivable
Cash Flows Expected
to be Collected
Fair Value
As of Acquisition Date
717,718
361,717
289,664
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, 2015
December 31, 2014
The following is a summary of the changes in accretable yield for these loans:
Unpaid Principal
Balance
Carrying Value
$
$
450,229
960,224
$
$
290,654
737,954
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
Additions
Accretion
Reclassifications from non-accretable difference(A)
Disposals(B)
Balance at December 31, 2015
$
$
—
207,231
(30,361)
6,836
(8,324)
(175,382)
—
72,053
(990)
—
—
$
71,063
(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 PCD loan pool at its carrying amount.
Recognition of the accretable yield ceases upon transfer of the PCD loan pools to held-for-sale.
151
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(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)
Sales
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
Purchases(A)
Sales
Transfer of loans to other assets
Transfer of loans to real estate owned
Adoption of ASU No. 2014-11(E)
Proceeds from repayments
Valuation provision on loans(D)
Balance at December 31, 2015
$
—
1,577,933
(1,289,687)
4,595
841,734
(2,413)
(5,723)
1,126,439
1,695,124
(1,871,054)
(41,752)
(34,139)
1,831
(85,698)
(14,070)
776,681
$
$
(A)
(B)
(C)
(D)
(E)
Represents loans acquired with the intent to sell, including loans acquired in the HLSS Acquisition (Note 1).
Represents loans previously financed with the selling counterparty and previously 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, including $10.5 million of provision related to the call transaction executed on December 23, 2015.
Represents loans financed with the selling counterparty that were previously accounted for as linked transactions (Note
10).
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.
Balance at December 31, 2014
Purchases
Transfer of loans to real estate owned
Sales
Valuation provision on REO
Balance at December 31, 2015
Real Estate
Owned
$
$
61,933
26,208
35,322
(68,441)
(4,448)
50,574
As of December 31, 2015, New Residential had non-performing residential mortgage loans that were in the process of foreclosure
with an unpaid principal balance of $565.3 million.
In addition, New Residential has recognized $68.8 million in claims receivable from FHA on Ginnie Mae EBO loans and reverse
mortgage loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim
(Note 2) during the year ended December 31, 2015.
152
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
9. INVESTMENTS IN CONSUMER LOANS, EQUITY METHOD INVESTEES
In April 2013, New Residential completed, through newly formed limited liability companies (together, the “Consumer Loan
Companies”), a co-investment in a portfolio of consumer loans. The portfolio included 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 acquired 30% membership interests in each of the
Consumer Loan Companies. Of the remaining 70% of the membership interests, OneMain acquired 47% and an affiliate of
Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. OneMain acts as the managing member of the Consumer Loan
Companies. The Consumer Loan Companies initially financed approximately 73% of the purchase price with asset-backed notes.
In September 2013, the Consumer Loan Companies issued and sold additional asset-backed notes that were subordinate to the
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, OneMain 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.
The following tables summarize the investment in the Consumer Loan Companies held by New Residential:
Consumer Loan Assets (amortized cost basis)
Other Assets
Debt
Other Liabilities
Equity
New Residential’s investment
New Residential’s ownership
December 31,
2015
2014
$ 1,698,130
$ 2,088,330
70,469
(1,912,267)
(5,640)
(149,308)
$
— $
30.0%
92,051
(2,411,421)
(12,340)
(243,380)
—
30.0%
$
$
153
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(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
2015
$
$
$
$
455,479
(87,000)
(67,935)
(60,263)
—
—
240,281
$
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%
30.0%
The following is a summary of New Residential’s consumer loan investments made through equity method investees:
December 31, 2015
December 31, 2014
Unpaid
Principal
Balance(A)
$ 2,094,904
$ 2,589,748
Interest in
Consumer
Loan
Companies
Carrying
Value(B)
30.0% $ 1,698,130
Weighted
Average
Coupon(C)
18.2%
30.0% $ 2,088,330
18.1%
Weighted
Average
Yield
18.1%
16.1%
Weighted
Average
Expected
Life
(Years)(D)
3.1
3.6
(A)
(B)
(C)
(D)
Represents the November 30, 2015 and 2014 balances, respectively.
Represents the carrying value of the consumer loans held by the Consumer Loan Companies.
Substantially all of the cash flows received on the loans was required to be used to make payments on the notes described
above.
Weighted Average Expected 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
Distributions of capital from equity method investees
Earnings from investments in consumer loan equity method investees
Balance at end of period
Tax withholding payments on behalf of New Residential, treated as non-cash distributions
Distributions in excess of basis, treated as gains, excluding tax withholding payments
Year Ended December 31,
2015
2014
— $
215,062
—
—
—
—
—
(53,840)
(215,062)
53,840
— $
—
$
$
Year Ended December 31,
2015
2014
$
$
585
43,369
$
$
609
91,411
154
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
10. DERIVATIVES
As of December 31, 2015, New Residential’s derivative instruments included economic hedges that were not designated as hedges
for accounting purposes. As of December 31, 2014 and 2013, New Residential’s derivative instruments also 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 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 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, 2015, New Residential held to-be-announced forward contract positions (“TBAs”) of $1.5 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 was entered into as an economic hedge in order to
mitigate New Residential’s interest rate risk on certain specified mortgage backed securities. As of December 31, 2015, New
Residential separately held TBAs of $750.0 million in a long 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 purchased these
TBAs during the fourth quarter of 2015, but as the specific securities were not identified as of December 31, 2015, the positions
are recorded as derivatives within the Accrued Expenses and Other Liabilities line on the balance sheet. 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.
As a result of ASU No. 2014-11 (Note 2), New Residential determined that, as of January 1, 2015, its linked transactions are
accounted for as secured borrowings. As a result, $32.4 million carrying amount of derivatives was removed from the balance
sheet and replaced with $116.8 million carrying amount of Non-Agency RMBS, $1.8 million carrying amount of Residential
Mortgage Loans, Held-for-Investment, $86.0 million of Repurchase Agreements, and $0.2 million of other liabilities.
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
TBAs
Interest Rate Swaps
Balance Sheet Location
Derivative assets
Derivative assets
Derivative assets
Accrued expenses and other liabilities
Accrued expenses and other liabilities
December 31,
2015
2014
$
$
$
$
— $
32,090
—
2,689
2,689
2,058
11,385
13,443
$
$
$
312
195
32,597
4,985
9,235
14,220
(A)
For December 31, 2014, investments purchased from, and financed by, the selling counterparty that New Residential
accounted for as linked transactions are reflected as derivatives. Upon the adoption of ASU No. 2014-11 on January 1,
2015, these transactions are accounted for as secured borrowings.
155
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following table summarizes notional amounts related to derivatives:
Non-Performing Loans(A)
Real Estate Securities(B)
TBAs, short position(C)
TBAs, long position(C)
Interest Rate Caps(D)
Interest Rate Swaps(E)
December 31,
2015
$
— $
—
1,450,000
750,000
3,400,000
2,444,000
2014
2,931
186,694
1,234,000
—
210,000
1,107,000
(A)
(B)
(C)
(D)
(E)
For December 31, 2014, represents the UPB of the underlying loans of the non-performing loan pools within linked
transactions.
For December 31, 2014, 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 0.50% for $650.0 million of notional, at 0.75% for $2,600.0 million of notional, and at 4.0% for $150.0
million of notional.
Receive LIBOR and pay a fixed rate.
The following table summarizes gains (losses) recorded in relation to derivatives:
Year Ended December 31,
2014
2013
2015
Other income (loss), net
Non-Performing Loans(A)
Real Estate Securities(A)
TBAs
Interest Rate Caps
Interest Rate Swaps
Gain (loss) on settlement of investments, net
Non-Performing Loans(A)
Real Estate Securities(A)
TBAs
Interest Rate Caps
Interest Rate Swaps
U.S.T. Short Positions
$
— $
—
(2,058)
(1,749)
(2,150)
(5,957)
(1,149) $
2,336
(4,985)
(4)
(9,235)
(13,037)
—
5,609
—
(27,142)
(1,180)
(16,241)
—
(44,563)
(50,520) $
43
(33,638)
—
(8,400)
176
(36,210)
(49,247) $
1,831
(11)
—
—
—
1,820
—
—
—
—
—
—
—
1,820
Total gains (losses)
$
(A)
For December 31, 2014, investments purchased from, and financed by, the selling counterparty that New Residential
accounted for as linked transactions are reflected as derivatives. Upon the adoption of ASU No. 2014-11 on January 1,
2015, these transactions are accounted for as secured borrowings.
156
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following table presents both gross and net information about transactions formerly accounted for as 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
$
$
1,581
(1,269)
312
116,739
(84,649)
32,090
32,402
(A)
(B)
(C)
Non-performing loans that had a UPB of $2.9 million as of December 31, 2014, 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 as of December 31, 2014, which represented the
notional amount of the linked transaction.
11. DEBT OBLIGATIONS
The following table presents certain information regarding New Residential’s debt obligations:
Month
Issued
Outstanding
Face
Amount
Carrying
Value(A)
Final
Stated
Maturity(B)
December 31, 2015
Weighted
Average
Funding
Cost
Weighted
Average
Life
(Years)
Collateral
Outstanding
Face
Amortized
Cost Basis
Carrying
Value
December
31, 2014
Weighted
Average
Life
(Years)
Carrying
Value(A)
Various
$
1,683,305
$ 1,683,305
Jan-16
0.60%
0.1
$
1,673,125
$
1,731,758
$
1,730,586
0.6
$
1,707,602
Debt Obligations/
Collateral
Repurchase Agreements(C)
Agency RMBS(D)
Non-Agency RMBS(E)
Various
1,333,852
1,333,852
Residential Mortgage
Loans(F)
Various
908,811
907,993
Real Estate Owned(G) (H)
Various
77,528
77,458
Jan-16 to
May-16
May-16 to
Jan-17
Feb-16 to
Jan-17
Consumer Loan
Investment(I)
Total Repurchase
Agreements
Notes Payable
Secured Corporate
Note(J)
Servicer Advances(K)
Residential Mortgage
Loans(L)
Real Estate Owned
Total Notes Payable
Apr-15
40,446
40,446
Apr-16
4,043,942
4,043,054
May-15
184,433
182,978
Apr-17
Various
7,058,094
7,047,061
Apr-16 to
Aug-18
Oct-15
—
19,529
19,529
Oct-16
—
—
—
7,262,056
7,249,568
Total/Weighted Average
$
11,305,998
$11,292,622
1.72%
2.80%
3.05%
3.83%
1.54%
5.67%
3.39%
3.08%
—%
3.45%
2.77%
0.1
0.8
0.9
0.3
0.2
1.3
1.4
0.8
—
1.3
1.0
3,233,171
1,535,350
1,538,703
1,318,603
1,091,523
1,075,816
N/A
N/A
N/A
N/A
86,911
—
92,619,325
217,517
261,102
7,578,110
7,400,068
7,426,794
34,423
N/A
21,113
N/A
19,560
—
7.0
3.2
N/A
3.1
5.1
4.4
4.2
N/A
539,049
867,334
35,105
—
3,149,090
—
2,885,784
22,194
785
2,908,763
$
6,057,853
(A)
(B)
(C)
(D)
Net of deferred financing costs associated with the adoption of ASU No. 2015-03 (Note 2).
All debt obligations with a stated maturity of January or February 2016 were refinanced, extended or repaid.
These repurchase agreements had approximately $4.8 million of associated accrued interest payable as of December 31,
2015.
All of the Agency RMBS repurchase agreements have a fixed rate. Collateral amounts include approximately $1.5 billion
of related trade and other receivables.
157
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
(L)
All of the Non-Agency RMBS repurchase agreements have LIBOR-based floating interest rates. This includes repurchase
agreements of $145.8 million on retained servicer advance bonds.
All of these repurchase agreements have LIBOR-based floating interest rates.
All of these repurchase agreements have LIBOR-based floating interest rates.
Includes financing collateralized by receivables including claims from FHA on Ginnie Mae EBO loans for which
foreclosure has been completed and for which New Residential have made or intend to make a claim on the FHA guarantee.
The repurchase agreement bears interest equal to three-month LIBOR plus 3.50% and is collateralized by New
Residential’s interest in consumer loans (Note 9).
The loan bears interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 5.25%.
The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the Excess
MSRs that secure this corporate note.
$2.7 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
1.7% to 2.2%.
The note is payable to Nationstar and bears interest equal to one-month LIBOR plus 2.875%.
As of December 31, 2015, New Residential had no outstanding repurchase agreements where the amount at risk with any individual
counterparty or group of related counterparties exceeded 10% of New Residential’s stockholders' equity. The amount at risk under
repurchase agreements is defined as the excess of carrying amount (or market value, if higher than the carrying amount) of the
securities or other assets sold under agreement to repurchase, including accrued interest plus any cash or other assets on deposit
to secure the repurchase obligation, over the amount of the repurchase liability (adjusted for accrued interest).
HLSS Servicer Advance Receivables Trust (“HSART”)
On October 1, 2015, an event of default (the “Specified Default”) occurred under the indenture related to certain notes issued by
HSART, a wholly-owned subsidiary of New Residential. The Specified Default occurred as a result of (and solely as a result of)
Ocwen’s master servicer rating downgrade to “Below Average”, announced by S&P on September 29, 2015. After giving effect
to such downgrade, Ocwen ceased to be an “Eligible Subservicer” under the indenture causing the “Collateral Test” under the
indenture to not be satisfied. The continuing failure of the Collateral Test as of close of business on October 1, 2015 resulted in
the occurrence of the Specified Default. The Specified Default caused $2.5 billion of term notes issued by HSART to become
immediately due and payable, without premium or penalty, as of the close of business on October 1, 2015, in accordance with the
terms of HSART’s indenture.
New Residential had previously secured approximately $4.0 billion of surplus Servicer Advance financing commitments from
HSART’s lenders. HSART repaid all $2.5 billion of the term notes on October 2, 2015 in full with the proceeds of draws by HSART
on variable funding notes previously issued by HSART. The holders of the variable funding notes issued by HSART previously
agreed that the Specified Default would not be deemed an “event of default” under HSART’s indenture for purposes of their
variable funding notes. After giving effect to the repayment of the term notes issued by HSART, the only outstanding notes issued
by HSART are variable funding notes. No other material obligation of HSART arises, increases or accelerates as a result of the
transactions described herein.
During the first three quarters of 2015, through their investment manager, certain bondholders (the “HSART Bondholders”) alleged
that events of default had occurred under HSART and that, as a result, the HSART Bondholders were due additional interest under
the related agreements. In February 2015, in response to such allegations, instead of releasing such amounts to New Residential’s
subsidiary that sponsors the HSART transaction entitled thereto, the trustee of HSART began to withhold, monthly, such interest
(the “Withheld Funds”) so that such amounts were reserved in the event that it was determined that any of the alleged events of
default had occurred. On August 28, 2015, the trustee commenced a legal proceeding requesting instruction from the court regarding
the alleged defaults and the disposition of the Withheld Funds.
On October 2, 2015, as described above, the notes held by the HSART Bondholders were repaid in full. On October 14, 2015, the
court ruled that no event of default had occurred under HSART, authorized the trustee to release the Withheld Funds and dismissed
the legal proceeding. As a result of this ruling, $92.7 million was released from restricted cash accounts related to HSART and
became available for unrestricted use by New Residential.
158
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
On October 13, 2015, New Residential entered into a settlement agreement in connection with which a subsidiary of New Residential
was liable for a $9.1 million payment to certain HSART Bondholders, which was recorded within General and Administrative
Expenses; this agreement did not impact other former or existing bondholders of HSART.
Federal Home Loan Bank of Cincinnati Membership
In November 2015, New Residential’s wholly-owned captive insurance subsidiary, NRZ Insurance Holdings LLC (“NRZ
Insurance”), was granted membership to the Federal Home Loan Bank of Cincinnati (“FHLBC”) . The 12 regional Federal Home
Loan Banks (“FHLBs”) provide long-term and short-term secured loans, called “advances,” to their members, provided the member
meets certain creditworthiness standards, pledges sufficient eligible collateral and complies with its agreements with FHLB. Each
advance requires approval by the FHLB and is secured by collateral in accordance with the FHLB’s credit and collateral guidelines,
as may be revised from time to time by the FHLB. FHLB members may use a variety of real estate related assets, including
residential mortgage loans, Agency RMBS and certain Non-Agency RMBS, as collateral for advances. In January 2016, however,
FHFA announced a final rule that will terminate the FHLB memberships of captive insurance companies. Absent the final rule
being overturned, or the passage of an amendment to the Federal Home Loan Bank Act permitting captive insurance companies
to be members of FHLBs, we do not expect NRZ Insurance to borrow from FHLBC, and NRZ Insurance’s FHLBC membership
will terminate in February 2017.
General
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 $4.0 billion of repurchase agreements as of December 31, 2015. 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.
159
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Activities related to the carrying value of New Residential’s debt obligations were as follows:
Servicer
Advances(A)
2,390,778
$
Real Estate
Securities
Real Estate
Loans and
REO
Other
Total
$
1,620,711
$
22,840
$
75,000
$
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)
—
—
—
1,242
—
5,841,474
—
(1,103)
925,418
—
(75,000)
$
— $
(4,446)
(5,416,883)
6,057,853
$
2,885,784
$
2,246,651
$
—
—
—
—
7,649,261
1,915,056
43,158
9,607,475
84,649
(6,963,404)
—
1,306
(1,832,462)
(888)
—
(2,712)
—
85,955
(8,798,578)
(888)
Retrospective adjustment for the
adoption of ASU No. 2015-03 (Note 2)
(4,446)
Balance at December 31, 2013(B)
Repurchase Agreements:
Borrowings
Repayments
Notes Payable:
Borrowings
Repayments
Balance at December 31, 2014(B)
Repurchase Agreements:
Borrowings
Modified retrospective adjustment for
the adoption of ASU No. 2014-11
(Note 2)
Repayments
Adoption of ASU No. 2015-03 (Note 2)
Notes Payable:
Borrowings
Repayments
Adoption of ASU No. 2015-03 (Note 2)
Balance at December 31, 2015
$
7,047,061
$
3,017,157
$
1,004,980
$
10,780,237
(6,612,372)
(6,588)
—
—
—
1,632
(5,082)
—
852,419
(669,406)
(35)
223,424
11,634,288
(7,286,860)
(6,623)
$ 11,292,622
(A)
(B)
New Residential net settles daily borrowings and repayments of the Notes Payable on its Servicer Advances.
Excludes debt related to linked transactions (Note 10).
Maturities
New Residential’s debt obligations as of December 31, 2015 had contractual maturities as follows:
Year
2016
2017
2018
Nonrecourse
2,754,360
$
3,996,400
368,380
7,119,140
$
$
$
Recourse
3,723,952
462,906
—
4,186,858
$
$
Total
6,478,312
4,459,306
368,380
11,305,998
160
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Borrowing Capacity
The following table represents New Residential’s borrowing capacity as of December 31, 2015:
Debt Obligations/ Collateral
Repurchase Agreements
Collateral Type
Borrowing
Capacity
Balance
Outstanding
Available
Financing
Residential Mortgage Loans
Real Estate Loans and REO $
2,495,000
$
986,339
$
1,508,661
Notes Payable
Servicer Advances(A)
Servicer Advances
8,524,183
11,019,183
$
$
7,058,094
8,044,433
$
1,466,089
2,974,750
(A)
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 0.5% fee on the unused borrowing capacity. Excludes borrowing capacity and outstanding debt
for retained non-agency bonds with a current face amount of $175.8 million.
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, as of a quarter
end, 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, 2015.
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.
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.
161
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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, 2015 were as follows:
Principal
Balance or
Notional
Amount
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
Assets:
Investments in:
Excess mortgage servicing rights, at fair value(A)
$
329,367,971
$
1,581,517
$
— $
— $
1,581,517
$
1,581,517
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
Cash and cash equivalents
Restricted cash
Liabilities:
Repurchase agreements
Notes payable
Derivative liabilities
73,058,050
7,578,110
4,418,552
506,135
859,714
3,400,000
249,936
94,702
217,221
7,426,794
2,501,881
330,178
776,681
2,689
249,936
94,702
—
—
—
—
—
—
249,936
94,702
—
—
917,598
—
—
2,689
—
—
217,221
7,426,794
1,584,283
330,433
784,750
—
—
—
217,221
7,426,794
2,501,881
330,433
784,750
2,689
249,936
94,702
$ 13,181,599
$ 344,638
$
920,287
$ 11,924,998
$ 13,189,923
$
4,043,942
$
4,043,054
$
— $
4,043,942
$
— $
4,043,942
7,262,056
4,644,000
7,249,568
13,443
—
—
—
7,260,909
7,260,909
13,443
—
13,443
$ 11,306,065
$
— $
4,057,385
$
7,260,909
$ 11,318,294
(A)
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.
162
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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:
Principal
Balance or
Notional
Amount
Carrying
Value
Level 1
Level 2
Level 3
Total
Fair Value
Assets
Investments in:
$
417,733
$
— $
— $
417,733
$
417,733
Excess mortgage servicing rights, at fair value(A) $ 102,481,758
Excess mortgage servicing rights, equity
method investees, at fair value(A)
Servicer advances
Real estate securities, available-for-sale
Residential mortgage loans, held-for-sale
Non-hedge derivatives(B)
Cash and cash equivalents
Restricted cash
Liabilities
Repurchase agreements
Notes payable
Derivative liabilities
146,257,821
330,876
3,102,492
3,270,839
3,542,511
2,463,163
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
2,908,763
2,341,000
14,220
—
—
822,587
2,092,814
2,915,401
14,220
—
14,220
$ 6,072,073
$
— $ 3,083,458
$ 2,995,253
$ 6,078,711
Residential mortgage loans, held-for-investment
69,581
47,838
(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 formerly linked transactions consisted of the aggregate UPB amounts of the loans and securities
that comprised 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.
163
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(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:
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 (loss) on settlement of investments,
net
Included in other income (loss), net(D)
Gains (losses) included in other comprehensive
income(E)
Interest income
Purchases, sales and repayments
Purchases/contributions from Newcastle
Proceeds from sales
Proceeds from repayments
Settlements(F)
Balance at December 31, 2014
Transfers(C)
Transfers from Level 3
Transfers to Level 3
Transfers from investments in excess mortgage
servicing rights, equity method investees, to
investments in excess mortgage servicing rights
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 (loss) on settlement of investments,
net
Included in other income (loss), net(D)
Gains (losses) included in other comprehensive
income(E)
Purchases
Proceeds from sales
Proceeds from repayments
Other
De-linked transactions(G)
Excess MSRs(A)
Level 3
Excess MSRs in Equity
Method Investees(A)(B)
Agency
Non-
Agency
Agency
Non-
Agency
Servicer
Advances
Non-Agency
RMBS
Linked
Transactions
Total
$
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)
$
217,519
$
200,214
$
232,618
$
98,258
$ 3,270,839
$
723,000
$
32,402
$ 4,774,850
—
—
—
—
—
—
98,258
—
(3,080)
41,723
—
—
—
2,852
—
—
—
—
147
—
254,149
917,078
—
—
—
—
—
—
—
31,160
—
—
—
—
—
—
—
—
—
(98,258)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(57,491)
—
—
—
352,316
—
—
(5,788)
—
—
—
3,061
879
(6,701)
69,632
20,042,582
1,288,901
—
(425,761)
(179,772)
—
(64,981)
(216,927)
(46,557)
— (16,181,452)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(5,788)
38,643
31,160
(57,491)
3,061
3,878
(6,701)
556,513
22,502,710
(425,761)
— (16,689,689)
—
84,430
Interest income
30,742
103,823
Purchases, sales, repayments and transfers
—
—
—
—
—
116,832
(32,402)
Balance at December 31, 2015
$
437,201
$ 1,144,316
$
217,221
$
— $ 7,426,794
$
1,584,283
$
— $ 10,809,815
(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.
164
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
(D)
(E)
(F)
(G)
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 and realized gains (losses) recorded during the period.
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.
See Note 10 for a discussion of transactions formerly accounted for as linked transactions.
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, SLS or Ocwen 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.
165
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following tables summarize certain information regarding the weighted average inputs used in valuing the Excess MSRs
owned directly and through equity method investees:
Directly Held (Note 4)
Agency
Original Pools
Recaptured Pools
Recapture Agreement
Non-Agency(F)
Nationstar and SLS Serviced:
Original Pools
Recaptured Pools
Recapture Agreement
Ocwen Serviced Pools
Total/Weighted Average--Directly Held
Held through Equity Method Investees (Note 5)
Agency
Original Pools
Recaptured Pools
Recapture Agreement
Total/Weighted Average--Held through Investees
Total/Weighted Average--All Pools
December 31, 2015
Significant Inputs(A)
Prepayment
Speed(B)
Delinquency(C)
Recapture Rate(D)
Excess Mortgage
Servicing Amount
(bps)(E)
10.7%
7.5%
7.6%
10.0%
12.5%
7.5%
7.5%
9.3%
10.0%
10.0%
12.6%
7.7%
7.7%
10.8%
10.2%
3.5%
4.9%
4.9%
3.8%
N/A
N/A
N/A
N/A
N/A
3.8%
5.9%
5.0%
4.9%
5.6%
4.2%
29.5%
20.0%
20.0%
27.4%
10.2%
20.0%
20.0%
—%
2.6%
9.5%
34.3%
20.0%
20.0%
29.0%
13.6%
21
20
22
21
14
20
20
14
14
16
19
23
23
20
17
166
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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
December 31, 2014
Significant Inputs(A)
Prepayment
Speed(B)
Delinquency(C)
Recapture Rate(D)
Excess Mortgage
Servicing Amount
(bps)(E)
11.0%
8.0%
10.6%
12.5%
8.0%
12.3%
11.4%
13.3%
8.0%
12.3%
13.4%
8.0%
13.0%
12.5%
12.1%
5.6%
5.0%
5.5%
N/A
N/A
N/A
5.5%
6.6%
5.0%
6.3%
N/A
N/A
N/A
6.3%
6.2%
31.6%
19.9%
30.1%
10.0%
20.0%
10.5%
20.7%
33.1%
20.0%
30.6%
10.0%
20.0%
10.8%
24.6%
23.1%
22
20
22
15
20
15
18
19
23
20
12
20
12
17
18
(A)
(B)
(C)
(D)
(E)
(F)
Weighted by fair value of the 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 or Ocwen, as applicable.
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, 2015 and 2014, weighted average discount rates of 9.8% and 9.6%, respectively, were 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.
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 loan level factors such as the borrower’s interest rate, 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 historical prepayment experience associated with the
167
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
collateral when determining this vector and also reviews industry research on the prepayment experience of similar loan
pools. 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. Delinquency rate projections are in the form of a “vector” that varies over the
expected life of the pool. The delinquency vector specifies the percentage of the unpaid principal balance that is expected
to be delinquent each month. The delinquency vector is based on assumptions that reflect macroeconomic conditions, the
historical delinquency rates for the pools and the underlying borrower characteristics such as the FICO score and loan-to-
value ratio. 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.
Recapture rate projections are in the format of a “vector” that varies over the expected life of the pool. The recapture vector
specifies the percentage of the refinanced loans that have been recaptured within the pool by the servicer. The recapture
vector takes into account the nature and timeline of the relationship between the borrowers in the pool and the servicer, the
customer retention programs offered by the servicer and the historical recapture rates.
• 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 base fee. For loans expected to be refinanced by Nationstar
and subject to a recapture agreement, New Residential considers the excess mortgage servicing spread on loans recently
originated by Nationstar over the past three months 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
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
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, SLS or Ocwen being removed as the
servicer, which likelihood is considered to be remote.
168
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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:
Significant Inputs
Weighted Average
Outstanding
Servicer Advances
to UPB of Underlying
Residential Mortgage
Loans
Prepayment
Speed(A)
Delinquency
Mortgage
Servicing
Amount(B)
Discount
Rate
December 31, 2015
December 31, 2014
2.3%
2.1%
10.4%
12.6%
17.5%
15.6%
9.2 bps
19.4 bps
5.6%
5.4%
(A)
(B)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
Mortgage servicing amount excludes the amounts New Residential pays its servicers 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, and which in the case of Servicer Advances acquired from HLSS is based partially on future LIBOR estimates. 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 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.
• LIBOR: The performance-based incentive fees on both Ocwen-serviced and Nationstar-serviced servicer advance portfolios
are driven by LIBOR-based factors. The LIBOR curves used are widely used by market participants as reference rates for
many financial instruments.
• 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.
169
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Real Estate Securities Valuation
New Residential’s securities valuation methodology and results are further detailed as follows:
Asset Type
December 31, 2015:
Agency RMBS
Non-Agency RMBS(C)
Total
December 31, 2014:
Agency RMBS
Non-Agency RMBS(C)
Outstanding
Face
Amount
Amortized
Cost Basis
Multiple
Quotes(A)
Single
Quote(B)
Total
Level
Fair Value
$
884,578
$
918,633
$
917,598
$
— $
917,598
3,533,974
1,579,445
1,029,981
554,302
1,584,283
$ 4,418,552
$ 2,498,078
$ 1,947,579
$ 554,302
$ 2,501,881
$ 1,646,361
$ 1,724,329
$ 1,740,163
$
— $ 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
2
3
Total
(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 it 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, it 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. New Residential’s investments in
Agency RMBS are classified within Level 2 of the fair value hierarchy because the market for these securities is very
active and market prices are readily observable.
Management was unable to obtain quotations from more than one source on these securities. For approximately $228.5
million in 2015 and $13.7 million in 2014, the one source was 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, 2015 and 2014, assets measured at fair value on a nonrecurring basis were $292.4 million and $666.6 million,
respectively. The $292.4 million of assets include approximately $253.0 million of residential mortgage loans held-for-sale and
$39.4 million of REO. The fair value of New Residential’s mortgage loans held-for-sale are estimated based on a discounted cash
170
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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:
Fair Value
Discount
Rate
Weighted
Average Life
(Years)(A)
Prepayment
Rate
CDR(B)
Loss
Severity(C)
December 31, 2015
Performing Loans
Non-Performing Loans
Total/Weighted Average
December 31, 2014
Performing Loans
PCD Loans
Total/Weighted Average
$
$
$
$
50,858
202,155
253,013
36,613
573,510
610,123
5.0%
5.7%
5.6%
4.6%
5.7%
5.6%
4.2
3.4
3.6
7.5
2.6
2.9
9.2%
2.9%
4.2%
4.2%
2.9%
3.0%
2.8%
N/A
4.2%
N/A
35.2%
19.6%
22.7%
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 PCD 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 20%.
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, 2015 was a reduction of approximately $14.1 million and $4.5 million for loans held-
for-sale and REO, respectively.
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.
171
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Residential Mortgage Loans for Which Fair Value is Only Disclosed
The fair value of New Residential’s residential mortgage loans 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 residential mortgage loans:
Carrying
Value
Fair Value
Valuation
Provision/
(Reversal)
In Current
Year
Discount
Rate
Weighted
Average Life
(Years)(A)
Prepayment
Rate
CDR(B)
Loss
Severity(C)
December 31, 2015
Reverse Mortgage Loans(D)
$
19,560
$
19,560
$
Performing Loans
Non-Performing Loans
246,190
588,096
248,858
593,754
Total/Weighted Average
$
853,846
$
862,172
$
35
43
N/A
78
10.0%
4.8%
5.4%
5.3%
December 31, 2014
Reverse Mortgage Loans(D)
$
24,965
$
24,965
$
1,057
10.2%
Performing Loans
Non-Performing 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%
4.2
5.2
2.5
3.3
3.9
7.0
2.8
5.6
N/A
6.6%
1.4%
N/A
5.7%
2.3%
N/A
1.2%
N/A
N/A
2.2%
N/A
8.1%
14.3%
13.1%
13.3%
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 formerly
accounted for the contemporaneous purchase of the investments and the associated financings as linked transactions (Note 10).
The linked transactions were valued on a net basis considering their underlying components, the investment value and the related
repurchase financing agreement value, generally determined consistently with the relevant instruments as described in this note.
Values of investments in non-performing loans were estimated based on a discounted cash flow analysis using internal pricing
models that employed 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 were categorized as Level 3, were
recorded as non-hedge derivative instruments on a net basis.
New Residential enters into economic hedges including interest rate swaps, caps and TBAs, which are categorized as Level 2 in
the valuation hierarchy. New Residential 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 are valued based on internal models utilizing
both observable and unobservable inputs.
172
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 relating to 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.
In April 2015, New Residential issued the New Residential Acquisition Common Stock in connection with the HLSS Acquisition
(Note 1).
In addition, in April 2015, New Residential issued 29,213,020 shares of its common stock in a public offering at a price to the
public of $15.25 per share for net proceeds of approximately $436.1 million. One of New Residential’s executive officers
participated in this offering and purchased 250,000 shares at the public offering price. For the purpose of compensating the Manager
for its successful efforts in raising capital for New Residential, in connection with this offering and the New Residential Acquisition
Common Stock issued in the HLSS Acquisition, New Residential granted options to the Manager relating to 5,750,000 shares of
New Residential’s common stock at a price of $15.25, which had a fair value of approximately $8.9 million as of the grant date.
The assumptions used in valuing the options were: a 2.02% risk-free rate, a 6.71% dividend yield, 24.04% volatility and a 10-
year term.
In June 2015, New Residential issued 27.9 million shares of its common stock in a public offering at a price to the public of $15.88
per share for net proceeds of approximately $442.6 million. One of New Residential’s executive officers participated in this offering
and purchased 9,100 shares at the public offering price. 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 relating to
2.8 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $3.7
million as of the grant date. The assumptions used in valuing the options were: a 2.61% risk-free rate, a 7.81% dividend yield,
23.73% volatility and a 10-year term. In addition, the Manager and its employees exercised an aggregate of 6.7 million options
and were issued an aggregate of 3.6 million shares of New Residential’s common stock in a cashless exercise, which were sold to
third parties in a simultaneous secondary offering.
173
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(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. In December 2014, a former employee of the Manager exercised
42,566 options with a weighted average exercise price of $7.19. Upon exercise, 42,566 shares of common stock of New Residential
were issued. In July 2015, one former employee of the Manager exercised an aggregate of 37,500 options with a weighted average
exercise price of $7.19 and received 20,227 shares of New Residential’s common stock.
On January 19, 2016, New Residential announced that its board of directors had authorized the repurchase of up to $200 million
of its common stock over the next 12 months. Repurchases may be made from time to time through open market purchases or
privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Securities Exchange
Act of 1934 or by means of one or more tender offers, in each case, as permitted by securities laws and other legal requirements.
The amount and timing of the purchases will depend on a number of factors including the price and availability of New Residential’s
shares, trading volume, capital availability, New Residential’s performance and general economic and market conditions. No share
repurchases have been made as of the date of issuance of these consolidated financial statements. The share repurchase program
may be suspended or discontinued at any time.
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
March 16, 2015
May 14, 2015
September 18, 2015
December 10, 2015
Payment Date
Quarterly
Dividend
Special
Dividend
Total
Dividend
Total Amounts
Distributed
(millions)
Per Share
$
July 2013
October 2013
January 2014
April 2014
July 2014
October 2014
January 2015
April 2015
July 2015
October 2015
January 2016
0.14
0.35
0.35
0.35
0.35
0.35
0.38
0.38
0.45
0.46
0.46
$
— $
—
0.15
—
0.15
—
—
—
—
—
—
$
0.14
0.35
0.50
0.35
0.50
0.35
0.38
0.38
0.45
0.46
0.46
17.7
44.3
63.3
44.3
70.6
49.5
53.7
53.7
89.5
106.0
106.0
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals
at December 31, 2015.
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 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 10-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. Increases of 8,543,539 and
1,437,500 were made on January 1, 2016 and 2015, respectively. 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
174
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
share of common stock on the date of exercise over the exercise 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, the 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.
New Residential’s outstanding options were summarized as follows:
Held by the Manager
345,720
10,582,860
10,928,580
473,377
8,432,597
8,905,974
December 31, 2015
December 31, 2014
Issued Prior
to 2011
Issued in 2011
- 2015
Total
Issued Prior
to 2011
Issued in 2011
- 2014
Total
Issued to the Manager and
subsequently transferred to certain
of the Manager’s employees
Issued to the independent directors
Total
88,280
1,359,247
1,447,527
125,622
1,700,497
1,826,119
—
4,000
4,000
1,000
4,000
5,000
434,000
11,946,107
12,380,107
599,999
10,137,094
10,737,093
The following table summarizes New Residential’s outstanding options as of December 31, 2015. The last sales price on the New
York Stock Exchange for New Residential’s common stock in the year ended December 31, 2015 was $12.16 per share.
Recipient
Directors
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Outstanding
Date of
Grant/
Exercise(A)
Various
2003 - 2007
2011 - 2012
2013
2014
2015
Number of
Unexercised
Options
4,000
434,000
25,000
1,936,068
1,437,500
8,543,539
12,380,107
Options
Exercisable
as of
December 31,
2015
Weighted
Average
Exercise
Price(B)
Intrinsic Value of
Exercisable
Options as of
December 31, 2015
(millions)
$
4,000
434,000
25,000
1,936,068
958,333
2,092,041
5,449,442
$
13.58
31.36
7.19
10.98
12.20
15.46
—
—
0.1
2.3
—
—
(A)
(B)
(C)
Options expire on the tenth anniversary from date of grant.
The exercise 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
2013
2014
Total
Range of Exercise
Prices
$29.92 to $33.80
$10.24 to $11.48
$12.20
Total Unexercised
Inception to Date
88,280
1,100,497
258,750
1,447,527
175
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
The following table summarizes activity in our outstanding options:
December 31, 2013 outstanding options
Options granted
Options exercised(A)
Options expired unexercised
December 31, 2014 outstanding options
Options granted
Options exercised(A)
Options expired unexercised
December 31, 2015 outstanding options
Weighted
Average
Exercise Price
12.20
5.72
15.46
7.81
Amount
10,365,229
1,437,500
$
(648,573) $
(417,063)
10,737,093
8,543,539
$
(6,734,525) $
(166,000)
12,380,107 See table above
(A)
The 6.7 million and 0.6 million options that were exercised in 2015 and 2014 had an intrinsic value of approximately
$59.4 million and $4.5 million, respectively, at the date of exercise.
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.
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, 2015, 2014 and 2013 based on the treasury stock method, New Residential had 2,167,796, 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), as well as HLSS for the period of April 6, 2015 through October 23, 2015.
14. COMMITMENTS AND CONTINGENCIES
Litigation – Following the HLSS Acquisition (see Note 1 for related defined terms), material potential claims, lawsuits, regulatory
inquiries or investigations, and other proceedings, of which New Residential is currently aware, are as follows. New Residential
has not accrued losses in connection with these legal contingencies because it does not believe there is a probable and reasonably
estimable loss. Furthermore, New Residential cannot reasonably estimate the range of potential loss related to these legal
contingencies at this time. However, the ultimate outcome of the proceedings described below may have a material adverse effect
on New Residential’s business, financial position or results of operations.
In addition to the matters described below, from time to time, New Residential is or may be involved in various disputes, litigation
and regulatory inquiry and investigation matters that arise in the ordinary course of business. Given the inherent unpredictability
of these types of proceedings, it is possible that future adverse outcomes could have a material adverse effect on its financial results.
176
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
New Residential is not aware of any unasserted claims that it believes are material and probable of assertion where the risk of loss
is expected to be reasonably possible.
Three putative class action lawsuits have been filed against HLSS and certain of its current and former officers and directors in
the United States District Court for the Southern District of New York entitled: (i) Oliveira v. Home Loan Servicing Solutions,
Ltd., et al., No. 15-CV-652 (S.D.N.Y.), filed on January 29, 2015; (ii) Berglan v. Home Loan Servicing Solutions, Ltd., et al., No.
15-CV-947 (S.D.N.Y.), filed on February 9, 2015; and (iii) W. Palm Beach Police Pension Fund v. Home Loan Servicing Solutions,
Ltd., et al., No. 15-CV-1063 (S.D.N.Y.), filed on February 13, 2015. On April 2, 2015, these lawsuits were consolidated into a
single action, which is referred to as the “Securities Action.” On April 28, 2015, lead plaintiffs, lead counsel and liaison counsel
were appointed in the Securities Action. On November 9, 2015, lead plaintiffs filed an amended class action complaint. On January
27, 2016, the Securities Action was transferred to the United States District Court for the Southern District of Florida and given
the Index No. 16-CV-60165 (S.D. Fla.).
The Securities Action names as defendants HLSS, former HLSS Chairman William C. Erbey, HLSS Director, President, and Chief
Executive Officer John P. Van Vlack, and HLSS Chief Financial Officer James E. Lauter. The Securities Action asserts causes of
action under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 based on certain public disclosures made by HLSS
relating to its relationship with Ocwen and HLSS’s risk management and internal controls. More specifically, the consolidated
class action complaint alleges that a series of statements in HLSS’s disclosures were materially false and misleading, including
statements about (i) Ocwen’s servicing capabilities; (ii) HLSS’s contingencies and legal proceedings; (iii) its risk management
and internal controls; and (iv) certain related party transactions. The consolidated class action complaint also appears to allege
that HLSS’s financial statements for the years ended 2012 and 2013, and the first quarter ended March 30, 2014, were false and
misleading based on HLSS’s August 18, 2014 restatement. Lead plaintiffs in the Securities Action also allege that HLSS misled
investors by failing to disclose, among other things, information regarding governmental investigations of Ocwen’s business
practices. Lead plaintiffs seek money damages under the Securities Exchange Act in an amount to be proven at trial and reasonable
costs, expenses, and fees. We intend to vigorously defend the Securities Action and consistent therewith on February 11, 2015,
defendants filed motions to dismiss the Securities Action in its entirety.
Two shareholder derivative actions have been filed purportedly on behalf of Ocwen naming as defendants HLSS and certain current
and former directors and officers of Ocwen, including former HLSS Chairman William C. Erbey, entitled (i) Sokolowski v. Erbey,
et al., No. 9:14-CV-81601 (S.D. Fla.), filed on December 24, 2014 (the “Sokolowski Action”), and (ii) Moncavage v. Faris, et al.,
No. 2015CA003244 (Fla. Palm Beach Cty. Ct.), filed on March 20, 2015 (collectively, with the Sokolowski Action, the “Ocwen
Derivative Actions”). The original complaint in the Sokolowski Action named as defendants certain current and former directors
and officers of Ocwen, including former HLSS Chairman William C. Erbey. On February 11, 2015, plaintiff in the Sokolowski
Action filed an amended complaint naming additional defendants, including HLSS. On January 8, 2016, two related derivative
actions – Hutt v. Erbey, et al., No. 9:15-CV-81709 (S.D. Fla.) and Lowinger v. Erbey, et al., No. 0:15-CV-62628 (S.D. Fla.) – were
consolidated with the Sokolowski Action. On February 17, 2016, the court appointed lead counsel and ordered that lead counsel
file a consolidated complaint on or before March 8, 2016. The Ocwen Derivative Actions assert a cause of action for aiding and
abetting certain alleged breaches of fiduciary duty under Florida law against HLSS and others, and claim that HLSS (i) substantially
assisted Ocwen’s alleged wrongful conduct by purchasing Ocwen’s MSRs and (ii) received improper benefits as a result of its
business dealings with Ocwen due to Mr. Erbey’s purported control over both HLSS and Ocwen. Additionally, the Sokolowski
Action asserts a cause of action for unjust enrichment against HLSS and others. The Ocwen Derivative Actions seek money
damages from HLSS in an amount to be proven at trial. We intend to vigorously defend these lawsuits.
On March 11, 2015, plaintiff David Rattner filed a shareholder derivative action purportedly on behalf of HLSS entitled Rattner
v. Van Vlack, et al., No. 2015CA002833 (Fla. Palm Beach Cty. Ct.) (the “HLSS Derivative Action”). The lawsuit names as defendants
HLSS directors John P. Van Vlack, Robert J. McGinnis, Kerry Kennedy, Richard J. Lochrie, and David B. Reiner (collectively,
the “Director Defendants”), New Residential Investment Corp., and Hexagon Merger Sub, Ltd. The HLSS Derivative Action
alleges that the Director Defendants breached their fiduciary duties of due care, diligence, loyalty, honesty and good faith and the
duty to act in the best interests of HLSS under Cayman law and claims that the Director Defendants approved a proposed merger
with New Residential Investment Corp. that (i) provided inadequate consideration to HLSS’s shareholders, (ii) included unfair
deal protection devices, (iii) and was the result of an inadequate process due to conflicts of interest. On July 8, 2015, the complaint
was voluntarily dismissed without prejudice.
On September 15, 2014, the Securities and Exchange Commission (“SEC”) instituted an investigation into HLSS’s restatement
of its consolidated financial statements for the years ended December 31, 2013 and 2012 and for the quarter ended March 31, 2014
177
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
and disclosures concerning related party transactions (the “HLSS Investigation”). HLSS agreed to resolve such matter by consenting
to the entry of a Cease and Desist Order, without admitting or denying that HLSS violated Sections 13(a), 13(b)(2)(A), and 13(b)
(2)(B) of the Securities Exchange Act of 1934, as amended, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder, and to
a settlement payment of $1.5 million to the SEC. On October 5, 2015, the terms of the settlement were approved and accepted by
the SEC. Pursuant to the HLSS Acquisition Agreement, New Residential acquired substantially all of the assets of HLSS and
assumed substantially all of the liabilities of HLSS, including the obligation for the aforementioned settlement payment. The matter
giving rise to the HLSS Investigation and related settlement is unrelated to any activities of New Residential.
During the first three quarters of 2015, through their investment manager, the HSART Bondholders alleged that events of default
had occurred under a debt issuance (HSART, see Notes 1 and 11) secured by a portion of the Servicer Advances acquired from
HLSS and that, as a result, the HSART Bondholders were due additional interest under the related agreements. In February 2015,
in response to such allegations, instead of releasing such amounts to the New Residential subsidiary that sponsors the HSART
transaction entitled thereto, the trustee of HSART began to withhold, monthly, such Withheld Funds so that such amounts were
reserved in the event that it was determined that any of the alleged events of default had occurred. On August 28, 2015, the trustee
commenced a legal proceeding requesting instruction from the court regarding the alleged defaults and the disposition of the
Withheld Funds.
On October 2, 2015, the notes held by the HSART Bondholders were repaid in full. On October 14, 2015, the court ruled that no
event of default had occurred under HSART, authorized the trustee to release the Withheld Funds and dismissed the legal proceeding.
As a result of this ruling, $92.7 million was released from restricted cash accounts related to HSART and is now available for
unrestricted use by New Residential.
New Residential is, from time to time, subject to inquiries by government entities. New Residential currently does not believe any
of these inquiries would result in a material adverse effect on New Residential’s business.
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, 2015, 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,
2015):
Excess MSRs — As of December 31, 2015, New Residential had outstanding capital commitments related to the acquisition of
Excess MSRs on portfolios of residential mortgage loans as discussed below. See Notes 4 and 5 for information on New Residential’s
investments in Excess MSRs.
On February 4, 2016, New Residential invested the remaining $2.0 million to complete the acquisition of a 66.7% interest in the
Excess MSRs on a portfolio of Fannie Mae residential mortgage loans with an aggregate UPB of $17.2 billion. Nationstar 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 and Nationstar, subject to certain limitations.
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.
178
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
Environmental Costs — As a residential real estate owner, through its REO, New Residential is subject to potential environmental
costs. At December 31, 2015, New Residential is not aware of any environmental concerns that would have a material adverse
effect on its consolidated financial position or results of operations.
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
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 U.S. Internal Revenue Service (“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 date of the spin-off (Note 13), 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 No. 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,
plus earnings (or losses) from equity method investees invested in Excess MSRs as if such equity method investees had not made
a fair value election, plus gains (or losses) from debt restructuring and gains (or losses) from sales of property, and plus non-routine
items, minus amortization of non-routine items, 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.
179
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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
Total
Affiliate expenses and fees were comprised of:
Management fees
Incentive compensation
Expense reimbursements(A)
Total
December 31,
2015
2014
$
$
6,671
$
16,017
1,097
23,785
$
1,710
54,334
1,380
57,424
Year Ended December 31,
2014
2013
2015
$
$
33,475
$
19,651
$
16,017
500
54,334
500
15,343
16,847
500
49,992
$
74,485
$
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.
On May 7, 2015, New Residential entered into the Third Amended and Restated Management and Advisory Agreement with the
Manager, which amends and restates the Second Amended and Restated Management and Advisory Agreement, dated as of August
5, 2014, in order to amortize certain non-capitalized transaction-related expenses over time in the computation of incentive
compensation. The impact of this change on the six months ended June 30, 2015 was to increase incentive compensation by $3.3
million.
See Notes 4, 5, 6, 7, 8, 11, 14 and 18 for a discussion of transactions with Nationstar. As of December 31, 2015, 64.4% and 34.9%
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, 2015, a total face amount of $2.4 billion of New Residential’s Non-
Agency RMBS portfolio and approximately $35.3 million of New Residential’s Agency RMBS portfolio was serviced or master
serviced by Nationstar. The total UPB of the loans underlying these Nationstar serviced Non-Agency RMBS was approximately
$9.5 billion as of December 31, 2015. New Residential holds a limited right to cleanup call options with respect to certain
securitization trusts serviced or master serviced by Nationstar whereby, when the outstanding balance of the underlying mortgage
loans falls below a pre-determined threshold, it can effectively purchase the underlying mortgage loans at par, plus unreimbursed
servicer advances, and repay all of the outstanding securitization financing at par, in exchange for a 0.75% (of UPB) fee paid to
Nationstar. In connection with New Residential's exercise of certain of these call rights in 2014 and 2015, New Residential has
made, and expects to continue to make, payments to funds managed by an affiliate of Fortress in respect of Excess MSRs held by
the funds affected by the exercise of the call rights (“MSR Fund Payments”). During 2015, New Residential made, or accrued for,
MSR Fund Payments in an aggregate amount of approximately $4.4 million. New Residential continues to evaluate the call rights
it purchased from Nationstar, and its ability to exercise such rights and realize the benefits therefrom are subject to a number of
risks. The actual UPB of the mortgage loans on which New Residential can successfully exercise call rights and realize the benefits
180
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
therefrom may differ materially from its initial assumptions. As of December 31, 2015, $588.4 million UPB of New Residential’s
residential mortgage loans and $24.8 million of New Residential’s REO were being serviced or master 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 OneMain and Note 5 regarding co-investments with Fortress-managed funds.
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
Statement of Income
Location
Reclassification of net realized (gain)
loss on securities into earnings
Gain on settlement of
securities
Reclassification of net realized (gain)
loss on securities into earnings
Other-than-temporary
impairment on securities
Total reclassifications
Year Ended December 31,
2014
2013
2015
$
$
(13,096) $
(65,701) $
(52,657)
5,788
(7,308) $
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.
17. INCOME TAXES
Income tax expense (benefit) consists of the following:
Current:
Federal
State and Local
Total Current Income Tax Expense (Benefit)
Deferred:
Federal
State and Local
Total Deferred Income Tax Expense (Benefit)
Total Income Tax Expense (Benefit)
Year Ended December 31,
2014
2013
2015
$
$
(2,737) $
(1,631)
(4,368)
(2,778)
(3,855)
(6,633)
(11,001) $
3,737
2,799
6,536
12,853
3,568
16,421
22,957
$
$
—
—
—
—
—
—
—
New Residential intends to qualify as a REIT for each of its tax years through December 31, 2015. 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 and 2014 REIT taxable income by the prescribed dates.
New Residential operates various securitization vehicles and has made certain investments, particularly its investments in Servicer
Advances (Note 6) and REO (Note 8), through TRSs that are subject to regular corporate income taxes which have been provided
for in the provision for income taxes, as applicable. 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.
181
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
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 related to state and local tax positions expected to be taken on the income tax
returns. As a result of information received from local tax authorities, New Residential has determined that the reserve for
unrecognized tax benefits is no longer needed and has reduced the reserve for unrecognized tax benefits to zero as of March 31,
2015. As a result, New Residential recorded a benefit of $2.3 million to the income tax provision as of March 31, 2015.
The decrease in the provision for income taxes for the year ended December 31, 2015 is primarily due to the benefit of $2.3 million
from reducing the reserve for unrecognized benefits to zero and a decrease 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,
2015
2014
2013
35.00 %
(36.51)%
(1.16)%
(1.58)%
(4.25)%
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 assets and liability are presented
below:
December 31,
2015
2014
Deferred tax assets:
Servicer Advances
Allowance for loan losses
Unrealized mark to market
Net operating losses
Other
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Unrealized
Total deferred tax (liability)
Net deferred tax assets (liability)
$
144,842
$
136
468
42,944
6,330
194,720
(9,409)
185,311
$
—
962
—
2,657
134
3,753
(3,619)
134
—
— $
(15,248)
(15,248)
185,311
$
(15,114)
$
$
$
As of December 31, 2015, New Residential’s TRSs had approximately $110.2 million of net operating loss carryforwards for
federal and state income tax purposes which may be available to offset future taxable income, if and when it arises. These federal
and state net operating loss carryforwards will begin to expire in 2034. The utilization of the net operating loss carryforwards to
reduce future income taxes will depend on the TRSs ability to generate sufficient taxable income prior to the expiration of the
carryforward period.
On April 6, 2015, as a part of the purchase price allocation related to the HLSS Acquisition (Note 1), New Residential recorded
an increase to its deferred tax asset of $195.1 million. The deferred tax asset primarily relates to the difference in the book basis
182
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
and tax basis of New Residential’s investment in Servicer Advances. New Residential believes that such deferred tax asset is more
likely than not to be realized and, therefore, no valuation allowance has been recorded against such deferred tax asset as of
December 31, 2015.
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, 2015, New
Residential recorded a valuation allowance related to certain 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
Valuation allowance at December 31, 2014
Increase related to net operating losses and loan loss reserves
Other increase (decrease)
Valuation allowance at December 31, 2015
$
$
$
493
3,126
3,619
6,680
(890)
9,409
New Residential records penalties and interest related to uncertain tax positions as a component of income tax expense, where
applicable. As of December 31, 2015, New Residential did not accrue interest or penalties related to uncertain tax positions. New
Residential does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly
change within 12 months of the reporting date. A reconciliation of the unrecognized tax benefits is as follows:
Balance at December 31, 2013
Additions for tax positions of the 2013 tax year
Balance at December 31, 2014
Additions for tax positions of current year
Other additions (reductions)
Balance at December 31, 2015
Common stock distributions were taxable as follows:
Year
2015
2014
2013
18. SUBSEQUENT EVENTS
$
$
—
2,258
2,258
—
(2,258)
—
Dividends
per Share
Ordinary
Income
Long-term
Capital
Gain
Return
of
Capital
$
$
$
1.75
1.58
0.99
92.92%
84.78%
90.01%
7.08%
15.22%
9.99%
—
—
—
These financial statements include a discussion of material events that have occurred subsequent to December 31, 2015 (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.
Corporate Activities
On December 10, 2015, New Residential’s board of directors declared a fourth quarter 2015 dividend of $0.46 per common share
or $106.0 million, which was paid on January 29, 2016 to stockholders of record as of December 31, 2015.
183
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
19. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is an unaudited summary information on New Residential’s quarterly operations.
2015
Quarter Ended
March 31
June 30
September 30
December 31
$
84,373
$
178,177
$
182,341
$
200,181
$
81,871
96,306
77,558
104,783
80,605
119,576
Year Ended
December 31
645,072
274,013
371,059
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 Before Income Taxes
Income tax expense (benefit)
Net Income
Noncontrolling Interests in Income of
Consolidated Subsidiaries
Net Income 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
$
$
$
$
$
$
33,979
50,394
1,071
977
2,048
48,346
12,295
22,270
38,371
(3,427)
41,798
5,823
35,975
0.25
0.25
$
$
$
$
$
649
1,574
2,494
5,788
4,772
5,421
90,885
37,650
34,952
93,583
14,306
79,277
4,158
75,119
0.37
0.37
$
$
$
$
$
(3,341)
(1,767)
106,550
(17,825)
32,902
55,823
(5,932)
61,755
7,193
54,562
0.24
0.24
$
$
$
$
$
16,188
18,682
100,894
9,909
27,699
83,104
18,596
24,384
346,675
42,029
117,823
270,881
(15,948)
(11,001)
99,052
$
281,882
(3,928) $
13,246
102,980
0.45
0.45
$
$
$
268,636
1.34
1.32
141,434,905
200,910,040
230,455,568
230,459,000
200,739,809
144,911,309
205,169,099
231,215,235
230,698,961
202,907,605
0.38
$
0.45
$
0.46
$
0.46
$
1.75
184
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015, 2014 and 2013
(dollars in tables in thousands, except share data)
2014
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
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 Before Income Taxes
Income tax expense (benefit)
Net Income
Noncontrolling Interests in Income (Loss) of
Consolidated Subsidiaries
Net Income Attributable to Common
Stockholders
Net Income Per Share of Common Stock
Basic
Diluted
Weighted Average Number of Shares of
Common Stock Outstanding
Basic
Diluted
$
$
$
$
$
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
(A)
Earnings from investments in equity method investees is included in other income.
185
Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
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 were effective.
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 Exchange Act, 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, 2015. In
making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in the 2013 Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of December 31, 2015, 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.”
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, except as described below.
During the fourth quarter of 2015, the Company implemented additional controls over the review and validation of models used
in the acquisition of assets, including an expanded testing and review process and additional documentation requirements, and
thereby remediated the material weakness identified in prior quarters.
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Item 9B. Other Information.
None.
187
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Incorporated by reference to our definitive proxy statement for the 2016 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, 2015.
Item 11. Executive Compensation.
Incorporated by reference to our definitive proxy statement for the 2016 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, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to our definitive proxy statement for the 2016 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, 2015.
Item 13. Certain Relationships and Related Transactions, Director Independence.
Incorporated by reference to our definitive proxy statement for the 2016 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, 2015.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference to our definitive proxy statement for the 2016 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, 2015.
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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:
Exhibit
Number
2.1
2.2
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)
2.3 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)
2.4
2.5
2.6
2.7
2.8
2.9
3.1
3.2
3.3
4.1
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)
Termination Agreement, dated as of April 6, 2015, by and among New Residential Investment Corp., Home Loan
Servicing Solutions, Ltd. and Hexagon Merger Sub Ltd. (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed on April 10, 2015)
Share and Asset Purchase Agreement, dated as of April 6, 2015, by and among New Residential Investment
Corp., HLSS Advances Acquisition Corp., HLSS MSR-EBO Acquisition LLC and Home Loan Servicing
Solutions, Ltd. (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K,
filed on April 10, 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)
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Exhibit
Number
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
Exhibit Description
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)
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)
Seventh Amended and Restated Indenture, dated as of October 23, 2015, by and among HLSS Servicer Advance
Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC,
New Residential Investment Corp., Barclays Bank PLC, Wells Fargo Securities, LLC and Credit Suisse AG, New
York Branch (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K filed
on October 29, 2015)
Series 2012-VF1 Second Amended and Restated Indenture Supplement, dated as of August 30, 2013, to the Fourth
Amended and Restated Indenture, dated as of August 8, 2013, by and among HLSS Servicer Advance Receivables
Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays
Bank PLC (incorporated by reference to Home Loan Servicing Solutions, Ltd’s Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2013)
Amendment No. 4, dated as of July 16, 2014, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank
National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC (incorporated
by reference to Home Loan Servicing Solutions, Ltd.’s Current Report on Form 8-K filed on July 17, 2014)
Amendment No. 5, dated December 5, 2014, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank
National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC (incorporated
by reference to Home Loan Servicing Solutions, Ltd.’s Current Report on Form 8-K filed on December 5, 2014)
Amendment No. 6, dated as of January 15, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC (incorporated by reference
to Home Loan Servicing Solutions, Ltd.’s Current Report on Form 8-K filed on January 15, 2015)
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Exhibit
Number
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
Exhibit Description
Amendment No. 7, dated as of April 6, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement, dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Barclays
Bank PLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q, for
the quarterly period ended June 30, 2015)
Amendment No. 8, dated as of May 5, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement, dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Barclays
Bank PLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2015)
Amendment No. 9, dated as of June 11, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement, dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Barclays
Bank PLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2015)
Series 2012-VF2 Third Amended and Restated Indenture Supplement, dated as of August 14, 2015, to the to the
Sixth Amended and Restated Indenture, dated as of January 17, 2014, as amended by Amendment No. 1, dated as
of May 5, 2015, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company,
HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Wells Fargo Securities
LLC (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K filed on August
20, 2015)
Series 2012-VF3 Third Amended and Restated Indenture Supplement, dated as of August 28, 2015, to the Sixth
Amended and Restated Indenture, dated as of January 17, 2014, as amended by Amendment No. 1, dated as of May
5, 2015, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company, HLSS
Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Wells Fargo Securities LLC
(incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K filed on September
3, 2015)
Amendment No. 1, dated as of October 16, 2015, to the Series 2012-VF3 Third Amended and Restated Indenture
Supplement, dated as of August 28, 2015, to the Sixth Amended and Restated Indenture, dated as of January 17,
2014, as amended by Amendment No. 1, dated as of May 5, 2015, by and among HLSS Servicer Advance Receivables
Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential
Investment Corp. and Wells Fargo Securities LLC (incorporated by reference to New Residential Investment Corp.’s
Current Report on Form 8-K filed on October 22, 2015)
Indenture, dated as of August 28, 2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank
National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch
and New Residential Investment Corp. (incorporated by reference to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2015)
Series 2015-T1 Indenture Supplement, dated as of August 28, 2015, to the Indenture, dated as of August 28, 2015,
by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan
Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp.
(incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2015)
Series 2015-T2 Indenture Supplement, dated as of August 28, 2015, to the Indenture, dated as of August 28, 2015,
by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan
Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp.
(incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2015)
Series 2015-VF1 Indenture Supplement, dated as of August 28, 2015, to the Indenture, dated as of August 28, 2015,
by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan
Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp.
(incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2015)
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Table of Contents
Exhibit
Number
4.22
4.23
4.24
Exhibit Description
Amendment No. 1, dated as of November 24, 2015, to the Series 2015-VF1 Indenture Supplement, dated as of
August 28, 2015, to the Indenture, dated as of August 28, 2015, by and among NRZ Advance Receivables Trust
2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit
Suisse AG, New York Branch and New Residential Investment Corp.
Series 2015-T3 Indenture Supplement, dated as of November 24, 2015, to the Indenture, dated as of August 28,
2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen
Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment
Corp.
Series 2015-T4 Indenture Supplement, dated as of November 24, 2015, to the Indenture, dated as of August 28,
2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen
Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment
Corp.
10.1 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)
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
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 for the quarterly period ended June 30, 2013)
Second Amended and Restated Management and Advisory Agreement between New Residential Investment Corp.
and FIG LLC, dated August 6, 2014 (incorporated by reference to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2014)
Third Amended and Restated Management and Advisory Agreement between New Residential Investment Corp.
and FIG LLC, dated May 7, 2015 (incorporated by reference to New Residential Investment Corp.’s Quarterly Report
on Form 10-Q for the quarterly period ended March 31, 2015)
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 for the quarterly period ended September 30, 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)
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)
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)
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)
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)
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Exhibit
Number
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
Exhibit Description
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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)
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Exhibit
Number
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
Exhibit Description
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)
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)
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)
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)
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)
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)
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)
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)
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)
Registration Rights Agreement, dated as of April 6, 2015, by and between New Residential Investment Corp and
Home Loan Servicing Solutions, Ltd. (incorporated by reference to New Residential Investment Corp.’s Current
Report on Form 8-K, filed on April 10, 2015)
Services Agreement, dated as of April 6, 2015, by and between HLSS Advances Acquisition Corp. and Home Loan
Servicing Solutions, Ltd. (incorporated by reference to New Residential Investment Corp.’s Current Report on Form
8-K, filed on April 10, 2015)
Third Amended and Restated Receivables Sale Agreement, dated as of March 13, 2013, by and among Ocwen Loan
Servicing, LLC, Homeward Residential, Inc., HLSS Holdings, LLC and HLSS Servicer Advance Facility Transferor,
LLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2015)
Second Amended and Restated Receivables Pooling Agreement, dated as of September 13, 2012, by and between
HLSS Servicer Advance Facility Transferor, LLC and HLSS Servicer Advance Receivables Trust (incorporated by
reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended
June 30, 2015)
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Exhibit
Number
10.47
Exhibit Description
Receivables Sale Agreement, dated as of August 28, 2015, by and among Ocwen Loan Servicing, LLC, HLSS
Holdings, LLC and NRZ Advance Facility Transferor 2015-ON1 LLC (incorporated by reference to New Residential
Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)
10.48
Receivables Pooling Agreement, dated as of August 28, 2015, by and between NRZ Advance Facility Transferor
2015-ON1 LLC and NRZ Advance Receivables Trust 2015-ON1 (incorporated by reference to New Residential
Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)
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 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
32.2 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
99.1 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.
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.
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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
February 25, 2016
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
February 25, 2016
/s/ Kevin J. Finnerty
By:
Kevin J. Finnerty
Director
February 25, 2016
/s/ Douglas L. Jacobs
By:
Douglas L. Jacobs
Director
February 25, 2016
/s/ David Saltzman
By:
David Saltzman
Director
February 25, 2016
/s/ Alan L. Tyson
By:
Alan L. Tyson
Director
February 25, 2016
/s/ Michael Nierenberg
By:
Michael Nierenberg
Director, Chief Executive Officer and President
(Principal Executive Officer)
February 25, 2016
/s/ Nicola Santoro, Jr.
By:
Nicola Santoro, Jr.
Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 25, 2016
/s/ Jonathan R. Brown
By:
Jonathan R. Brown
Chief Accounting Officer
(Principal Accounting Officer)
February 25, 2016
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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 proved 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.
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Exhibit Index
Exhibit
Number
Exhibit Description
2.1 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)
2.2 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)
2.3 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)
2.4 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)
2.5 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)
2.6 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)
2.7 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)
2.8 Termination Agreement, dated as of April 6, 2015, by and among New Residential Investment Corp., Home Loan
Servicing Solutions, Ltd. and Hexagon Merger Sub Ltd. (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K, filed on April 10, 2015)
2.9 Share and Asset Purchase Agreement, dated as of April 6, 2015, by and among New Residential Investment Corp.,
HLSS Advances Acquisition Corp., HLSS MSR-EBO Acquisition LLC and Home Loan Servicing Solutions, Ltd.
(incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K, filed on April 10,
2015)
3.1 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)
3.2 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)
3.3 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)
4.1 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)
4.2 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)
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Exhibit
Number
Exhibit Description
4.3 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)
4.4 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)
4.5 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)
4.6 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)
4.7 Seventh Amended and Restated Indenture, dated as of October 23, 2015, by and among HLSS Servicer Advance
Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC,
New Residential Investment Corp., Barclays Bank PLC, Wells Fargo Securities, LLC and Credit Suisse AG, New
York Branch (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K filed
on October 29, 2015)
4.8 Series 2012-VF1 Second Amended and Restated Indenture Supplement, dated as of August 30, 2013, to the
Fourth Amended and Restated Indenture, dated as of August 8, 2013, by and among HLSS Servicer Advance
Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC
and Barclays Bank PLC (incorporated by reference to Home Loan Servicing Solutions, Ltd’s Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2013)
4.9 Amendment No. 4, dated as of July 16, 2014, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche
Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC
(incorporated by reference to Home Loan Servicing Solutions, Ltd.’s Current Report on Form 8-K filed on July
17, 2014)
4.10 Amendment No. 5, dated December 5, 2014, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche
Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC
(incorporated by reference to Home Loan Servicing Solutions, Ltd.’s Current Report on Form 8-K filed on
December 5, 2014)
4.11 Amendment No. 6, dated as of January 15, 2015, to the Second Amended and Restated Series 2012-VF1
Indenture Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase
Agreement dated as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche
Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC and Barclays Bank PLC
(incorporated by reference to Home Loan Servicing Solutions, Ltd.’s Current Report on Form 8-K filed on
January 15, 2015)
4.12 Amendment No. 7, dated as of April 6, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement, dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Barclays
Bank PLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q, for
the quarterly period ended June 30, 2015)
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Exhibit
Number
Exhibit Description
4.13 Amendment No. 8, dated as of May 5, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement, dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Barclays
Bank PLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2015)
4.14 Amendment No. 9, dated as of June 11, 2015, to the Second Amended and Restated Series 2012-VF1 Indenture
Supplement, dated as of August 30, 2013 and the Second Amended and Restated Note Purchase Agreement, dated
as of August 30, 2013, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Barclays
Bank PLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 2015)
4.15 Series 2012-VF2 Third Amended and Restated Indenture Supplement, dated as of August 14, 2015, to the to the
Sixth Amended and Restated Indenture, dated as of January 17, 2014, as amended by Amendment No. 1, dated as
of May 5, 2015, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust
Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Wells
Fargo Securities LLC (incorporated by reference to New Residential Investment Corp.’s Current Report on Form
8-K filed on August 20, 2015)
4.16 Series 2012-VF3 Third Amended and Restated Indenture Supplement, dated as of August 28, 2015, to the Sixth
Amended and Restated Indenture, dated as of January 17, 2014, as amended by Amendment No. 1, dated as of
May 5, 2015, by and among HLSS Servicer Advance Receivables Trust, Deutsche Bank National Trust Company,
HLSS Holdings, LLC, Ocwen Loan Servicing, LLC, New Residential Investment Corp. and Wells Fargo
Securities LLC (incorporated by reference to New Residential Investment Corp.’s Current Report on Form 8-K
filed on September 3, 2015)
4.17 Amendment No. 1, dated as of October 16, 2015, to the Series 2012-VF3 Third Amended and Restated Indenture
Supplement, dated as of August 28, 2015, to the Sixth Amended and Restated Indenture, dated as of January 17,
2014, as amended by Amendment No. 1, dated as of May 5, 2015, by and among HLSS Servicer Advance
Receivables Trust, Deutsche Bank National Trust Company, HLSS Holdings, LLC, Ocwen Loan Servicing, LLC,
New Residential Investment Corp. and Wells Fargo Securities LLC (incorporated by reference to New Residential
Investment Corp.’s Current Report on Form 8-K filed on October 22, 2015)
4.18 Indenture, dated as of August 28, 2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche
Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York
Branch and New Residential Investment Corp. (incorporated by reference to New Residential Investment Corp.’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)
4.19 Series 2015-T1 Indenture Supplement, dated as of August 28, 2015, to the Indenture, dated as of August 28, 2015,
by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen
Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential
Investment Corp. (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2015)
4.20 Series 2015-T2 Indenture Supplement, dated as of August 28, 2015, to the Indenture, dated as of August 28, 2015,
by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen
Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential
Investment Corp. (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2015)
4.21 Series 2015-VF1 Indenture Supplement, dated as of August 28, 2015, to the Indenture, dated as of August 28,
2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company,
Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential
Investment Corp. (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2015)
4.22 Amendment No. 1, dated as of November 24, 2015, to the Series 2015-VF1 Indenture Supplement, dated as of
August 28, 2015, to the Indenture, dated as of August 28, 2015, by and among NRZ Advance Receivables Trust
2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit
Suisse AG, New York Branch and New Residential Investment Corp.
4.23 Series 2015-T3 Indenture Supplement, dated as of November 24, 2015, to the Indenture, dated as of August 28,
2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company,
Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential
Investment Corp.
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Exhibit
Number
Exhibit Description
4.24 Series 2015-T4 Indenture Supplement, dated as of November 24, 2015, to the Indenture, dated as of August 28,
2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company,
Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential
Investment Corp.
10.1 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)
10.2 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 for the quarterly period ended June 30, 2013)
10.3 Second Amended and Restated Management and Advisory Agreement between New Residential Investment Corp.
and FIG LLC, dated August 6, 2014 (incorporated by reference to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2014)
10.4 Third Amended and Restated Management and Advisory Agreement between New Residential Investment Corp.
and FIG LLC, dated May 7, 2015 (incorporated by reference to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2015)
10.5 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)
10.6 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)
10.7 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 for the quarterly period ended September 30, 2014)
10.8 Investment Guidelines (incorporated by reference to Amendment No. 4 of New Residential Investment Corp.’s
Registration Statement on Form 10, filed April 9, 2013)
10.9 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)
10.10 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)
10.11 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)
10.12 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)
10.13 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)
10.14 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)
10.15 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)
10.16 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)
10.17 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)
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Exhibit
Number
Exhibit Description
10.18 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)
10.19 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)
10.20 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)
10.21 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)
10.22 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)
10.23 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)
10.24 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)
10.25 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)
10.26 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)
10.27 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)
10.28 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)
10.29 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)
10.30 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)
10.31 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)
10.32 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)
10.33 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)
10.34 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)
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Table of Contents
Exhibit
Number
Exhibit Description
10.35 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)
10.36 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)
10.37 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)
10.38 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)
10.39
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)
10.40 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)
10.41 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)
10.42 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)
10.43 Registration Rights Agreement, dated as of April 6, 2015, by and between New Residential Investment Corp and
Home Loan Servicing Solutions, Ltd. (incorporated by reference to New Residential Investment Corp.’s Current
Report on Form 8-K, filed on April 10, 2015)
10.44 Services Agreement, dated as of April 6, 2015, by and between HLSS Advances Acquisition Corp. and Home Loan
Servicing Solutions, Ltd. (incorporated by reference to New Residential Investment Corp.’s Current Report on Form
8-K, filed on April 10, 2015)
10.45 Third Amended and Restated Receivables Sale Agreement, dated as of March 13, 2013, by and among Ocwen Loan
Servicing, LLC, Homeward Residential, Inc., HLSS Holdings, LLC and HLSS Servicer Advance Facility Transferor,
LLC (incorporated by reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2015)
10.46 Second Amended and Restated Receivables Pooling Agreement, dated as of September 13, 2012, by and between
HLSS Servicer Advance Facility Transferor, LLC and HLSS Servicer Advance Receivables Trust (incorporated by
reference to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June
30, 2015)
10.47 Receivables Sale Agreement, dated as of August 28, 2015, by and among Ocwen Loan Servicing, LLC, HLSS
Holdings, LLC and NRZ Advance Facility Transferor 2015-ON1 LLC (incorporated by reference to New Residential
Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)
10.48 Receivables Pooling Agreement, dated as of August 28, 2015, by and between NRZ Advance Facility Transferor
2015-ON1 LLC and NRZ Advance Receivables Trust 2015-ON1 (incorporated by reference to New Residential
Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)
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.
203
Table of Contents
Exhibit
Number
Exhibit Description
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 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
32.2 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
99.1 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.
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.
204
CORPORATE INFORMATION
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
NICK SANTORO
Chief Financial Officer
JONATHAN BROWN
Chief Accounting Officer
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
New Residential Investment Corp.
1345 Avenue of the Americas, 45th 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.
1345 Avenue of the Americas, 45th 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 future cash flows, expected lifetime IRRs, expected future earnings, ability to
acquire more servicing assets, expected risk-adjusted returns, expected dividend and earnings growth, the Company’s preparation for various
interest rate environments, and statements regarding the Company’s investment pipeline and investment opportunities. These statements
are not historical facts. They represent management’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 factors 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 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
45TH FLOOR
NEW YORK, NY 10105
(212) 479-3150
IR@NEWRESI.COM