ANNUAL REPORT
NEW RESIDENTIAL
INVESTMENT CORP.
2017 NEW RESIDENTIAL INVESTMENT CORP. (NYSE: NRZ)*
~26%
2017 Total
Return
~17%
YoY Book Value
Increase
NEW RESIDENTIAL
~$3.3Bn
INVESTMENT CORP.
~$1.7Bn
Total Lifetime
Dividends
Deployed in
2017
~24%
2017 ROE
2
Dividend Increases
in 2017
~$145Bn
UPB Call Rights(1)
$530Bn
UPB MSR
Portfolio
(1) 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*
$4,910M
MSRs (Excess & Full)
$2,368M
Servicer Advances
$159M
Residential Securities & Call Rights
$1,434M
Residential Loans
Consumer Loans
$524M
$129M
Cash
$296M
CUMULATIVE COMMON DIVIDENDS SINCE SPIN-OFF*
$2.57
$1.7Bn
$1.84
$2.19
$1.6Bn
$1.4Bn
$1.3Bn
$1.1Bn
1200
1000
$1.34
$0.99
$1.0Bn
$889M
$783M
$677M
$0.49
$0.14
$169M
$125M
$62M
$18M
$571M
$465M
$375M
$321M
$267M
$218M
Q2-13
Q2-13
Q3-13
Q3-13
Q4-13
Q1-14
Q4-13
Q2-14
Q3-14
Q1-15
Q4-14
Q1-14
Q2-15
Q3-15
Q4-15
Q2-14
Q1-16
Q2-16
Q4-16
Q3-16
Q3-14
Q1-17
Q2-17
Q3-17
Q4-14
Q4-17
* As of 4Q 2017. Detailed endnotes are included in the appendix of the Company’s 4Q 2017 Quarterly Supplement. You can find the Company’s 4Q 2017 Quarterly Supplement on the
Company’s website at www.newresi.com.
DEAR FELLOW SHAREHOLDERS,
As we begin our fifth year as a public company, we are
The Company’s GAAP Net Income for the year totaled $958
extremely pleased with the performance and results New
million, or $3.15 per diluted share, representing a 49% year-
Residential Investment Corp. (NYSE: NRZ; “we,” “New
over-year increase per share. Core Earnings for the year
Residential” or the “Company”) has achieved to date. Since
totaled $861 million, or $2.83 per diluted share, representing
2013, we have delivered record core earnings and growth in
a 32% year-over-year increase per share.(4) In addition, we
book value, and repeatedly raised our quarterly dividend.(1) As
increased our quarterly dividend twice in 2017, paying out
of 2017 year end, we have achieved a lifetime total return of
$609 million in Common Dividends, or $1.98 per diluted
over 85% and paid out over $1.7 billion in total lifetime
share, during the year.
dividends to our shareholders.
Throughout the year, we continued to execute across a num-
Over the course of the last few years, we have strategically
ber of key strategic initiatives. In particular, in anticipation of
grown our business into a well-diversified portfolio of assets,
a rising rate environment, we continued to grow our portfolio
including mortgage servicing rights (“MSRs”), servicer
of MSRs. Furthermore, in November 2017, we announced
advances, residential securities and residential and con-
that we entered into definitive agreements to acquire
sumer loans. We believe the scale and composition of our
Shellpoint Partners LLC (“Shellpoint”), a vertically integrated
investments are difficult to replicate and provide us with a
mortgage platform with established origination and servicing
competitive edge compared to our peers. With the Federal
capabilities, for approximately $190 million.(5) In addition to
Reserve expected to raise rates in 2018, we believe we are
being a licensed mortgage servicer and an approved Fannie
well positioned given our large portfolio of MSRs, which are
Mae servicer, Freddie Mac servicer and FHA-approved mort-
one of the few fixed income assets that should increase in
gagee through our wholly owned subsidiary New Residential
value as interest rates rise.
Mortgage LLC (“NRM”), upon closing of the Shellpoint acqui-
sition, we will have in-house servicing, asset origination and
2017 OVERVIEW
recapture capabilities that could help protect and enhance
Looking back on 2017, it was truly another exceptional year
returns on our existing MSR portfolio, and create new com-
for New Residential, both in terms of financial performance and
plementary revenue channels. More importantly, we believe
execution around our key strategic initiatives. Our performance
Shellpoint will be a leading third party servicer that could
across key financial metrics continued to be notably strong
provide added servicing capacity and further diversify our
for the full year, generating a total return of approximately
servicing relationships.
26%(2), realizing a return on equity of approximately 24%(3)
and achieving a book value increase of approximately 17%.
NEW RESIDENTIAL INVESTMENT CORP. 2017 ANNUAL REPORT 1
KEY INVESTMENT HIGHLIGHTS
u Servicer Advances
Consistent with our track record, we continued to deliver
Our servicer advance balance continued to decline mean-
outstanding results and deployed over $3.3 billion in 2017
ingfully in 2017 as the legacy non-agency mortgage mar-
across our business segments in total, including MSRs, ser-
ket continued to improve and overall delinquencies
vicer advances, residential mortgage-backed securities
trended lower. Our total outstanding advance balances
(“RMBS”), as well as residential and consumer loans.
decreased approximately 31% during the year from $5.9
billion to $4.1 billion, and we expect advance balances to
u Mortgage Servicing Rights
continue to decline over time as the performance in the
MSRs continued to be one of our key focuses and core
housing market continues to improve.
areas of capital deployment in 2017. We remained
extremely diligent in seeking out attractive and sizable
Throughout the year, our team continued to work closely
MSR transactions in an effort to continue scaling our ser-
with our servicers and financing counterparties to
vicing asset portfolio. During the year, New Residential
improve portfolio performance by lowering delinquencies,
purchased or agreed to purchase MSRs totaling $237 billion
locking in longer term fixed-rate financings, extending
unpaid principal balance (“UPB”), including $110 billion in
maturities, decreasing costs of funds and enhancing
UPB of MSRs from Ocwen Financial Corporation and $92
advance rates. In 2017, we extended maturities on two
billion UPB of MSRs from CitiMortgage, Inc.
advance facilities totaling $410 million, refinanced $885
million of floating rate debt and refinanced $400 million of
Since making our inaugural full MSR purchase in August
debt from floating rate to fixed rate. As of 2017 year end,
2016, we have made meaningful headway in growing our
88% of our advance debt is fixed rate, compared to only
full MSR portfolio to approximately $351 billion in total
38% as of December 31, 2015. Furthermore, we contin-
UPB. As of 2017 year end, our overall MSR portfolio,
ued to diversify our funding sources through the issuance
excess and full MSRs combined, totals approximately
of servicer advance-backed term notes.
$530 billion UPB.
u Non-Agency Securities & Associated Call Rights
Given the current market backdrop and the Federal
Non-agency call rights continue to be a focus for New
Reserve’s indication of future benchmark interest rate
Residential, and we made meaningful strides in acceler-
hikes in 2018, we believe a gradual rise in rates remains
ating our deal collapse strategy by increasing total call
likely in the foreseeable future. We remain optimistic that
volume in 2017 by approximately 290%. During the year,
our MSR portfolio should continue to perform well and
we executed clean-up calls on approximately $4.7 billion
benefit from additional upside as interest rates rise.
UPB across 176 seasoned, non-agency residential
NEW RESIDENTIAL INVESTMENT CORP. 2017 ANNUAL REPORT 2
mortgage-backed securities (“RMBS”) deals. As the exe-
SpringCastle Investment
cution and liquidity around New Residential’s securitization
In April 2013, we invested $241 million to purchase an
platform continued to improve, we generated approxi-
interest in a $3.9 billion UPB consumer loan portfolio
mately $132 million of GAAP income from discount bonds
(“SpringCastle portfolio”). Since then, we have been dili-
paid off at par and proceeds from re-securitizations during
gent in maximizing the returns on our investment by
the year. To date, New Residential has executed clean-up
increasing our equity investment in, and securing multiple
calls across 339 deals with an aggregate UPB of approxi-
refinancings of, the SpringCastle portfolio. As a result of
mately $8.5 billion.
distributions and refinancing proceeds, we received total
life-to-date cash flows of $642 million and generated
In addition, New Residential continues to strategically
outstanding returns. On our total equity investment of
invest in non-agency securities that are expected to be
$333 million to date, the SpringCastle investment has
accretive to the Company’s call rights strategy. During
generated an impressive IRR of approximately 89% as of
the year, we purchased $3.1 billion fair market value of
year end. We currently expect future returns on the
non-agency RMBS, growing our non-agency portfolio by
investment and future cash flow will continue to be strong.
approximately 69% year-over-year. As of 2017 year end,
our non-agency RMBS portfolio totaled approximately
Prosper Investment
$6.0 billion in fair market value, compared to $3.5 billion
In February 2017, New Residential became part of a four-
at the end of 2016.
member consortium which agreed to purchase up to $5 bil-
lion of unsecured consumer loans on a forward flow basis
As of December 31, 2017, we control the call rights on
from Prosper Marketplace (“Prosper”). As part of the
approximately $145 billion UPB(6) of non-agency residential
transaction, the consortium earns warrants to purchase
mortgage securitizations, or approximately 30% of the
shares of Prosper equity as loans are purchased on a for-
non-agency market. We continue to see meaningful
ward flow basis (term of 24 months) and, as of December
opportunities in this segment of our business and will
31, 2017, the consortium had earned approximately 44%
remain focused on strategically monetizing call rights as
of its expected warrants. As of 2017 year end, New
they become exercisable over time.
Residential, as part of the consortium, acquired approxi-
u Other Investments—Consumer Loan Portfolio
Prosper, achieving a life-to-date IRR greater than 20%.
mately $2.23 billion of unsecured consumer loans from
In addition to our core business segments, from time to
time, we also make opportunistic investments that we
believe have the potential to generate outsized returns.
NEW RESIDENTIAL INVESTMENT CORP. 2017 ANNUAL REPORT 3
LOOKING FORWARD
We will remain steadfast in our commitment to evaluate the
In summary, over the past two years alone, we have success-
best investment opportunities and to actively manage our
fully built a scaled and hard to replicate investment portfolio,
portfolio with the goal of generating stable earnings and
a wide network of servicing partners and a healthy balance
growing book value for our shareholders. We look forward to
sheet supported by diversified funding sources. Encouraged
keeping you updated on our developments in the coming
by our investment pipeline, we are excited to see what 2018
quarters and on behalf of New Residential, we thank you for
will bring.
your continued support.
2017
Sincerely,
Michael Nierenberg
Chairman of the Board,
Chief Executive Officer & President
(1) New Residential’s full year core earnings were $130 million, $219 million, $389 million, $511 million and $861 million for 2013, 2014, 2015, 2016 and 2017,
respectively. New Residential’s full year dividends were $125 million, $218 million, $355 million, $443 million and $609 million for 2013, 2014, 2015, 2016 and
2017, respectively. New Residential’s book value per share ending in 2013, 2014, 2015, 2016 and 2017 were $10.00, $11.28, $12.13, $13.00 and $15.26, respec-
tively. Note that Core Earnings is a Non-GAAP measure. Please see the Company’s 2017 Annual Report on Form 10-K for a reconciliation to the most comparable
GAAP measure.
(2) 2017 Total Return is calculated by dividing the appreciation in the Company’s stock price plus dividends declared by the Company in 2017, over the Company’s
closing stock price on December 30, 2016.
(3) 2017 Return on Equity (“ROE”) is calculated by dividing the Company’s 2017 net income using 2017 GAAP Earnings over average shareholders’ equity in 2017.
(4) Core Earnings is a Non-GAAP measure. Please see the Company’s 2017 Annual Report on Form 10-K for a reconciliation to the most comparable GAAP measure.
(5) Final purchase price is subject to certain adjustments, plus potential additional consideration pursuant to a three-year earnout based on the performance of
Shellpoint after closing.
(6) Our call rights may be materially lower than the estimates in this Annual Report and there can be no assurance that we will execute on this pipeline of callable
deals in the near term, or at all, or that callable deals will be economically favorable. The economic returns from this strategy could be adversely affected by a rise
in interest rates and are contingent on the level of delinquencies and outstanding advances in each transaction, fair market value of the related collateral and
other economic factors and market conditions. We may become subject to claims and legal proceedings, including purported class-actions, in the ordinary
course of our business, challenging whether our loan servicing practices and other aspects of our business comply with applicable laws, agreements and regula-
tory requirements. Call rights are usually exercisable when current loan balance is equal to, or lower than, 10% of its original balance.
NEW RESIDENTIAL INVESTMENT CORP. 2017 ANNUAL REPORT 4
2017
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, 2017
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, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth 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
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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, 2017 (computed based on the closing price on such date as reported on the
NYSE) was: $4.7 billion.
Common stock, $0.01 par value per share: 336,135,391 shares outstanding as of February 8, 2018.
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 2018
Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.
DOCUMENTS INCORPORATED BY REFERENCE
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;
•
the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;
• our ability to deploy capital accretively and the timing of such deployment;
• our counterparty concentration and default risks in Nationstar, Ocwen, OneMain, Ditech, PHH and other third parties;
• events, conditions or actions that might occur at Nationstar, Ocwen, OneMain, Ditech, PHH and other third parties, as well
as the continued effect of prior events;
• 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 MSRs, Excess MSRs, Servicer Advance Investments, RMBS, residential
mortgage loans and consumer loan portfolios;
the risks that default and recovery rates on our MSRs, Excess MSRs, Servicer Advance Investments, RMBS, 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 MSRs or Excess
MSRs;
•
the risk that projected recapture rates on the loan pools underlying our MSRs or Excess MSRs are not achieved;
• 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 Servicer Advance Investments or MSRs;
•
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 relative spreads between the yield on the assets in which we invest and the cost of financing;
• 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;
•
the availability and terms of capital for future investments;
• changes in economic conditions generally and the real estate and bond markets specifically;
• competition within the finance and real estate industries;
i
•
•
the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Act, U.S. government
programs intended to grow the economy, future changes to tax laws, the federal conservatorship of Fannie Mae and Freddie
Mac and legislation that permits modification of the terms of residential mortgage loans;
the risk that GSE or other regulatory initiatives or actions may adversely affect returns from investments in MSRs and Excess
MSRs;
• our ability to maintain our qualification as a REIT for U.S. federal income tax purposes and the potentially onerous
consequences that any failure to maintain such qualification would have on our business;
• 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 Home Loan Servicing Solutions (“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
• effects of the recently completed merger of Fortress Investment Group LLC with affiliates of SoftBank Group Corp.
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
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
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
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, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and
2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Segment Reporting
Investments in Excess Mortgage Servicing Rights
Investments in Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables
Servicer Advance Investments
Investments in Real Estate and Other Securities
Investments in Residential Mortgage Loans
Investments in Consumer Loans
Note 1. Organization and Basis of Presentation
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 Measurement
Note 13. Equity and Earnings Per Share
Note 14. Commitments and Contingencies
Note 15. Transactions with Affiliates and Affiliated Entities
Note 16. Reclassification from Accumulated Other Comprehensive Income into Net Income
iv
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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
PART IV
Item 15. Exhibits; Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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v
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 Drive Shack
Inc. (formerly Newcastle Investment Corp., “Drive Shack”) in September 2011 and were spun-off from Drive Shack 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”). In 2016, our wholly-owned subsidiary, New Residential Mortgage
LLC (“NRM”), became a licensed or otherwise eligible mortgage servicer.
We seek to drive strong risk-adjusted returns primarily through investments in the U.S. residential real estate market, which at
times incorporate the use of leverage. We generally target assets that generate significant current cash flows and/or have the
potential for meaningful capital appreciation. 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 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.” On December 27, 2017, SoftBank Group Corp. (“SoftBank”) announced that it completed its
previously announced acquisition of Fortress (the “SoftBank Merger”). In connection with the SoftBank Merger, Fortress will
operate within SoftBank as an independent business headquartered in New York. Fortress’s senior investment professionals will
remain in place, including those individuals who perform services for New Residential.
Our portfolio is currently composed of mortgage servicing related assets, residential mortgage backed securities (“RMBS”) (and
associated call rights), residential mortgage loans and other opportunistic investments. For more details on our portfolio, see “—
Our Portfolio” below, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our
Portfolio.” For information concerning current market trends which impact our portfolio, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Market Considerations” and “Quantitative and Qualitative Disclosures
About Market Risk.”
The Residential Real Estate Market
The residential mortgage industry is transforming the way mortgages are originated, owned and serviced. We believe significant
investment opportunities exist in today’s complex and dynamic mortgage market. As a major capital provider to the mortgage
servicing industry, we believe we are one of only a select number of market participants that have the combination of capital,
industry expertise and key business relationships that are necessary to take advantage of these opportunities.
The U.S. residential real estate market is vast: The value of the housing market totaled approximately $24.6 trillion as of September
2017, including about $14.1 trillion of home equity and $10.5 trillion of single-family mortgage debt outstanding, according to
the Board of Governors of the Federal Reserve System.
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 residential
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 residential 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. GSEs (defined below) are currently the
largest purchasers of residential mortgage loans. Under a process known as securitization, GSEs and financial institutions typically
package residential mortgage loans into pools that are sold to securitization trusts. These securitization trusts fund the acquisition
of residential 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 residential 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 residential mortgage loans into a pool, the servicing of such residential mortgage loans and the terms of the
RMBS issued by the securitization trust is often referred to as a pooling and servicing agreement.
1
As of the third quarter of 2017, approximately $7.5 trillion of the $10.5 trillion of one-to-four family residential mortgages
outstanding had been securitized, according to Inside Mortgage Finance. Approximately $7.0 trillion were Agency RMBS according
to Inside Mortgage Finance, and the balance were Non-Agency RMBS.
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. However, origination volume in recent years has been relatively
robust. In 2017, according to Inside Mortgage Finance, first lien mortgage loan origination totaled approximately $1.8 trillion, up
approximately 39% compared to full year 2014, although this trend could be dampened if market interest rates increase. The role
of private capital has increased in financing the mortgage origination process despite the GSEs’ presence as the largest purchasers
of residential mortgage loans.
In connection with a securitization, a number of entities perform specific roles with respect to the residential mortgage loans in a
pool, including the trustee and the mortgage servicer. The trustee holds legal title to the residential 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 residential 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 residential mortgage loans that have been securitized are generally required to be performed in accordance with
industry-accepted servicing practices and the terms of the relevant 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 residential mortgage loans and distributes
them to the investors in the RMBS pursuant to the terms of the pooling and servicing agreement.
Following the credit crisis, the need for “high-touch” non-bank specialty servicers 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.
The Residential Mortgage Loan Market
Residential mortgage loans are classified based on certain payment characteristics. Performing loans are residential mortgage
loans where the borrower is generally current on required payments; by contrast, non-performing loans are residential 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”).
The residential mortgage loan market is commonly further divided into a number of categories based on certain residential 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.
• Government-Sponsored Enterprise and Government Guaranteed Loans. This category of residential mortgage loans
includes “conforming loans,” which are first lien residential mortgage loans that are secured by single-family residences
that meet or “conform” to the underwriting standards established by the Federal National Mortgage Association (“Fannie
Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac,” and collectively with Fannie Mae, the “GSEs”).
The conforming loan limit is established by statute and currently is $453,100 with certain exceptions for high-priced real
estate markets. This category also includes residential 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 the Government
National Mortgage Association (“Ginnie Mae” and, collectively with the GSEs, the “Agencies” (with each of Fannie
Mae, Freddie Mac and Ginnie Mae an “Agency”)), 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
2
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
MSRs, Mortgage Servicing Rights Financing Receivables and Excess MSRs
A mortgage servicing right (“MSR”) provides a mortgage servicer with the right to service a pool of residential mortgage loans
in exchange for a portion of the interest payments made on the underlying residential mortgage loans. This amount typically ranges
from 25 to 50 basis points (“bps”) times the unpaid principal balance (“UPB”) of the residential mortgage loans, plus ancillary
income and custodial interest. An MSR is made up of two components: a basic fee and an excess MSR (“Excess MSR”). The basic
fee is the amount of compensation for the performance of servicing duties (including advance obligations), and the Excess MSR
is the amount that exceeds the basic fee. Ownership of an MSR requires the owner to be a licensed mortgage servicer. An owner
of an Excess MSR is not required to be licensed, and 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 Receivable and Servicer Advance Investments
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 residential mortgage loan or (ii) to support the value of the collateral property. Our interests in servicer advances
include the following:
•
•
Servicer Advance Investments. These investments are associated with specified pools of mortgage loans and include
the related outstanding servicer advances, the requirement to purchase future servicer advances and the rights to the
basic fee component of the related MSR. We have purchased Servicer Advance Investments on certain loan pools
underlying our Excess MSRs.
Servicer advances receivable. The outstanding servicer advances related to a specified pool of mortgage loans.
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 residential 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.
3
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
residential 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 residential mortgage
loans unless the servicer determines in good faith that the advance would not be ultimately recoverable from the proceeds of the
related residential 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 trustee custodial account for payments on the
serviced residential mortgage loans to reimburse the applicable advance. This is what is often referred to as a “general collections
backstop.” Under certain circumstances, a servicer may also be reimbursed for an otherwise unrecoverable advance by a GSE,
with respect to loans in Agency RMBS (defined below). 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 Servicer Advance Investments or MSRs.”
The status of our interests in servicer advances for purposes of the REIT requirements is uncertain, and therefore our ability to
acquire servicer advances may be limited. We currently hold our interests in servicer advances in taxable REIT subsidiaries.
We also purchase 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
Residential mortgage loans are often packaged into pools held in securitization entities which issue securities (RMBS) collateralized
by such loans. Agency RMBS are RMBS issued or guaranteed by an Agency. “Non-Agency” RMBS are issued by either public
trusts or private label securitization (“PLS”) entities. We invest in both Agency RMBS and 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 residential
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 residential mortgage loans that underlie the securities, net of fees paid in connection with the issuance of the
securities and the servicing of the underlying residential 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 residential 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.
The Non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-
rate mortgages. The residential mortgage loan collateral may be classified as “conforming” or “non-conforming,” depending on
a variety of factors.
4
RMBS, and in particular Non-Agency RMBS, may be subject to call rights, commonly referred to as “cleanup call rights.” Call
rights permit the holder of the rights to purchase all of the residential 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 servicer advances and unpaid servicing fees). Call rights may be subject to limitations with respect to when they may
be exercised (such as specific dates or upon the reduction of the outstanding balances of the remaining residential mortgage loans
to a specified level). Call rights generally become exercisable when the current principal balance of the underlying residential
mortgage loans is equal to or lower than 10% of their original balance.
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 pursue opportunities in structured transactions that enable us to
realize identified excesses of collateral value over related RMBS value, particularly through the acquisition and execution of call
rights. We control the call rights on Non-Agency deals with a total UPB of approximately $144.9 billion.
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. Generally, 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 (which results in increases in our
portfolio of residential mortgage loans and REO).
We continue to evaluate the call rights we acquired, and our ability to exercise such rights and realize the benefits therefrom are
subject to a number of risks. 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. 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.”
Residential Mortgage 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. In addition, we may seek to employ leverage to increase
returns, either through traditional financing lines or, if available, securitization options.
Other Investments
We may pursue other types of investments as the market evolves, such as our opportunistic investment in consumer loans. 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.”
Our Portfolio
Our current investment portfolio is comprised primarily of:
•
“Servicing Related Assets”:
MSRs, including mortgage servicing rights financing receivables (which are MSRs where our subsidiary, NRM, is
the named servicer and we acquired the entire economic interest in the MSR but, solely for accounting purposes,
the acquisition was not treated as a sale);
Excess MSRs;
Servicer Advance Investments (which include the related servicer advances receivable, the requirement to make
future servicer advances, and the rights to receive the base fee portion of the related MSR, each of which on the
loans underlying such investments); and
5
Servicer advances receivable (and the requirement under our MSRs to make future servicer advances);
•
“Residential Securities and Loans”:
Real estate securities, or RMBS; and
Residential mortgage loans; and
• Consumer loans.
For more detail, see “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, 2017 (dollars in thousands):
Investments in:
Excess MSRs(B)
MSRs(B) (C)
Mortgage Servicing Rights
Financing Receivables(B) (C)
Servicer Advance Investments(B) (D)
Agency RMBS(E)
Non-Agency RMBS(E)
Residential Mortgage Loans
Real Estate Owned
Consumer Loans
Consumer Loans, Equity Method
Investees
Total / Weighted Average
Reconciliation to GAAP total assets:
Cash and restricted cash
Servicer advances receivable
Trades receivable
Deferred tax asset, net
Other assets
GAAP total assets
Outstanding
Face Amount
Amortized
Cost Basis
Percentage of
Total
Amortized
Cost Basis
Carrying Value
Weighted
Average Life
(years)(A)
$ 267,622,353
$
1,145,271
172,454,150
1,476,330
6.1% $
1,345,478
7.9%
1,735,504
64,344,893
3,581,876
2,065,629
12,757,357
2,713,686
N/A
1,377,792
489,144
3,924,003
2,105,121
5,599,644
2,447,953
137,668
1,380,369
2.6%
21.0%
11.3%
29.9%
13.1%
0.7%
7.4%
598,728
4,027,379
2,096,351
5,974,789
2,416,689
128,295
1,374,263
178,422
N/A
N/A
51,412
$
18,705,503
100.0% $
19,748,888
6.3
6.3
5.8
5.1
7.5
7.7
4.6
N/A
3.5
1.4
6.1
446,050
675,593
1,030,850
—
312,181
$
22,213,562
(A)
(B)
(C)
(D)
(E)
Weighted average life is based on the timing of our expected principal reduction on the asset.
The outstanding face amount of Excess MSRs, MSRs, Mortgage Servicing Rights Financing Receivables, and Servicer
Advance Investments is based on 100% of the face amount of the underlying residential mortgage loans and currently
outstanding advances, as applicable.
Represents MSRs where our subsidiary, NRM, is the named servicer.
The value of our Servicer Advance Investments also includes the rights to a portion of the related MSR.
Amortized cost basis is net of impairment.
Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions.
With respect to our Excess MSRs, Servicer Advance Investments, RMBS, residential mortgage loans and consumer loans, we
engage servicers to service the loans, or loans underlying the investments, as applicable. With respect to our MSRs and servicer
advances receivable, NRM is the named servicer but it engages a subservicer to service the loans underlying the investments. We
refer to the servicers and subservicers we engage as our “Servicing Partners.” As of December 31, 2017, our Servicing Partners
include, but are not limited to: Nationstar Mortgage LLC (“Nationstar”), Ocwen Financial Corporation (together with its
subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), PHH Corporation (together with its subsidiaries, including PHH
Mortgage Corporation, “PHH”), Ditech Financial LLC (“Ditech,” a subsidiary of Walter Management Corp. (“Walter”)), Flagstar
Bank, FSB (“Flagstar”), CitiMortgage, Inc. (“Citi”), Specialized Loan Servicing LLC (“SLS”), OneMain Holdings, Inc.
(“OneMain”), and the Consumer Loan Seller (Note 9 to our Consolidated Financial Statements). In addition, NRM is referred to
as a “Servicing Partner” when contextually applicable.
6
Our Segments
As of December 31, 2017, New Residential conducted its business through the following segments: (i) investments in Excess
MSRs, (ii) investments in MSRs, (iii) Servicer Advance Investments (including the basic fee component of the related MSRs),
(iv) investments in real estate securities, (v) investments in residential mortgage loans, (vi) investments in consumer loans and
(vii) corporate.
The following table summarizes financial information about our segments as of December 31, 2017 (in thousands):
Servicing Related Assets
Residential Securities and Loans
Excess MSRs
MSRs
Servicer
Advances
Real Estate
Securities
Residential
Mortgage
Loans
Consumer
Loans
Corporate
Total
$
1,345,478
$
2,334,232
$
4,027,379
$
8,071,140
$
2,544,984
$
1,425,675
$
— $
19,748,888
$
$
408
13,153
2,891
1,361,930
483,978
1,033
485,011
876,919
104,545
30,454
726,530
78,353
60,516
18,576
$
$
3,195,761
1,761,011
$
$
4,184,824
3,526,380
$
$
194,465
1,955,476
1,240,285
(5,658)
3,520,722
664,102
38,728
—
1,098,921
9,208,789
6,534,300
1,200,905
7,735,205
1,473,584
15,483
—
113,035
40,687
46,129
28,621
$
$
2,673,502
2,108,007
$
$
1,541,112
1,332,854
$
$
17,594
—
295,798
150,252
30,050
2,018,624
47,644
$
22,213,562
— $
15,746,530
23,917
6,596
2,131,924
1,339,450
249,612
249,612
1,670,870
17,417,400
541,578
201,662
(201,968)
4,796,162
—
—
71,491
—
—
34,466
—
105,957
$
876,919
$
1,240,285
$
592,611
$
1,473,584
$
541,578
$
167,196
$
(201,968)
$
4,690,205
Investments
Cash and cash equivalents
Restricted cash
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total Equity
Noncontrolling interests in
equity of consolidated
subsidiaries
Total New Residential
stockholders’ equity
For additional information, see Note 3 to our Consolidated Financial Statements.
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.
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.
Hedging Strategy
Subject to maintaining our qualification as a REIT and exclusion from registration under 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 Investment Company Act of 1940
(the “1940 Act”), we may also engage in a variety of interest rate management techniques that seek on the one hand to mitigate
7
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 and techniques that we deem appropriate. We
expect these instruments and techniques may allow us to reduce, but not eliminate, 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 Drive Shack 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 Drive Shack on the distribution date and the prices per share of our
common stock in any offerings by us (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest
rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding.
“Funds from operations” means net income (computed in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”)), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real
estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations is computed on an
unconsolidated basis. The computation of funds from operations may be adjusted at the direction of our independent directors
based on changes in, or certain applications of, GAAP. Funds from operations is determined from the date of our separation from
Drive Shack and without regard to Drive Shack’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.
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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 (taking into account, among other things, the expected future
performance 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 16.4 million shares of our common stock, representing approximately 5.8% of our
common stock on a fully diluted basis, as of December 31, 2017.
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 New York Stock Exchange (“NYSE”) requirements), to issue additional common stock or preferred stock in
any manner and on such terms and for such consideration it deems appropriate, including in exchange for property.
Decisions regarding the form and other characteristics of the financing for our investments are made by our Manager subject to
the general investment guidelines adopted by our board of directors.
Conflicts of Interest
Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance
that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest
could give rise to investor dissatisfaction, litigation or regulatory enforcement actions.
One or more of our officers and directors have responsibilities and commitments to entities other than us, including, at times, but
not limited to, Nationstar Mortgage LLC (“Nationstar”) (the servicer for a significant portion of our loans, and the loans underlying
our MSRs, Excess MSRs, Servicer Advance Investments, and Non-Agency RMBS), and OneMain Holdings, Inc. (formerly
Springleaf Holdings, Inc.) (together with its subsidiaries, “OneMain”) (the servicer for a significant portion of the consumer loans
in which we have invested). For example, we have and have had, at times, some of the same directors and officers as Nationstar
and 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 Drive Shack 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 Drive Shack 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 Drive Shack 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.”
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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 Nationstar, 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. Fortress
has two funds primarily focused on investing in Excess MSRs with approximately $0.6 billion in investments 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.
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 Specialized Loan
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Servicing LLC (“SLS”) 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 investments
and are not excluded from the definition of “investment company” by Section 3(c)(5)(A), (B), or (C) of the 1940 Act 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 interest in SLS 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
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 for which we do not own the related servicing rights 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
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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.
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, other than three part-time employees
of NRM.
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, and 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 codes 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
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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.
Our internet site is http://www.newresi.com. We make available free of charge through our internet site our annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of
directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the
‘‘Investor Relations—Corporate Governance” section are charters for the Company’s Audit Committee, Compensation Committee
and Nominating and Corporate Governance Committee as well as our Corporate Governance Guidelines and our Code of Business
Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a
part of, and is not incorporated into, this report.
Item 1A. Risk Factors
Investing in our common stock involves a high degree of risk. You should carefully read and consider the following risk factors
and all other information contained in this report. If any of the following risks, as well as additional risks and uncertainties not
currently known to us or that we currently deem immaterial, occur, our business, financial condition or results of operations could
be materially and adversely affected. The risk factors summarized below are categorized as follows: (i) Risks Related to Our
Business, (ii) Risks Related to Our Manager, (iii) Risks Related to the Financial Markets, (iv) Risks Related to Our Taxation as a
REIT and (v) Risks Related to Our Common Stock. However, these categories do overlap and should not be considered exclusive.
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.
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, and conditions in the real estate market, the
financial markets and economic conditions.
The value of our investments is based on various assumptions that could prove to be incorrect and could have a negative
impact on our financial results.
When we make investments, we base the price we pay and, in some cases, the rate of amortization of those investments on, among
other things, our projection of the cash flows from the related pool of loans. We generally record such investments on our balance
sheet at fair value, and we measure their fair value on a recurring basis. Our projections of the cash flow from our investments,
and the determination of the fair value thereof, are based on assumptions about various factors, including, but not limited to:
rates of prepayment and repayment of the underlying loans;
potential fluctuations in prevailing interest rates and credit spreads;
rates of delinquencies and defaults, and related loss severities;
costs of engaging a subservicer to service MSRs;
•
•
•
•
• market discount rates;
•
•
in the case of MSRs and Excess MSRs, recapture rates; and
in the case of Servicer Advance Investments and servicer advances receivable, the amount and timing of servicer advances
and recoveries.
Our assumptions could differ materially from actual results. The use of different estimates or assumptions in connection with the
valuation of these investments could produce materially different fair values for such investments, which could have a material
adverse effect on our consolidated financial position and results of operations. The ultimate realization of the value of our
investments may be materially different than the fair values of such investments as reflected in our Consolidated Financial
Statements as of any particular date.
We refer to our MSRs, mortgage servicing rights financing receivables, Excess MSRs, and the base fee portion of the related
MSRs included in our Servicer Advance Investments, collectively, as our interests in MSRs.
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With respect to our investments in interests in MSRs, residential mortgage loans and consumer loans, and a portion of our RMBS,
when the related loans are prepaid as a result of a refinancing or otherwise, the related cash flows payable to us will either, in the
case of interest-only RMBS, and/or interests in MSRs, cease (unless, in the case of our interests in MSRs, the loans are recaptured
upon a refinancing), or we will cease to receive interest income on such investments, as applicable. Borrowers under residential
mortgage loans and consumer loans are generally permitted to prepay their loans at any time without penalty. Our expectation of
prepayment rates is a significant assumption underlying our cash flow projections. Prepayment rate 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. A significant increase in prepayment rates could materially reduce the ultimate cash flows and/or interest income, as
applicable, we receive from our investments, and we could ultimately receive substantially less than what we paid for such assets,
decreasing the fair value of our investments. If the fair value of our investment portfolio decreases, we would generally be required
to record a non-cash charge, which would have a negative impact on our financial results. Consequently, the price we pay to
acquire our investments may prove to be too high if there is a significant increase in prepayment rates.
The values of our investments are highly sensitive to changes in interest rates. Historically, the value of MSRs, which underpin
the value of our investments, including interests in MSRs, has increased when interest rates rise and decreased when interest rates
decline due to the effect of changes in interest rates on prepayment rates. Prepayment rates could increase 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 our investments. When the UPB of mortgage loans cease
to be a part of the aggregate UPB of the serviced loan pool (for example, when delinquent loans are foreclosed on or repurchased,
or otherwise sold, from a securitized pool), the related cash flows payable to us, as the holder of an interest in the related MSR,
cease. An increase in delinquencies will generally result in lower revenue because typically we will only collect on our interests
in MSRs from GSEs or mortgage owners for performing loans. An increase in delinquencies with respect to the loans underlying
our servicer advances could also result in a higher advance balance and the need to obtain additional financing, which we may
not be able to do on favorable terms or at all. Additionally, in the case of residential mortgage loans, consumer loans and RMBS
that we own, an increase in foreclosures could result in an acceleration of repayments, resulting in a decrease in interest income.
Alternatively, increases in delinquencies and defaults could also adversely affect our investments in RMBS, residential mortgage
loans and/or consumer loans if and to the extent that losses are suffered on residential mortgage loans, consumer loans or, in the
case of RMBS, the residential mortgage loans underlying such RMBS. Accordingly, if delinquencies are significantly greater than
expected, the estimated fair value of these investments 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 several “recapture agreements” whereby our MSR or Excess MSR is retained if the applicable Servicing Partner
originates a new loan the proceeds of which are used to repay a loan underlying an MSR or Excess MSR in our portfolio. We
believe that such agreements will mitigate the impact on our returns in the event of a rise in voluntary prepayment rates, with
respect to investments where we have such agreements. There are no assurances, however, that counterparties will enter into such
arrangements with us in connection with any future investment in MSRs or Excess MSRs. We are not party to any such arrangements
with respect to any of our investments other than MSRs and Excess MSRs.
If the applicable Servicing Partner 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 MSRs or 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.
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 Servicer Advance Investments or MSRs.
NRM is generally required to make servicer advances related to the pools of loans for which it is the named servicer. In addition,
we have agreed (in the case of Nationstar, together with certain third-party investors) to purchase from certain of our Servicing
Partners 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 of servicer advances and payment of deferred servicing fees are generally made from late payments and other collections
and recoveries on the related residential mortgage loan (including liquidation, insurance and condemnation proceeds) or, if the
related servicing agreement provides for a “general collections backstop,” from collections on other residential mortgage loans
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to which such servicing agreement relates. The rate and timing of payments on servicer advances and 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 residential mortgage loan, while others are also reimbursable out of
principal and interest collections with respect to all residential 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 residential mortgage loans to third parties prior to a sale of the underlying
real estate, resulting in the early reimbursement of outstanding unreimbursed servicer advances in respect of such
residential 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 residential mortgage loan defaults or becomes delinquent, the repayment of the advance may be delayed until
the residential mortgage loan is repaid or refinanced, or a liquidation occurs. To the extent that one of our Servicing Partners fails
to recover the servicer advances in which we have invested, or takes longer than we expect to recover such advances, the value
of our investment could be adversely affected and we could fail to achieve our expected return and suffer losses.
Servicing agreements related to residential mortgage securitization transactions generally require a residential mortgage servicer
to make servicer advances in respect of serviced residential mortgage loans unless the servicer determines in good faith that the
servicer advance would not be ultimately recoverable from the proceeds of the related residential 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. 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 our Servicing Partners to achieve our investment objective and have no direct ability to influence their
performance.
The value of substantially all of our investments is dependent on the satisfactory performance of servicing obligations by the
related mortgage servicer or subservicer, as applicable. The duties and obligations of mortgage servicers are defined through
contractual agreements, generally referred to as Servicing Guides in the case of GSEs, the MBS Guide in the case of Ginnie Mae
or pooling agreements, securitization servicing agreements, pooling and servicing agreements or other similar agreements
(collectively, “PSAs”) in the case of Non-Agency RMBS (collectively, the “Servicing Guidelines”). The duties of the subservicers
we engage to service the loans underlying our MSRs are contained in subservicing agreements with our subservicers. The duties
of a subservicer under a subservicing agreement may not be identical to the obligations of the servicer under Servicing Guidelines.
Our interests in MSRs are 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 the required bondholders in the case of Non-Agency RMBS). Under the Agency Servicing
Guidelines, the servicer may be terminated by the applicable Agency for any reason, “with” or “without” cause, for all or any
portion of the loans being serviced for such Agency. In the event mortgage owners (or bondholders) terminate the servicer (regardless
of whether such servicer is a subsidiary of New Residential or one of its subservicers), the related interests in MSRs would under
most circumstances lose all value on a going forward basis. If the servicer is terminated as servicer for any Agency pools, the
servicer’s right to service the related mortgage loans will be extinguished and our interests in related MSRs will likely lose all of
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their value. Any recovery in such circumstances, in the case of Non-Agency RMBS, will be highly conditioned and may require,
among other things, a new servicer willing to pay for the right to service the applicable residential mortgage loans while assuming
responsibility for the origination and prior servicing of the residential mortgage loans. In addition, in the case of Agency MSRs,
any payment received from a successor servicer will be applied first to pay the applicable Agency for all of its claims and costs,
including claims and costs against the servicer that do not relate to the residential mortgage loans for which we own interests in
the MSRs. A termination could also result in an event of default under our related financings. 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 possible that all investments with a
given servicer would lose all their value in the event mortgage owners (or bondholders) terminate such servicer. See “—We have
significant counterparty concentration risk in certain of our Servicing Partners, and are subject to other counterparty concentration
and default risks.” As a result, we could be materially and adversely affected if one of our Servicing Partners is unable to adequately
carry out its duties as a result of:
•
•
•
•
•
•
•
•
•
•
its failure to comply with applicable laws and regulations;
its failure to comply with contractual and financing obligations and covenants;
a downgrade in, or failure to maintain, any of its servicer ratings;
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 or regulatory actions regarding any aspect of a servicer’s operations, including, but not limited
to, servicing practices and foreclosure processes lengthening foreclosure timelines;
an Agency’s or a whole-loan owner’s transfer of servicing to another party; or
any other reason.
In the ordinary course of business, our Servicing Partners are subject to numerous legal proceedings, federal, state or local
governmental examinations, investigations or enforcement actions, which could adversely affect their reputation and their liquidity,
financial position and results of operations. Mortgage servicers, including certain of our Servicing Partners, have experienced
heightened regulatory scrutiny and enforcement actions, and our Servicing Partners could be adversely affected by the market’s
perception that they could experience, or continue to experience, regulatory issues. See “—Certain of our Servicing Partners have
been and are subject to federal and state regulatory matters and other litigation, which may adversely impact us.” In light of recent
regulatory actions against Ocwen, we cannot assure you that Ocwen will not be removed as servicer by the Agencies or by
bondholders, which could have a material adverse effect on our interests in MSRs serviced or subserviced by 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 Servicing Partners fail to adequately perform their loss mitigation obligations, we could be required to make or purchase, as
applicable, servicer advances in excess of those that we might otherwise have had to make or 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 Servicer Advance
Investments.
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 Servicing Partner 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 residential mortgage loan, which could cause us to
suffer losses.
Favorable servicer ratings from third-party rating agencies, such as S&P Global Ratings (“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 Servicing Partner’s servicer ratings could have an adverse effect on the value of our interests in MSRs and result
in an event of default under our financings. Downgrades in a Servicing Partner’s servicer ratings could adversely affect our ability
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to finance our assets 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 financing that
a Servicing Partner or we may seek in the future. A Servicing Partner’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 because we
will rely heavily on Servicing Partners to achieve our investment objectives and have no direct ability to influence their performance.
For additional information about the ways in which we may be affected by mortgage servicers, see “—The value of our interests
in MSRs, servicer advances, residential mortgage loans and RMBS may be adversely affected by deficiencies in servicing and
foreclosure practices, as well as related delays in the foreclosure process.”
A number of lawsuits, including class-actions, have been filed against mortgage servicers alleging improper servicing in
connection with residential non-agency mortgage securitizations. Investors in, and counterparties to, such securitizations
may commence legal action against us and responding to such claims, and any related losses, could negatively impact our
business.
A number of lawsuits, including class actions, have been filed against mortgage servicers alleging improper servicing in connection
with residential non-agency mortgage securitizations. Investors in, and counterparties to, such securitizations may commence
legal action against us and responding to such claims, and any related losses, could negatively impact our business. The number
of counterparties on behalf of which we service loans significantly increases as the size of our non-agency MSR portfolio increases
and we may become subject to claims and legal proceedings, including purported class-actions, in the ordinary course of our
business, challenging whether our loan servicing practices and other aspects of our business comply with applicable laws,
agreements and regulatory requirements. We are unable to predict whether any such claims will be made, the ultimate outcome
of any such claims, the possible loss, if any, associated with the resolution of such claims or the potential impact any such claims
may have on us or our business and operations. Regardless of the merit of any such claims or lawsuits, defending any claims or
lawsuits may be time consuming and costly and we may be required to expend significant internal resources and incur material
expenses, and management time may be diverted from other aspects of our business, in connection therewith. Further, if our efforts
to defend any such claims or lawsuits are not successful, our business could be materially and adversely affected. As a result of
investor and other counterparty claims, we could also suffer reputational damage and trustees, lenders and other counterparties
could cease wanting to do business with us.
Certain of our Servicing Partners have been and are subject to federal and state regulatory matters and other litigation,
which may adversely impact us.
Regulatory actions or legal proceedings against certain of our Servicing Partners 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. Such Servicing Partners may be subject to additional federal and state regulatory matters in the future that could materially
and adversely affect the value of our investments to the extent we rely on them to achieve our investment objectives because we
have no direct ability to influence their performance. Certain of our Servicing Partners have disclosed certain matters in their
periodic reports filed with the SEC, and there can be no assurance that such events will not have a material adverse effect on them.
We are currently evaluating the impact of such events and cannot assure you what impact these events may have or what actions
we may take under our agreements with the servicer. In addition, any of our Servicing Partners could be removed as servicer by
the related loan owner or certain other transaction counterparties, which could have a material adverse effect on our interests in
the loans and MSRs serviced by such Servicing Partner.
In addition, certain of our Servicing Partners have been and continue to be subject to regulatory and governmental examinations,
information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings. In connection with
formal and informal inquiries, such Servicing Partners may receive numerous requests, subpoenas and orders for documents,
testimony and information in connection with various aspects of their activities, including whether certain of their residential loan
servicing and originations practices, bankruptcy practices and other aspects of their business comply with applicable laws and
regulatory requirements. Such Servicing Partners cannot provide any assurance as to the outcome of any of the aforementioned
actions, proceedings or inquiries, or that such outcomes will not have a material adverse effect on their reputation, business,
prospects, results of operations, liquidity or financial condition.
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Completion of the pending transactions related to MSRs (the “MSR Transactions”) is subject to various closing conditions,
involves significant costs, and we cannot assure you if, when or the terms on which such transactions will close. Failure to
complete the pending MSR Transactions could adversely affect our future business and results of operations.
We have entered into an agreement for the purchase and sale of approximately $60.1 billion UPB of MSRs and related servicer
advances from PHH (the various aspects of such transaction, the “PHH Transaction”). Although we have completed a portion of
the MSR transfers contemplated by the PHH Transaction, the completion of the pending portions of the PHH Transaction is subject
to the satisfaction of closing conditions, consents of third parties and certain actions by rating agencies and we cannot assure you
that such conditions will be satisfied or that such portions of the PHH Transaction will be successfully completed on their current
terms, if at all. In the event that any portion of the PHH Transaction is not consummated, we will have spent considerable time
and resources, and incurred substantial costs, many of which must be paid even if the PHH Transaction is not completed. The
purchase settled in stages during 2017. As of December 31, 2017, MSRs, and related servicer advances receivables, with respect
to private-label residential mortgage loans of approximately $6.0 billion in total UPB with a purchase price of approximately
$35.5 million had not been settled.
In addition, we have entered into an agreement for Ocwen to transfer its remaining interests in $110.0 billion of UPB of non-
Agency MSRs to NRM (the “Ocwen Subject MSRs”). We currently hold certain interests in the Ocwen Subject MSRs (including
all servicer advances) pursuant to existing agreements with Ocwen. The transfer of Ocwen’s interests in the Ocwen Subject MSRs
is subject to numerous consents of third parties and certain actions by rating agencies. While certain of the Ocwen Subject MSRs
have previously transferred to NRM, there is no assurance that we will be able to obtain such consents in order to transfer Ocwen’s
interests in the Ocwen Subject MSRs to NRM. We have spent considerable time and resources, and incurred substantial costs, in
connection with the negotiation of such transaction and we will incur such costs even if the Ocwen Subject MSRs cannot be
transferred to NRM. As of December 31, 2017, MSRs representing approximately $14.8 billion UPB of underlying loans have
been transferred pursuant to the Ocwen Transaction, and MSRs representing approximately $86.8 billion UPB of underlying loans
remain to be transferred (after paydowns and other factors).
We may be unable to become the named servicer in respect of certain Non-Agency MSRs because, among other potential reasons,
we do not maintain any servicer ratings from rating agencies. If we are unable to become the named servicer in respect of any of
the Ocwen Subject MSRs in accordance with the Ocwen Transaction (Note 5 to our Consolidated Financial Statements), Ocwen
has the right, in certain circumstances, to purchase from us our interests in the related MSRs. In such a situation, we will be required
to sell Ocwen those assets (and will cease to receive income on those investments) and/or may be required to refinance certain
indebtedness on terms that are not favorable to us.
Our ability to acquire MSRs may be subject to the approval of various third parties and such approvals may not be provided
on a timely basis or at all, or may be subject to conditions, representations and warranties and indemnities.
Our ability to acquire MSRs may be subject to the approval of various third parties and such approvals may not be provided on a
timely basis or at all, or may be conditioned upon our satisfaction of significant conditions which could require material expenditures
and the provision of significant representations, warranties and indemnities. Such third parties may include the Agencies and the
Federal Housing Finance Agency (“FHFA”) with respect to agency MSRs, and securitization trustees, master servicers, depositors,
rating agencies and insurers, among others, with respect to non-agency MSRs. The process of obtaining any such approvals required
for a servicing transfer, especially with respect to non-agency MSRs, may be time consuming and costly and we may be required
to expend significant internal resources and incur material expenses in connection with such transactions. Further, the parties
from whom approval is necessary may require that we provide significant representations and warranties and broad indemnities
as a condition to their consent, which such representations and warranties and indemnities, if given, may expose us to material
risks in addition to those arising under the related servicing agreements. Consenting parties may also charge a material consent
fee and may require that we reimburse them for the legal expenses they incur in connection with their approval of the servicing
transfer, which such expenses may include costs relating to substantial contract due diligence and may be significant. No assurance
can be given that we will be able to successfully obtain the consents required to acquire the MSRs that we have agreed to purchase.
We have significant counterparty concentration risk in certain of our Servicing Partners 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.
Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners. As disclosed in Notes 4,
5, and 6 of our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion
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of our interests in MSRs. If any of these Servicing Partners is the named servicer of the related MSR and is terminated, its servicing
performance deteriorates, or in the event that any of them files for bankruptcy, our expected returns on these investments could
be severely impacted. In addition, a large portion of the loans underlying our Non-Agency RMBS are serviced by certain of our
Servicing Partners. We closely monitor our Servicing Partners’ mortgage servicing performance and overall operating performance,
financial condition and liquidity, as well as their compliance with applicable regulations and Servicing Guidelines. We have various
information, access and inspection rights in our agreements with these Servicing Partners that enable us to monitor aspects of their
financial and operating performance and credit quality, which we periodically evaluate and discuss with their management.
However, we have no direct ability to influence our Servicing Partners’ performance, and our diligence cannot prevent, and may
not even help us anticipate, the termination of any such Servicing Partners’ servicing agreement or a severe deterioration of any
of our Servicing Partners’ servicing performance on our portfolio of interests in MSRs.
Furthermore, certain of our Servicing Partners are subject to numerous legal proceedings, federal, state or local governmental
examinations, investigations or enforcement actions, which could adversely affect their operations, reputation and liquidity,
financial position and results of operations. See “—Certain of our Servicing Partners have been and are subject to federal and state
regulatory matters and other litigation, which may adversely impact us” for more information.
None of our Servicing Partners has 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 interests in MSRs, which could
impact our business strategy. See “—We rely heavily on our Servicing Partners 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 the related Servicing Partner breaches any of its obligations under the Servicing
Guidelines, including, without limitation, any failure of such Servicing Partner to perform its servicing and advancing functions
in accordance with the terms of such Servicing Guidelines. If any applicable Servicing Partner 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
adversely affect the returns from our investment.
We are subject to substantial other operational risks associated with our Servicing Partners in connection with the financing of
servicer advances. In our current financing facilities for servicer advances, the failure of our Servicing Partner 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 Servicing
Partners’ compliance with those covenants and tests. Failure of our Servicing Partners to satisfy any such covenants or tests could
result in a partial or total loss on our investment.
In addition, our Servicing Partners are party to our servicer advance financing agreements, with respect to those advances where
they service or subservice the loans underlying the related MSRs. Our ability to obtain financing for these assets is dependent on
our Servicing Partners’ agreement to be a party to the related financing agreements. If our Servicing Partners do 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. Our
ability to obtain financing on such assets is dependent on our Servicing Partners’ ability to satisfy various tests under such financing
arrangements. Breaches and other events with respect to our Servicing Partners (which may include, without limitation, failure
of a Servicing Partner to satisfy certain financial tests) could cause certain or all of the relevant servicer advance financing to
become due and payable prior to maturity.
We are dependent on our Servicing Partners as the servicer or subservicer of the residential mortgage loans with respect to which
we hold interests in MSRs, and their servicing practices may impact the value of certain of our assets. We may be adversely
impacted:
• By regulatory actions taken against our Servicing Partners;
• By a default by one of our Servicing Partners under their debt agreements;
• By downgrades in our Servicing Partners’ servicer ratings;
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•
•
•
If our Servicing Partners fail to ensure their servicer advances comply with the terms of their PSAs;
If our Servicing Partners were terminated as servicer under certain PSAs;
If our Servicing Partners become subject to a bankruptcy proceeding; or
If our Servicing Partners fail to meet their obligations or are deemed to be in default under the indenture governing notes
issued under any servicer advance facility with respect to which such Servicing Partner is the servicer.
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Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners. As disclosed in Notes 4,
5, and 6 of our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion
of our interests in MSRs. In addition, Nationstar is currently the servicer for a significant portion of our loans, and the loans
underlying our RMBS. If the servicing performance of one of our subservicers deteriorates, if one of our subservicers files for
bankruptcy or if one of our subservicers is otherwise unwilling or unable to continue to subservice MSRs for us, our expected
returns on these investments would be severely impacted. In addition, if a subservicer becomes subject to a regulatory consent
order or similar enforcement proceeding, that regulatory action could adversely affect us in several ways. For example, the regulatory
action could result in delays of transferring servicing from an interim subservicer to our designated successor subservicer or cause
the subservicer’s performance to degrade. Any such development would negatively affect our expected returns on these investments,
and such effect could be materially adverse to our business and results of operations. We closely monitor each subservicer’s
mortgage servicing performance and overall operating performance, financial condition and liquidity, as well as its compliance
with applicable regulations and GSE servicing guidelines. We have various information, access and inspection rights in our
respective agreements with our subservicers that enable us to monitor aspects of their financial and operating performance and
credit quality, which we periodically evaluate and discuss with each subservicer’s respective management. However, we have no
direct ability to influence each subservicer’s performance, and our diligence cannot prevent, and may not even help us anticipate,
a severe deterioration of each subservicer’s respective servicing performance on our MSR portfolio.
In addition, a material portion of 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 or is otherwise unable to continue to
service such loans, our expected returns on these investments could be severely impacted.
Moreover, we are party to repurchase agreements with a limited number of counterparties. If any of our counterparties elected not
to roll our repurchase agreements, we may not be able to find a replacement counterparty, which would have a material adverse
effect on our financial condition.
Our risk-management processes may not accurately anticipate the impact of market stress or counterparty financial condition, and
as a result, we may not take sufficient action to reduce our risks effectively. Although we will monitor our credit exposures, default
risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, concerns about, or a default
by, one large participant could lead to significant liquidity problems for other participants, which may in turn expose us to significant
losses.
In the event of a counterparty default, particularly a default by a major investment bank or Servicing Partner, 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.
A bankruptcy of any of our Servicing Partners could materially and adversely affect us.
If any of our Servicing Partners becomes subject to a bankruptcy proceeding, we could be materially and adversely affected, and
you could suffer losses, as discussed below.
A sale of MSRs or interests in MSRs and servicer advances or other assets, 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 MSRs or interests in MSRs and servicer advances or 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 MSRs or interests in MSRs and 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. We generally create and perfect security interests
with respect to the MSRs that we acquire, though we do not do so in all instances. If such assertion were successful, all or part of
the MSRs or interests in MSRs and 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 could be those of a secured
creditor with a lien on such present and future 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
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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 entitlement pursuant to the U.S. bankruptcy laws.
If such a recharacterization occurs, the validity or priority of our security interest in the MSRs or interests in MSRs and 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 MSRs or interests in MSRs and 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, to the extent we have created and perfected a security
interest, our security interests may be challenged and ruled unenforceable, ineffective or subordinated by a bankruptcy court, and
the amount of our claims may be disputed so as not to include all MSRs or interests in MSRs and servicer advances to be collected.
If this were to occur, or if we have not created a security interest, then the servicer’s obligations to us with respect to purchased
MSRs or interests in MSRs and servicer advances or 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 Servicing Partners 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 (if any) 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
bankruptcy estate as preferential transfers. Among other reasons, 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
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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 MSRs or interests in
MSRs and 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, among other reasons, 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, our Servicing Partner, as applicable (as debtor-in-possession in the
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bankruptcy proceeding), or a bankruptcy trustee on such Servicing Partner’s behalf would be entitled to recover such transfer or
to avoid the obligation previously incurred.
Any purchase agreement pursuant to which we purchase interests in MSRs, servicer advances or other assets, including loans, or
any subservicing agreement between us and a subservicer on our behalf could be rejected in a bankruptcy proceeding of one of
our Servicing Partners or counterparties.
A mortgage servicer (as debtor-in-possession in the bankruptcy proceeding) or a bankruptcy trustee appointed in such servicer’s
or counterparty’s bankruptcy proceeding could seek to reject the related purchase agreement or subservicing agreement with a
counterparty and thereby terminate such servicer’s or counterparty’s obligation to service the MSRs or interests in MSRs and
servicer advances or 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 or counterparty for any
damages from the rejection, and the resulting transfer of our interests in MSRs or servicing of the MSRs relating to our Excess
MSRs to another subservicer may result in significant cost and may negatively impact the value of our interests in MSRs.
A bankruptcy court could stay a transfer of servicing to another servicer.
Our ability to terminate a subservicer or 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.
Any Subservicing Agreement could be rejected in a bankruptcy proceeding.
If one of our Servicing Partners were to file, or to become the subject of, a bankruptcy proceeding under the United States Bankruptcy
Code or similar state insolvency laws, such Servicing Partner (as debtor-in-possession in the bankruptcy proceeding) or the
bankruptcy trustee could reject its subservicing agreement with us and terminate such Servicing Partner’s obligation to service
the 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 Servicing
Partner’s bankruptcy estate.
Our Servicing Partners could discontinue servicing.
If one of our Servicing Partners were to file, or to become the subject of, a bankruptcy proceeding under the United States Bankruptcy
Code, such Servicing Partner 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 interests in
MSRs, servicer advances and other assets purchased under the related purchase agreement or subserviced under the related
subservicing agreement. Even if we were able to obtain the servicing rights or terminate the related subservicer, 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 or the Agencies, as applicable.
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 interests in 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 Servicing Partners may default our MSR, Excess MSR and servicer advance financing facilities and
negatively impact our ability to continue to purchase interests in MSRs.
If any of our Servicing Partners were to file for bankruptcy or become the subject of a bankruptcy proceeding, it could result in
an event of default under certain of our financing facilities that would require the immediate paydown of such facilities. In this
scenario, we may not be able to comply with our obligations to purchase interests in MSRs and servicer advances under the related
purchase agreements. Notwithstanding this inability to purchase, the related seller may try to force us to continue making such
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purchases. If it is determined that we are in breach of our obligations under our purchase agreements, any claims that we may
have against such related seller may be subject to offset against claims such seller may have against us by reason of this breach.
GSE initiatives and other actions may adversely affect returns from interests in MSRs.
On January 18, 2011, the 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
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
interests in 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 interests
in 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 interests in MSRs. We cannot predict
whether any changes to current MSA rules will occur or what impact any changes will have on our business, results of operations,
liquidity or financial condition.
Our interests in MSRs may involve complex or novel structures.
Interests in MSRs may entail 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 interests in MSRs on Agency
pools, Agencies may require that we submit to costly or burdensome conditions as a prerequisite to their consent to an investment
in, or our financing of, interests in MSRs on Agency pools. Agency conditions, including capital requirements, may diminish or
eliminate the investment potential of interests in MSRs on Agency pools by making such investments too expensive for us or by
severely limiting the potential returns available from interests in MSRs on Agency pools.
It is possible that an Agency’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. An Agency’s evolving posture toward an acquisition or disposition structure through which we invest in or dispose
of interests in MSRs on Agency pools may cause such Agency to impose new conditions on our existing interests in MSRs on
Agency pools, including the owner’s ability to hold such interests in 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 interests in 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.
Our ability to finance the MSRs and servicer advances acquired in the MSR Transactions may depend on the related
Servicing Partner’s cooperation with our financing sources and compliance with certain covenants.
We have in the past and intend to continue to finance some or all of the MSRs or servicer advances acquired in the MSR Transactions,
and as a result, we will be subject to substantial operational risks associated with the related Servicing Partners. In our current
financing facilities for interests in MSRs and servicer advances, the failure of the related Servicing Partner to satisfy various
covenants and tests can result in an amortization event and/or an event of default. Our financing sources may require us to include
similar provisions in any financing we obtain relating to the MSRs and servicer advances acquired in the MSR Transactions. If
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we decide to finance such assets, we will not have the direct ability to control any party’s compliance with any such covenants
and tests and the failure of any party to satisfy any such covenants or tests could result in a partial or total loss on our investment.
Some financing sources may be unwilling to finance any assets acquired in the MSR Transactions.
In addition, any financing for the MSRs and servicer advances acquired in the MSR Transactions may be subject to regulatory
approval and the agreement of the relevant Servicing Partner to be party to such financing agreements. If we cannot get regulatory
approval or these parties do not agree to be a party to such financing agreements, we may not be able to obtain financing on
favorable terms or at all.
Mortgage servicing is heavily regulated at the U.S. federal, state and local levels, and each transfer of MSRs to our
subservicer of such MSRs may not be approved by the requisite regulators.
Mortgage servicers must comply with U.S. federal, state and local laws and regulations. These laws and regulations cover topics
such as licensing; allowable fees and loan terms; permissible servicing and debt collection practices; limitations on forced-placed
insurance; special consumer protections in connection with default and foreclosure; and protection of confidential, nonpublic
consumer information. The volume of new or modified laws and regulations has increased in recent years, and states and individual
cities and counties continue to enact laws that either restrict or impose additional obligations in connection with certain loan
origination, acquisition and servicing activities in those cities and counties. The laws and regulations are complex and vary greatly
among the states and localities, and in some cases, these laws are in conflict with each other or with U.S. federal law. In connection
with the MSR Transactions, there is no assurance that each transfer of MSRs to our selected subservicer will be approved by the
requisite regulators. If regulatory approval for each such transfer is not obtained, we may incur additional costs and expenses in
connection with the approval of another replacement subservicer.
We do not have legal title to the MSRs underlying our Excess MSRs or certain of our Servicer Advance Investments.
We do not have legal title to the MSRs underlying our Excess MSRs or certain of the MSRs related to the transactions contemplated
by the purchase agreements pursuant to which we acquire Servicer Advance Investments from Ocwen, SLS and Nationstar, and
are subject to increased risks as a result of the related 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. As part of the Ocwen Transaction, we and Ocwen
have agreed to cooperate to obtain any third party consents required to transfer Ocwen’s remaining interest in the Ocwen Subject
MSRs to us. As noted above, however, there is no assurance that we will be successful in obtaining those consents.
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.
Interests in MSRs 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 interests in 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, interests in MSRs may entail complex transaction structures 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 interests in MSRs. There is some risk that we will be required to dispose of interests in
MSRs 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 interests in MSRs, 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 interests in MSRs. 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.
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In addition, some of our real estate and other 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 and certain of our
interests in 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.
Our real estate and other 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 and other 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;
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, and credit losses with respect
to our investments;
prepayment and repayment rates, delinquency rates and legislative/regulatory changes with respect to our investments,
and the timing and amount of servicer advances;
the availability and cost of quality Servicing Partners, and advance, recovery and recapture rates;
competition;
the actual and perceived state of the real estate markets, bond 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. Market conditions could be volatile or 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 interests in 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, hurricanes,
earthquakes or other natural disasters; and changes in interest rates.
As of December 31, 2017, 24.0% and 19.0% of the total UPB of the residential mortgage loans underlying our Excess MSRs and
MSRs, respectively, was secured by properties located in California, which are particularly susceptible to natural disasters such
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as fires, earthquakes and mudslides. 8.7% and 6.0% of the total UPB of the residential mortgage loans underlying our Excess
MSRs and MSRs, respectively, was secured by properties located in Florida, which are particularly susceptible to natural disasters
such as hurricanes and floods. As of December 31, 2017, 38.4% of the collateral securing our Non-Agency RMBS was located
in the Western U.S., 23.6% was located in the Southeastern U.S., 20.1% was located in the Northeastern U.S., 10.5% was located
in the Midwestern U.S. and 7.3% was located in the Southwestern U.S. We were unable to obtain geographical information for
0.1% 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.
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. Subprime mortgage loans may 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 interests in MSRs, servicer advances, residential mortgage loans 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 U.S. Department of Housing and Urban Development (“HUD”), 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 $25.0 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 agreements governing our Servicer Advance Investments and MSRs, we (in certain cases, together with
third-party co-investors) are required to make or purchase from certain of our Servicing Partners, servicer advances on certain
loan pools. While a residential 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 we or our
Servicing Partners 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, servicer 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.
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Even in states where servicers have not suspended foreclosure proceedings or have lifted (or will soon lift) any such delayed
foreclosures, servicers, including our Servicing Partners, 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 liquidity and
profitability. Although the terms of our Servicer Advance Investments contain adjustment mechanisms that would reduce the
amount of performance fees payable to the related Servicing Partner 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 is critical to the value of the residential mortgage loans in which we invest
and of the portfolios of loans underlying our interests in MSRs 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 senior classes of RMBS that we may own, thus possibly adversely affecting these securities. Additionally, a substantial
portion of the $25.0 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 interests in MSRs and RMBS.
While we believe that the sellers and servicers would be in violation of the applicable Servicing Guidelines 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.
As described in Note 6 to our Consolidated Financial Statements, New Residential and third-party co-investors, through a joint
venture entity (Advance Purchaser LLC, the “Buyer”) have 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 servicer 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 residential mortgage 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, including 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.
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In the event of default under a residential mortgage loan held directly by us, we will bear a risk of loss of principal to the extent
of any deficiency between the value of the collateral and the outstanding principal and accrued but unpaid interest of the loan,
which could adversely affect our results of operations, cash flows and financial condition.
Our investments in real estate and other 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 and other 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, 2017, 90.5% of our Non-Agency RMBS Portfolio consisted of floating rate securities and 9.5%
consisted of fixed rate securities, and 9.2% of our Agency RMBS portfolio consisted of floating rate securities and 90.8% 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 and other 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 and other 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 our residential mortgage loans and those underlying our real estate and other securities may adversely
affect our profitability.
In general, residential mortgage loans may be prepaid at any time without penalty. Prepayments result when homeowners/
mortgagors satisfy (i.e., pay off) the mortgage upon selling or refinancing their mortgaged property. When we acquire a particular
loan or security, we anticipate that the loan or underlying residential mortgage loans will prepay at a projected rate which, together
with expected coupon income, provides us with an expected yield on such investments. If we purchase assets at a premium to par
value, and borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on our assets may reduce
the expected yield on such assets 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 our assets may reduce the expected yield on such assets 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,
political 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 loans and real estate and other securities may, because of the risk of prepayment,
benefit less than other fixed-income securities from declining interest rates.
We may purchase assets 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 over the life of the related assets. If the mortgage loans securing these assets 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 assets. In accordance with
GAAP, we would accrete any discounts over the life of the related assets. If the mortgage loans securing these assets 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
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equal to a portion of our investment principal in a particular security as the underlying mortgages are prepaid. In general, on the
date each month that principal prepayments are announced (i.e., factor day), the value of our real estate related security pledged
as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will
typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal,
in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with
respect to our Agency RMBS, the announcement on factor day of principal prepayments is in advance of our receipt of the related
scheduled payment, thereby creating a short-term receivable for us in the amount of any such principal prepayments. However,
under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS
and, prior to receipt of this short-term receivable, be required to post additional collateral or cash in the amount of the principal
prepayment on or about factor day, which would reduce our liquidity during the period in which the short-term receivable is
outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity.
Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales made in the normal
course of business. If our real estate and other 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 and other 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 and other 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 loans and
real estate and other 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 loans, REO and 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 financing 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 with repurchase agreements and other short-term financing arrangements.
Under the terms of repurchase agreements, we will sell an asset to the lending counterparty for a specified price and concurrently
agree to repurchase the same asset 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 asset 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 asset 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 asset 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 or other financing agreements upon the expiration of their
stated terms, which subjects us to a number of risks. Counterparties electing to roll our financing 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 financing agreement counterparty elects not to extend our financing, we would be required to pay the counterparty
in full 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 asset financed with a
repurchase agreement, the counterparty has the right to sell the asset 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). Moreover, our financing agreement obligations are currently with a limited number of
counterparties. If any of our counterparties elected not to roll our financing agreements, we may not be able to find a replacement
counterparty in a timely manner. Finally, some of our financing 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 Servicer Advance Investments and servicer advances receivable with structured financing
arrangements. These arrangements are commonly of a short-term nature. These arrangements are generally accomplished by
having the named servicer, if the named servicer is a subsidiary of the Company, or the purchaser of such Servicer Advance
Investments (which is a subsidiary of the Company) transfer our right to repayment for certain servicer advances that we have as
servicer under the relevant Servicing Guidelines or that we have acquired from one of our Servicing Partners, as applicable, 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, if applicable, are
transferred from one of our Servicing Partners) 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 Servicing Partners, 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.
Currently, certain of the notes issued under our structured servicer advance financing arrangements accrue 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 Servicing Partners. If any holders of term notes allege or assert noncompliance by us or the related Servicing Partner under
our servicer advance financing arrangements in order to realize such benefits, we or our Servicing Partners, or our ability to
maintain servicer advance financing on favorable terms, could be materially and adversely affected.
In order to continue to finance servicer advances and deferred servicing fees arising in connection with the Ocwen Subject MSRs
upon any transfer in connection with the Ocwen Transaction, we will need to amend our existing servicer advance financing
facilities (or establish new servicer advance financing facilities) related to the Ocwen Subject MSRs to permit such continued
financing. There is no assurance we will able to do so on favorable terms or at all. As of December 31, 2017, we had borrowed
$2.6 billion against approximately $3.0 billion of servicer advances and deferred servicing fees arising under the Ocwen Subject
MSRs that had not yet been transferred. Our obligation to pay Ocwen lump sum payments in connection with any transfer of
interests in the Ocwen Subject MSRs in connection with the Ocwen Transaction is not conditioned on having such servicer advance
financings amended (or having new servicer advance financing facilities established).
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We may not be able to finance our investments on attractive terms or at all, and financing for interests in 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, or the refinancing of current investments, which will likely require a larger portion
of our cash flows to be put toward making the 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 a limited market for financing of interests in 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
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 Servicing Partners or fund servicer advances under
our MSRs in accordance with the applicable Servicing Guidelines, we or any such Servicing Partner, as applicable, could default
on its obligation to fund such advances, which could result in its termination of us or any applicable Servicing Partner, as applicable,
as servicer under the applicable Servicing Guidelines, and a partial or total loss of our interests in MSRs and servicer advances,
as applicable.
The non-recourse long-term financing structures we use expose us to risks, which could result in losses to us.
We use structured finance and other non-recourse long-term financing for our investments to the extent available and appropriate.
In such structures, our financing sources typically 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 generally intend to retain a portion of the interests
issued under such 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 and access to financing.
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 mortgage loans, and thus the type of risks that we have experience managing, there are nevertheless
substantial risks and uncertainties associated with engaging in a different 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 inclusion of
consumer loans in 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
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sector. In addition, one of our consumer loan investments is held through LoanCo (Note 9 to our Consolidated Financial Statements),
in which we hold a minority, non-controlling interest. We do not control LoanCo and, as a result, LoanCo may make decisions,
or take risks, that we would otherwise not make, and LoanCo may not have access to the same management and financing expertise
that we have. Failure to successfully manage these risks could have a material adverse effect on our business and financial results.
The consumer loans we invest in 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 we invest in 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. Furthermore, our returns on our consumer loan investments
are dependent on the interest we receive exceeding any losses we may incur from defaults or delinquencies.The relatively higher
interest rates paid by consumer loan borrowers could lead to increased delinquencies and defaults, or could lead to financially
stronger borrowers prepaying their loans, thereby reducing the interest we receive from them, while financially weaker borrowers
become delinquent or default, either of which would reduce the return on our investment or could cause losses.
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
mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such
cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding
loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. Further,
repossessing personal property securing a consumer loan can present additional challenges, including locating the collateral and
taking possession of it. In addition, borrowers under consumer loans may have lower credit scores. There can be no guarantee that
we will not suffer unexpected losses on our investments as a result of the factors set out above, which could have a negative impact
on our financial results.
The servicer of the loans underlying our consumer loan investment may not be able to accurately track the default status
of senior lien loans in instances where our consumer loan investments are secured by second or third liens on real estate.
A portion of our investment in consumer loans is secured by second and third liens on real estate. When we hold the second or
third lien, another creditor or creditors, as applicable, holds the first and/or second, as applicable, lien on the real estate that is the
subject of the security. In these situations our second or third lien is subordinate in right of payment to the first and/or second, as
applicable, holder’s right to receive payment. Moreover, as the servicer of the loans underlying our consumer loan portfolio is not
able to track the default status of a senior lien loan in instances where we do not hold the related first mortgage, the value of the
second or third lien loans in our portfolio may be lower than our estimates indicate.
The consumer loan investment sector is subject to various initiatives on the part of advocacy groups and extensive regulation
and supervision under federal, state and local laws, ordinances and regulations, which could have a negative impact on
our financial results.
In recent years consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe
restrictions on the types of short-term consumer loans in which we have invested. Such consumer advocacy groups and media
reports generally focus on the annual percentage rate to a consumer for this type of loan, which is compared unfavorably to the
interest typically charged by banks to consumers with top-tier credit histories.
The fees charged on the consumer loans in the portfolio in which we have invested may be perceived as controversial by those
who do not focus on the credit risk and high transaction costs typically associated with this type of investment. If the negative
characterization of these types of loans becomes increasingly accepted by consumers, demand for the consumer loan products in
which we have invested could significantly decrease. Additionally, if the negative characterization of these types of loans is
accepted by legislators and regulators, we could become subject to more restrictive laws and regulations in the area.
In addition, we are, or may become, subject to federal, state and local laws, regulations, or regulatory policies and practices,
including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) (which, among other things,
established the CFPB 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 we invest in, 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.
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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. In addition, we may acquire REO assets
directly, which involves the same risks. Any loss we incur may be significant and could materially and adversely affect us.
Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans and/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
hold some but not all 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. 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, the income from such assets may respond more slowly to interest rate fluctuations than the cost of our borrowings.
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Because of this dynamic, interest income from such investments may rise more slowly than the related interest expense, with a
consequent decrease in our net income. Interest rate fluctuations resulting in our interest expense exceeding interest income would
result in operating losses for us from these investments.
Accordingly, to the extent our investments are not match funded with respect to maturities and interest rates, we are exposed to
the risk that we may not be able to finance or refinance our investments on economically favorable terms, or at all, or may have
to liquidate assets at a loss.
Interest rate fluctuations and shifts in the yield curve may cause losses.
Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international
economic and political considerations and other factors beyond our control. Our primary interest rate exposures relate to our
interests in MSRs, RMBS, loans, derivatives 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 and other securities and loans at attractive
prices, the value of our real estate and other securities, loans 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.
Recently, the Federal Reserve has increased the benchmark interest rate and indicated that there may be further increases in the
future. 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 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 most of our investments 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 investments 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
and other securities and loan 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
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instruments, we consider the effect of the expected hedging income on the REIT qualification tests that limit the amount of gross
income that a REIT may receive from hedging. We need to carefully monitor, and may have to limit, our hedging strategy to assure
that we do not realize hedging income, or hold hedges having a value, in excess of the amounts that would cause us to fail the
REIT gross income and asset tests. See “—Risks Related to Our Taxation as a REIT—Complying with the REIT requirements
may limit our ability to hedge effectively.”
Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in
accordance with GAAP in our financial statements could adversely affect 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, unless another exclusion
from the definition of “investment company” is available to us. For purposes of the foregoing, we currently treat our interest in
our SLS Servicer Advance Investment 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 Advance Investments
and are not excluded from the definition of “investment company” by Section 3(c)(5)(A), (B) or (C) of the 1940 Act 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 Servicer Advance Investment 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
constitute 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
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determine which assets are qualifying real estate assets and real estate-related assets. However, the SEC’s guidance was issued in
accordance with factual situations that may be substantially different from the factual situations each of our subsidiaries may face,
and much of the guidance was issued more than 20 years ago. No assurance can be given that the SEC staff will concur with the
classification of each of our subsidiaries’ assets. In addition, the SEC staff may, in the future, issue further guidance that may
require us to re-classify some of our subsidiaries’ assets for purposes of qualifying for an exclusion from regulation under the
1940 Act. For example, the SEC and its staff have not published guidance with respect to the treatment of whole pool Non-Agency
RMBS for purposes of the Section 3(c)(5)(C) exclusion. Accordingly, based on our own judgment and analysis of the guidance
from the SEC and its staff identifying Agency whole pool certificates as qualifying real estate assets under Section 3(c)(5)(C), we
treat whole pool Non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which our subsidiary relying
on Section 3(c)(5)(C) holds all of the certificates issued by the pool as qualifying real estate assets. Based on our own judgment
and analysis of the guidance from the SEC and its staff with respect to analogous assets, we treat Excess MSRs for which we do
not own the related servicing rights 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, including, but not limited to, interests
in MSRs, may lead to decreased availability, higher market prices and decreased returns available from such investments, which
may further limit our ability to generate our desired returns. We cannot assure you that other companies will not be formed that
compete with us for investments or otherwise pursue investment strategies similar to ours or that we will be able to compete
successfully against any such companies.
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Furthermore, we currently do not have a mortgage servicing platform. Therefore, we may not be an attractive buyer for those
sellers of MSRs that prefer to sell MSRs and their mortgage servicing platform in a single transaction. Since our business model
does not currently include acquiring and running servicing platforms, to engage in a bid for such a business we would need to find
a servicer to acquire and run the platform or we would need to incur additional costs to shut down the acquired servicing platform.
The need to work with a servicer in these situations increases the complexity of such potential acquisitions, and our Servicing
Partners may be unwilling or unable to act as servicer or subservicer on any acquisitions of interests in MSRs we want to execute.
The complexity of these transactions and the additional costs incurred by us if we were to execute future acquisitions of this type
could adversely affect our future operating results.
The valuations of our assets are subject to uncertainty 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, directly or through their impact
on our Servicing Partners or counterparties.
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 our loans or the loans
underlying our securities, interests in 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 investments 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.
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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, 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”). 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,
plaintiff filed an amended complaint (the “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, which was heard by the court on June 14, 2016. On October 7, 2016, the court
issued an opinion dismissing without prejudice the breach of fiduciary duty claims and declaratory judgment claims, except for
the claim relating to the applicability of Article Twelfth. On October 14, 2016, plaintiff moved to reargue the Court's dismissal
opinion, and defendants filed an opposition to the motion for reargument on October 28, 2016. On December 1, 2016, the court
denied the motion for reargument. Plaintiff filed a second amended complaint (the “Second Amended Complaint”) on February
27, 2017 containing allegations and seeking relief similar to that in the Amended Complaint. Defendants moved to dismiss the
Second Amended Complaint on March 30, 2017. The court held an oral argument on the motion to dismiss on July 7, 2017, which
the court granted in the defendants’ favor on October 6, 2017. On November 2, 2017, the plaintiff filed a notice of appeal to the
Delaware Supreme Court appealing the court’s original motion to dismiss opinion, motion for reargument opinion, and second
motion to dismiss opinion. The parties have briefed the appeal and are currently awaiting argument and decision.
We have engaged and may in the future engage in a number of acquisitions (including the HLSS Acquisition and the
Shellpoint Acquisition described in Note 18 to our Consolidated Financial Statements), and we may be unable to successfully
integrate the acquired assets and assumed liabilities in connection with such acquisitions.
As part of our business strategy, we regularly evaluate acquisitions of what we believe are complementary assets. Identifying and
achieving the anticipated benefits of such acquisitions is subject to a number of uncertainties, including, without limitation, whether
we are able to acquire the assets, within our parameters, integrate the acquired assets and manage the assumed liabilities efficiently.
As an example, we depend on Ocwen for significant operational support with respect to HLSS assets and the Ocwen Subject
MSRs. 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 such acquisitions.
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 conduct
business and potential disputes or litigation with contract counterparties or other persons with whom we or such counterparties
conduct business. We could also be adversely affected by any issues attributable to the related seller’s operations that arise or are
based on events or actions that occurred prior to the closing of such acquisitions. Completion of 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. Due to the costs of engaging in a number of acquisitions, we may also have difficulty completing more acquisitions in the
future.
There may be difficulties with integrating the loans related to the Citi Transaction into Nationstar’s servicing platform,
which could have a material adverse effect on our results of operations, financial condition and liquidity.
In connection with the Citi Transaction (Note 5 to our Consolidated Financial Statements), Citi’s remaining interim servicing
obligations will be transferred to Nationstar, subject to GSE and other regulatory approvals. The ability to integrate and service
the assets acquired in the Citi Transaction and in all similar future transactions will depend in large part on the success of Nationstar’s
development and integration of expanded servicing capabilities with Nationstar’s current operations. We may fail to realize some
or all of the anticipated benefits of the transaction if the integration process takes longer, or is more costly, than expected.
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Potential difficulties we may encounter during the integration process with the assets acquired in the Citi Transaction or future
similar acquisitions include, but are not limited to, the following:
•
•
•
•
•
•
•
•
the integration of the portfolio into Nationstar’s information technology platforms and servicing systems;
the quality of servicing during any interim servicing period after we purchase the portfolio but before Nationstar assumes
servicing obligations from the seller or its agents;
the disruption to our ongoing businesses and distraction of our management teams from ongoing business concerns;
incomplete or inaccurate files and records;
the retention of existing customers;
the creation of uniform standards, controls, procedures, policies and information systems;
the occurrence of unanticipated expenses; and
potential unknown liabilities associated with the transactions, including legal liability related to origination and servicing
prior to the acquisition.
Our failure to meet the challenges involved in successfully integrating the assets acquired in the Citi Transaction and in all similar
future transactions with our current business could impair our operations. For example, it is possible that the data Nationstar
acquires upon assuming the direct servicing obligations for the loans may not transfer from the Citi platform to its systems properly.
This may result in data being lost, key information not being locatable on Nationstar’s systems, or the complete failure of the
transfer. If Nationstar’s employees are unable to access customer information easily, or if Nationstar is unable to produce originals
or copies of documents or accurate information about the loans, collections could be affected significantly, and Nationstar may
not be able to enforce its right to collect in some cases. Similarly, collections could be affected by any changes to Nationstar’s
collections practices, the restructuring of any key servicing functions, transfer of files and other changes that occur as a result of
the transfer of servicing obligations from Citi to Nationstar.
We are responsible for certain of HLSS’s contingent and other corporate liabilities.
Under the HLSS acquisition agreement (see Note 1 to our Consolidated Financial Statements), we have assumed and are responsible
for the payment of HLSS’s contingent and other liabilities, including: (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.
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.
We could be materially and adversely affected by past events, conditions or actions with respect to 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 Servicing Partners, 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 business. Moreover, any insurance proceeds received with respect to such matters may be inadequate to cover the
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associated losses. 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, including those described above, could have a material adverse effect on us. See
“—We rely heavily on our Servicing Partners to achieve our investment objective and have no direct ability to influence their
performance.”
Our ability to borrow may be adversely affected by the suspension or delay of the rating of the notes issued under certain
of our financing facilities by the credit agency providing the ratings.
Certain of our financing facilities are rated by one rating agency and we may sponsor financing facilities in the future that are
rated by credit agencies. The related agency or rating agencies may suspend rating notes backed by servicer advances, MSRs,
Excess MSRs and our other investments at any time. Rating agency delays may result in our inability to obtain timely ratings on
new notes, or amend or modify other financing facilities 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 our financing facilities could 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 residential 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 it determines 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, servicer 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 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. For more information, see “—We could be materially and adversely affected by past events, conditions or actions with
respect to HLSS or Ocwen” above.
Certain of our Servicing Partners 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.
In certain of these circumstances, the related Servicing Partner may be terminated without any right to compensation for its loss,
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 we or one of our Servicing Partners is terminated as servicer, we may have the right to receive an indemnification
payment from the applicable Servicing Partner, even if such termination related to servicer termination events or events of default
existing at the time of any transaction with such Servicing Partner. If one of our Servicing Partners is terminated as servicer under
a PSA, we will lose any investment related to such Servicing Partner’s MSRs. If we or such Servicing Partner is terminated as
servicer with respect to a PSA and we are unable to enforce our contractual rights against such Servicing Partner, or if such
Servicing Partner 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 condition, results of operations, ability to make distributions, liquidity and financing
arrangements, including our servicer advance financing facilities, and may make it more difficult for us to acquire additional
interests in MSRs in the future.
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
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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.
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 were 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 laws
and the delivery of all documents required to perfect title to the lien. If the purchaser is successful in asserting its claim for recourse,
this 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 sales 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
these 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.
The exercise of cleanup calls could negatively impact our interests in MSRs.
The exercise of cleanup call rights results in the termination of the MSRs on the loans held within the related securitization trusts.
To the extent we own interests in MSRs with respect to loans held within securitization trusts where cleanup call rights are exercised,
whether they are exercised by us or a third party, the value of our interests in those MSRs will likely be reduced to zero and we
could incur losses and reduced cash flows from any such interests.
New Residential’s subsidiary New Residential Mortgage LLC is or may become subject to significant state and federal
regulations.
A subsidiary of New Residential, NRM, has obtained or is currently in the process of obtaining applicable qualifications, licenses
and approvals to own Non-Agency and certain Agency MSRs in the United States and certain other jurisdictions. As a result of
NRM’s current and expected approvals, NRM is subject to extensive and comprehensive regulation under federal, state and local
laws in the United States. These laws and regulations do, and may in the future, significantly affect the way that NRM does
business, and 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 additional 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
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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 or federal regulators, and other industry participants have been the subject of actions by state Attorneys General.
Failure of New Residential’s subsidiary, NRM, to obtain or maintain certain licenses and approvals required for NRM to
purchase and own MSRs could prevent us from purchasing or owning MSRs, which could limit our potential business
activities.
State and federal laws require a business to hold certain state licenses prior to acquiring MSRs. NRM is currently licensed or
otherwise eligible to hold MSRs in each applicable state. As a licensee in such states, NRM may become subject to administrative
actions in those states for failing to satisfy ongoing license requirements or for other state law violations, the consequences of
which could include fines or suspensions or revocations of NRM’s licenses by applicable state regulatory authorities, which could
in turn result in NRM becoming ineligible to hold MSRs in the related jurisdictions. We could be delayed or prohibited from
conducting certain business activities if we do not maintain necessary licenses in certain jurisdictions. We cannot assure you that
we will be able to maintain all of the required state licenses.
Additionally, NRM has received approval from FHA to hold MSRs associated with FHA-insured mortgage loans, from Fannie
Mae to hold MSRs associated with loans owned by Fannie Mae, and from Freddie Mac to hold MSRs associated with loans owned
by Freddie Mac. NRM may seek approval from Ginnie Mae to become an approved Ginnie Mae Issuer, which would make NRM
eligible to hold MSRs associated with Ginnie Mae securities. As an approved Fannie Mae Servicer, Freddie Mac Servicer and
FHA Lender, NRM is required to conduct aspects of its operations in accordance with applicable policies and guidelines published
by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals. Should NRM fail to maintain FHA, Fannie Mae or
Freddie Mac approval, or fail to obtain approval from Ginnie Mae, NRM may be unable to purchase certain types of MSRs, which
could limit our potential business activities.
NRM is currently subject to various, and may become subject to additional information reporting and other regulatory requirements,
and there is no assurance that we will be able to satisfy those requirements or other ongoing requirements applicable to mortgage
loan servicers under applicable state and federal laws. Any failure by NRM to comply with such state or federal regulatory
requirements may expose us to administrative or enforcement actions, license or approval suspensions or revocations or other
penalties that may restrict our business and investment options, any of which could restrict our business and investment options,
adversely impact our business and financial results and damage our reputation.
We may become subject to fines or other penalties based on the conduct of mortgage loan originators and brokers that
originate residential mortgage loans related to MSRs that we acquire, and the third-party servicers we may engage to
subservice the loans underlying MSRs we acquire.
We have acquired MSRs and may in the future acquire additional MSRs from third-party mortgage loan originators, brokers or
other sellers, and we therefore are or will become dependent on such third parties for the related mortgage loans’ compliance with
applicable law, and on third-party mortgage servicers, including our Servicing Partners, to perform the day-to-day servicing on
the mortgage loans underlying any such MSRs. Mortgage loan originators and brokers are subject to strict and evolving consumer
protection laws and other legal obligations with respect to the origination of residential mortgage loans. These laws and regulations
include the residential mortgage servicing standards, “ability-to-repay” and “qualified mortgage” regulations promulgated by the
CFPB, which became effective in 2014. In addition, there are various other federal, state, and local laws and regulations that are
intended to discourage predatory lending practices by residential mortgage loan originators. These laws may be highly subjective
and open to interpretation and, as a result, a regulator or court may determine that that there has been a violation where an originator
or servicer of mortgage loans reasonably believed that the law or requirement had been satisfied. Although we do not currently
originate or directly service any mortgage loans, failure or alleged failure by originators or servicers to comply with these laws
and regulations could subject us, as an investor in MSRs, to state or CFPB administrative proceedings, which could result in
monetary penalties, license suspensions or revocations, or restrictions to our business, all of which could adversely impact our
business and financial results and damage our reputation.
The final servicing rules promulgated by the CFPB to implement certain sections of the Dodd-Frank Act include provisions relating
to, among other things, periodic billing statements and disclosures, responding to borrower inquiries and complaints, force-placed
insurance, and adjustable rate mortgage interest rate adjustment notices. Further, the mortgage servicing rules require servicers
to, among other things, make good faith early intervention efforts to notify delinquent borrowers of loss mitigation options, to
implement specified loss mitigation procedures, and if feasible, exhaust all loss mitigation options before proceeding to foreclosure.
Proposed updates to further refine these rules have been published and will likely lead to further changes in requirements applicable
to servicing mortgage loans.
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We do not currently engage in any day-to-day servicing operations, and instead engage third-party servicers to subservice mortgage
loans relating to any MSRs we acquire. It is therefore possible that a third-party servicer’s failure to comply with the new and
evolving servicing protocols could adversely affect the value of the MSRs we acquire. Additionally, we may become subject to
fines, penalties or civil liability based upon the conduct of any third-party servicer who services mortgage loans related to MSRs
that we have acquired or will acquire in the future.
Investments in MSRs may expose us to additional risks.
We hold investments in MSRs. Our investments in MSRs may subject us to certain additional risks, including the following:
• We have limited experience acquiring MSRs and operating a servicer. Although ownership of MSRs and the operation of
a servicer includes many of the same risks as our other target assets and business activities, including risks related to
prepayments, borrower credit, defaults, interest rates, hedging, and regulatory changes, there can be no assurance that we
will be able to successfully operate a servicer subsidiary and integrate MSR investments into our business operations.
• As of today, we rely on subservicers to subservice the mortgage loans underlying our MSRs on our behalf. We are generally
responsible under the applicable Servicing Guidelines for any subservicer’s non-compliance with any such applicable
Servicing Guideline. In addition, there is a risk that our current subservicers will be unwilling or unable to continue
subservicing on our behalf on terms favorable to us in the future. In such a situation, we may be unable to locate a replacement
subservicer on favorable terms.
• NRM’s existing approvals from government-related entities or federal agencies are subject to compliance with their
respective servicing guidelines, minimum capital requirements, reporting requirements and other conditions that they may
impose from time to time at their discretion. Failure to satisfy such guidelines or conditions could result in the unilateral
termination of NRM’s existing approvals or pending applications by one or more entities or agencies.
• NRM is presently licensed or otherwise eligible to hold MSRs in all states within the United States and the District of
Columbia. Such state licenses may be suspended or revoked by a state regulatory authority, and we may as a result lose
the ability to own MSRs under the regulatory jurisdiction of such state regulatory authority.
• Changes in minimum servicing compensation for Agency loans could occur at any time and could negatively impact the
•
value of the income derived from any MSRs that we hold or may acquire in the future.
Investments in MSRs are highly illiquid and subject to numerous restrictions on transfer and, as a result, there is risk that
we would be unable to locate a willing buyer or get approval to sell any MSRs in the future should we desire to do so.
Our business, results of operations, financial condition and reputation could be adversely impacted if we are not able to successfully
manage these or other risks related to investing and managing MSR investments.
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 (other than three part-time employees of NRM), 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.
On December 27, 2017, SoftBank announced that it completed the SoftBank Merger. In connection with the SoftBank Merger,
Fortress will operate within SoftBank as an independent business headquartered in New York. While Fortress’s senior investment
professionals are expected to remain in place, including those individuals who perform services for us, there can be no assurance
that the SoftBank Merger will not have an impact on us or our relationship with the Manager.
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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 Nationstar and OneMain—invest
in real estate and other securities and loans, consumer loans and interests in MSRs 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. Although we have the same Manager, we may compete with entities affiliated with our
Manager or Fortress 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
$0.6 billion in investments in aggregate. We have broad investment guidelines, and we have co-invested 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.
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 Nationstar and OneMain which may include, but are not
limited to, certain financing arrangements, purchases of debt, co-investments in interests in MSRs, consumer loans, 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
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.
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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 12-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 performance of the underlying investments) or
otherwise we may continue to pay the incentive compensation to our Manager. These provisions may increase the effective cost
to us of terminating the Management Agreement, thereby adversely affecting our ability to terminate our Manager without cause.
Our directors have approved broad investment guidelines for our Manager and do not approve each investment decision
made by our Manager. In addition, we may change our investment strategy without a stockholder vote, which may result
in our making investments that are different, riskier or less profitable than our current investments.
Our Manager is authorized to follow broad investment guidelines. Consequently, our Manager has great latitude in determining
the types and categories of assets it may decide are proper investments for us, including the latitude to invest in types and categories
of assets that may differ from those in which we currently invest. Our directors will periodically review our investment guidelines
and our investment portfolio. However, our board does not review or pre-approve each proposed investment or our related financing
arrangements. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our
Manager. Furthermore, transactions entered into by our Manager may be difficult or impossible to unwind by the time they are
reviewed by the directors, even if the transactions contravene the terms of the Management Agreement. In addition, we may change
our investment strategy, including our target asset classes, without a stockholder vote.
Our investment strategy may evolve in light of existing market conditions and investment opportunities, and this evolution may
involve additional risks depending upon the nature of the assets in which we invest and our ability to finance such assets on a
short or long-term basis. Investment opportunities that present unattractive risk-return profiles relative to other available investment
opportunities under particular market conditions may become relatively attractive under changed market conditions, and changes
in market conditions may therefore result in changes in the investments we target. Decisions to make investments in new asset
categories present risks that may be difficult for us to adequately assess and could therefore reduce our ability to pay dividends
on our common stock or have adverse effects on our liquidity, results of operations or financial condition. A change in our investment
strategy may also increase our exposure to interest rate, foreign currency, real estate market or credit market fluctuations and
expose us to new legal and regulatory risks. In addition, a change in our investment strategy may increase our use of non-match-
funded financing, increase the guarantee obligations we agree to incur or increase the number of transactions we enter into with
affiliates. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such
assets could adversely affect our results of operations, liquidity and financial condition.
Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement,
including with respect to the performance of our investments.
Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called
for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow
its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of
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.
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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 CFPB 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 and December 2016, respectively, sponsors securitizing residential mortgages
and certain other types of assets must comply with the Risk Retention Rules. 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,
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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.
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 RMBS 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
RMBS.
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 RMBS 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 RMBS 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 RMBS 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 RMBS.
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 RMBS 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 residential 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. Each chairman of the respective Congressional committees of jurisdiction, as well
as the Secretary of the Treasury, has each stated that housing finance policy is a priority. However, the details of any plans, policies
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or proposals with respect to the housing GSEs are unknown at this time. Other bills have been introduced that change the GSEs’
business charters and eliminate the entities or make other changes to the existing framework. 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 RMBS and could, therefore, materially and adversely affect
the value of our Agency RMBS 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 interests in MSRs. As a result, such loan modifications are negatively
affecting our business, results of operations, liquidity and financial condition. In addition, certain market participants propose
reducing the amount of paperwork required by a borrower to modify a loan, which could increase the likelihood of fraudulent
modifications and materially harm the U.S. mortgage market and investors that have exposure to this market. Additional legislation
intended to provide relief to borrowers may be enacted and could further harm our business, results of operations and financial
condition.
Risks Related to Our Taxation as a REIT
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.
Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which
only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT
qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution,
stockholder ownership and other requirements on a continuing basis. Compliance with these requirements must be carefully
monitored on a continuing basis. Monitoring and managing our REIT compliance has become challenging due to the increased
size and complexity of the assets in our portfolio, a meaningful portion of which are not qualifying REIT assets. There can be no
assurance that our Manager’s personnel responsible for doing so will be able to successfully monitor our compliance or maintain
our REIT status.
Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.
We intend to operate in a manner intended to qualify us as a REIT for U.S. federal income tax purposes. Our ability to satisfy the
asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise
determination, and for which we do not obtain independent appraisals. See “—Risks Related to our Business—The valuations of
our assets are subject to uncertainty because 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 market price 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 Drive Shack failed to qualify as a REIT for any
taxable year ended on or before December 31, 2014, and we were treated as a successor to Drive Shack for U.S. federal income
tax purposes. Although Drive Shack (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
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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 Drive Shack’s taxable years ended on or before December 31, 2014 (unless Drive
Shack obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Drive
Shack’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 Drive Shack, there can be no assurance that such damages,
if any, would appropriately compensate us. In addition, if Drive Shack were to fail to qualify as a REIT despite its reasonable best
efforts, we would have no claim against Drive Shack.
Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.
The NYSE requires, as a condition to the listing of our shares, that we maintain our REIT status. Consequently, if we fail to
maintain our REIT status, our shares would promptly be delisted from the NYSE, which would decrease the trading activity of
such shares. This could make it difficult to sell shares and would likely cause the market volume of the shares trading to decline.
If we were delisted as a result of losing our REIT status and desired to relist our shares on the NYSE, we would have to reapply
to the NYSE to be listed as a domestic corporation. As the NYSE’s listing standards for REITs are less onerous than its standards
for domestic corporations, it would be more difficult for us to become a listed company under these heightened standards. We
might not be able to satisfy the NYSE’s listing standards for a domestic corporation. As a result, if we were delisted from the
NYSE, we might not be able to relist as a domestic corporation, in which case our shares could not trade on the NYSE.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to
qualify as a REIT.
We enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell
certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in
exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto.
We believe that, for purposes of the REIT asset and income tests, we should be treated as the owner of the assets that are the subject
of any such sale and repurchase agreement, notwithstanding that those agreements generally transfer record ownership of the
assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own
the assets during the term of the sale and repurchase agreement, in which case we might fail to qualify as a REIT.
The failure of our Excess MSRs to qualify as real estate assets or the income from our Excess MSRs to qualify as mortgage
interest could adversely affect our ability to qualify as a REIT.
We have received from the IRS a private letter ruling substantially to the effect that our Excess MSRs represent interests in
mortgages on real property and thus are qualifying “real estate assets” for purposes of the REIT asset test, which generate income
that qualifies as interest on obligations secured by mortgages on real property for purposes of the REIT income test. The ruling
is based on, among other things, certain assumptions as well as on the accuracy of certain factual representations and statements
that we and Drive Shack 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 “qualified dividends.”
Dividends payable to domestic stockholders that are individuals, trusts, and estates are generally taxed at reduced tax rates applicable
to “qualified dividends.” Dividends payable by REITs, however, generally are not eligible for those 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.
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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 residential 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 residential mortgage loans underlying the Excess MSR.
If the residential mortgage loans underlying an Excess MSR prepay at a rate different than that under the prepayment assumption,
our recognition of original issue discount will be either increased or decreased depending on the circumstances. Thus, in a particular
taxable year, we may be required to accrue an amount of income in respect of an Excess MSR that exceeds the amount of cash
collected in respect of that Excess MSR. Furthermore, it is possible that, over the life of the investment in an Excess MSR, the
total amount we pay for, and accrue with respect to, the Excess MSR may exceed the total amount we collect on such Excess
MSR. No assurance can be given that we will be entitled to a deduction for such excess, meaning that we may be required to
recognize “phantom income” over the life of an Excess MSR.
Other debt instruments that we may acquire, including consumer loans, may be issued with, or treated as issued with, original
issue discount. Those instruments would be subject to the original issue discount accrual and income computations that are described
above with regard to Excess MSRs.
Under the recently enacted Tax Cuts and Jobs Act (“TCJA”), we generally will be required to take certain amounts into income
no later than the time such amounts are reflected on certain financial statements. The application of this rule may require the
accrual of, among other categories of income, income with respect to certain debt instruments or mortgage-backed securities, such
as original issue discount or market discount, earlier than would be the case under the general tax rules, although the precise
application of this rule is unclear at this time. This rule generally will be effective for tax years beginning after December 31,
2017 or, for debt instruments or mortgage-backed securities issued with original issue discount, for tax years beginning after
December 31, 2018.
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.
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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 gains) each year to our stockholders. To qualify for the tax benefits accorded
to REITs, we intend to make distributions to our stockholders in amounts such that we distribute all or substantially all of our net
taxable income, subject to certain adjustments, although there can be no assurance that our operations will generate sufficient cash
to make such distributions. Moreover, our ability to make distributions may be adversely affected by the risk factors described
herein. See also “—Risks Related to our Common Stock—We have not established a minimum distribution payment level, and
we cannot assure you of our ability to pay distributions in the future.”
The stock ownership limit imposed by the Internal Revenue Code for REITs and our certificate of incorporation may
inhibit market activity in our stock and restrict our business combination opportunities.
In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our
outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities) at any time during the last half of each taxable year after our first taxable year. Our certificate of
incorporation, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to
preserve our qualification as a REIT. Stockholders are generally restricted from owning more than 9.8% by value or number of
shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever
is more restrictive, of our outstanding shares of capital stock. Our board may grant an exemption in its sole discretion, subject to
such conditions, representations and undertakings as it may determine in its sole discretion. These ownership limits could delay
or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in
the best interest of our stockholders.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and
assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure,
and state or local income, property and transfer taxes. Moreover, if a REIT distributes less than 85% of its ordinary income and
95% of its capital gain net income plus any undistributed shortfall from the prior year (the “Required Distribution”) 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 Distribution 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 may hold some of our assets through TRSs. Such subsidiaries generally 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. Currently, we hold some of our investments in TRSs, including Servicer Advance Investments and MSRs, and we
may contribute other non-qualifying investments, such as our investment in consumer loans, to a TRS in the future.
Complying with the REIT requirements may negatively impact our investment returns or cause us to forgo 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, forgo 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
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acquire and hold MSRs, interests in consumer loans, Servicer Advance Investments 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:
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part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be
treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension
trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership
tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income;
part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated
business taxable income if the investor incurs debt in order to acquire the stock; and
to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a “taxable mortgage pool,” or if we hold
residual interests in a real estate mortgage investment conduit, a portion of the distributions paid to a tax exempt stockholder
that is allocable to excess inclusion income may be treated as unrelated business taxable income.
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner
in which we effect future securitizations.
We may enter into securitization or other financing transactions that result in the creation of taxable mortgage pools for U.S. federal
income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we would generally
not be adversely affected by the characterization of a securitization as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax
exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their
dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax
exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject
to tax on unrelated business income, we could incur a corporate level tax on a portion of our income from the taxable mortgage
pool. In that case, we might reduce the amount of our distributions to any disqualified organization whose stock ownership gave
rise to the tax. Moreover, we may be precluded from selling equity interests in these securitizations to outside investors, or selling
any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes.
These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.
Uncertainty exists with respect to the treatment of TBAs for purposes of the REIT asset and income tests, and the failure
of TBAs to be qualifying assets or of income/gains from TBAs to be qualifying income could adversely affect our ability to
qualify as a REIT.
We purchase and sell Agency RMBS through TBAs and recognize income or gains from the disposition of those TBAs, through
dollar roll transactions or otherwise. In a dollar roll transaction, we exchange an existing TBA for another TBA with a different
settlement date. There is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government
securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the
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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.
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.
Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders.
The present U.S. federal income tax treatment of REITs and their shareholders 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 our shares. The U.S. federal income tax rules, including those dealing with REITs, are constantly 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.
The recently enacted TCJA makes substantial changes to the Internal Revenue Code. Among those changes are a significant
permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate
taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination
or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest and, in
the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net
operating losses and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-
corporate taxpayers in comparison to other ordinary income recognized by such taxpayers. The effect of these, and the many other,
changes made in the TCJA is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common
stock and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the provisions of
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the TCJA will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial
delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on
us. It is also likely that there will be technical corrections legislation proposed with respect to the TCJA next year, the effect of
which cannot be predicted and may be adverse to us or our stockholders.
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;
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our quarterly or annual earnings and cash flows, or those of other comparable companies;
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actual or anticipated fluctuations in our operating results;
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changes in accounting standards, policies, guidance, interpretations or principles;
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announcements by us or our competitors of significant investments, acquisitions or dispositions;
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the failure of securities analysts to cover our common stock;
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changes in earnings estimates by securities analysts or our ability to meet those estimates;
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• market performance of affiliates and other counterparties with whom we conduct business;
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the operating and stock price performance of other comparable companies;
our failure to qualify as a REIT, maintain our exemption under the 1940 Act or satisfy the NYSE listing requirements;
negative public perception of us, our competitors or industry;
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 market 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 or issuances of substantial amounts of shares of our common stock, or the perception that such sales or issuances 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 or convertible securities
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
our internal control over financial reporting was effective. If we are not able to maintain or document effective internal control
over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our
internal control over financial reporting. Matters impacting our internal control over financial reporting 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 the effectiveness of our internal control over
financial reporting. This could materially adversely affect us by, for example, leading to a decline in our stock price and impairing
our ability to raise capital.
54
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. We have adopted 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 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
million shares of our common stock for issuance under the Plan. The term of the Plan expires in 2023. On the first day of each
fiscal year beginning during the term of the Plan, 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. 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 an
offering of our common stock 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,
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 our actual and anticipated results of operations,
liquidity and financial condition, restrictions under Delaware law or applicable financing covenants, our REIT 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.
Our board of directors approved two increases in our quarterly dividends during 2017, which has resulted in reduced cash flows.
Although we have other sources of liquidity, such as sales of and repayments from our investments, potential debt financing sources
and the issuance of equity securities, there can be no assurance that we will generate sufficient cash or 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 cash from operations to pay our operating expenses
and to pay distributions to our stockholders”), we may elect not to maintain our REIT status, in which case we would no longer
be required to make such distributions. Moreover, even if we do elect to maintain our REIT status, we may elect to comply with
the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of
the required amount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to
satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively and materially affect our
business, results of operations, liquidity and financial condition as well as the market price of our common stock. No assurance
can be given that we will make any distributions on shares of our common stock in the future.
55
We may in the future choose to make distributions in our own stock, in which case you could be required to pay income
taxes in excess of any cash distributions you receive.
We may in the future make taxable distributions that are payable in cash and shares of our common stock at the election of each
stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution 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 distributions in excess of the cash distributions received.
If a U.S. stockholder sells the stock that it receives as a distribution in order to pay this tax, the sale proceeds may be less than the
amount included in income with respect to the distribution, 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
distributions, including in respect of all or a portion of such distribution 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 distributions, it may put downward
pressure on the market price of our common stock.
In August 2017, the IRS issued guidance authorizing elective cash/stock dividends to be made by public REITs where there is a
minimum (of at least 20%) amount of cash that may be paid as part of the dividend, provided that certain requirements are met.
It is unclear whether and to what extent we would be able to or choose to pay taxable distributions in cash and stock. In addition,
no assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock
distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions 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 stock 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 outstanding and future (variable and fixed) 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 market 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
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
56
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, 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 Exchange Act 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 Exchange Act in an amount to be proven at trial and reasonable costs, expenses, and
fees. On February 11, 2015, defendants filed motions to dismiss the Securities Action in its entirety. On June 6, 2016, all allegations
except those regarding certain related party transactions were dismissed.
On June 15, 2017, the court entered an order preliminarily approving a settlement of the Securities Action for $6.0 million, certifying
a settlement class, approving the form and content of notice of the settlement to class members, and setting a hearing to determine
57
whether the settlement should receive final approval. Following a hearing on November 17, 2017, the court entered an order and
judgment finally approving the settlement and dismissing all claims with prejudice.
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.
58
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
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
New Residential Investment Corp.
100.00
NAREIT All REIT
Russell 2000
NAREIT Mortgage REIT
S&P 500
100.00
100.00
97.34
97.72
99.41
96.13
97.55
98.17
95.39
102.76
95.68
109.56
119.12
94.28
94.42
102.66
113.45
102.25
103.89
120.45
104.96
115.50
103.53
111.12
122.92
111.17
121.55
98.62
108.20
113.87
106.40
122.92
111.19
121.66
124.95
111.31
128.98
134.18
126.59
130.34
113.92
130.21
139.61
115.28
130.89
105.64
130.57
120.01
116.16
115.29
102.51
122.17
119.90
124.44
119.43
101.43
130.77
Period Ended
Period Ended
Index
New Residential Investment Corp.
NAREIT All REIT
Russell 2000
NAREIT Mortgage REIT
S&P 500
3/31/2016
6/30/2016
9/30/2016
12/31/2016
3/31/2017
6/30/2017
9/30/2017
12/31/2017
119.21
131.73
117.62
105.75
132.53
141.86
141.43
122.08
116.07
135.79
151.44
140.08
133.12
121.88
141.02
177.47
135.99
144.88
124.60
146.41
197.22
140.03
148.46
138.09
155.29
186.42
143.38
152.11
144.52
160.09
206.43
145.16
160.74
149.58
167.26
226.72
148.60
166.10
149.26
178.37
59
We have one class of common stock, which is listed on the New York Stock Exchange (NYSE) under the symbol “NRZ.” 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.
2017
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
Last Sale
Distributions
Declared
$
$
$
$
$
$
$
$
17.25
17.86
17.30
18.43
12.50
13.98
14.89
16.43
$
$
$
$
$
$
$
$
15.03
15.37
15.04
16.68
9.07
11.36
12.73
13.30
$
$
$
$
$
$
$
$
16.98
15.56
16.73
17.88
11.63
13.84
13.81
15.72
$
$
$
$
$
$
$
$
0.48
0.50
0.50
0.50
0.46
0.46
0.46
0.46
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. In addition, such distributions may be subject to the receipt of sufficient funds from our servicer subsidiary, NRM, which
is subject to regulatory restrictions on its ability to pay distributions.
On February 8, 2018, the closing sale price for our common stock, as reported on the NYSE, was $16.09. As of February 8, 2018,
there were approximately 35 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 April 29, 2013, New Residential’s board of directors adopted the Plan, which was amended and restated as of November 4,
2014. 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 NYSE rules.
In connection with our separation from Drive Shack, each Drive Shack 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 Drive
Shack’s stockholders was converted into an adjusted Drive Shack option as well as a new New Residential option (a “Converted
Option”). The exercise price of each adjusted Drive Shack option and Converted Option was set to collectively maintain the
intrinsic value of the Drive Shack option immediately prior to the distribution and to maintain the ratio of the exercise price of
the adjusted Drive Shack 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 Drive Shack 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.
60
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, 2017.
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
17,641,617
$
17,641,617 (A) $
14.90
14.90
14,859,204
14,859,204 (B)
None
(A)
(B)
The number of securities to be issued upon exercise of outstanding options does not include 860,571 Converted Options
(with a weighted average exercise price of $11.36) held by an affiliate of our Manager.
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 134,796 shares of our common stock and 6,000
options awarded to our directors, 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, 2018, 2017, 2016 and 2015, 5,654,578 shares, 2,000,000 shares, 8,543,539 shares and 1,437,500 shares, respectively,
were added to the number of securities remaining available for future issuance; all of these amounts have been included
in the table above.
61
Item 6. Selected Financial Data.
The selected historical consolidated financial information set forth below as of December 31, 2017, 2016, 2015, 2014 and 2013
and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013 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
Servicing revenue, net
Other Income
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
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,
2017
2016
2015
2014
2013
$ 1,519,679
$ 1,076,735
$
645,072
$
346,857
$
460,865
1,058,814
86,092
972,722
424,349
207,786
422,577
1,182,280
167,628
$ 1,014,652
$
$
$
$
57,119
957,533
3.17
3.15
$
$
$
$
$
373,424
703,311
87,980
615,331
118,169
62,337
174,210
621,627
38,911
582,716
78,263
504,453
2.12
2.12
$
$
$
$
$
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
$
$
$
$
$
87,567
15,024
72,543
5,454
67,089
—
241,008
42,474
265,623
—
265,623
(326)
265,949
2.10
2.07
302,238,065
238,122,665
200,739,809
136,472,865
126,539,024
304,381,388
238,486,772
202,907,605
139,565,709
128,684,128
$
1.98
$
1.84
$
1.75
$
1.58
$
0.99
62
Balance Sheet Data
Investments in:
Excess mortgage servicing rights, at fair value
$
1,173,713
$
1,399,455
$
1,581,517
$
417,733
$
324,151
2017
2016
2015
2014
2013
December 31,
Excess mortgage servicing rights, equity method investees, at
fair value
Mortgage servicing rights, at fair value
Mortgage servicing rights financing receivables, at fair value
Servicer advance investments, at fair value
Real estate and other securities, available-for-sale
Residential mortgage loans, held-for-investment
Residential mortgage loans, held-for-sale
Real estate owned
171,765
1,735,504
598,728
4,027,379
8,071,140
691,155
1,725,534
128,295
194,788
659,483
—
5,706,593
5,073,858
190,761
696,665
59,591
Consumer loans, held-for-investment
1,374,263
1,799,486
Consumer loans, equity method investees
Cash and cash equivalents
51,412
295,798
—
290,602
249,936
Total assets
Total debt
Total liabilities
Total New Residential stockholders’ equity
22,213,562
18,399,529
15,192,722
15,746,530
13,181,236
11,292,622
17,417,400
14,931,352
12,206,142
4,690,205
3,260,100
2,795,933
Noncontrolling interests in equity of consolidated subsidiaries
105,957
208,077
190,647
217,221
330,876
352,766
—
—
7,426,794
2,501,881
330,178
776,681
50,574
—
—
—
—
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
—
—
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
Total equity
Supplemental Balance Sheet Data
Common shares outstanding
Book value per share of common stock
Other Data
Core earnings(A)
4,796,162
3,468,177
2,986,580
1,849,925
1,513,075
307,361,309
250,773,117
230,471,202
141,434,905
126,598,987
15.26
$
13.00
$
12.13
$
11.28
$
10.00
861,381
$
510,821
$
388,756
$
219,261
$
129,997
$
$
(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, on our investments. “Core earnings” is a non-
GAAP measure of our operating performance, excluding the fourth variable above, and adjusts the earnings from the
consumer loan investment to a level yield basis. Core earnings 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 generally limited to 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.
Our definition of core earnings includes 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. In addition, our definition of core earnings excludes 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. Our definition of core earnings also limits 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, net of related
costs including advances. We created this limit in order to be able to accrete to the lower of par or the net value of the
underlying collateral, in instances where the net 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.
Our investments in consumer loans are accounted for under ASC No. 310-20 and ASC No. 310-30, including certain
non-performing consumer loans with revolving privileges that are explicitly excluded from being accounted for under
ASC No. 310-30. Under ASC No. 310-20, the recognition of expected losses on these non-performing consumer loans
63
is delayed in comparison to the level yield methodology under ASC No. 310-30, which recognizes income based on an
expected cash flow model reflecting an investment’s lifetime expected losses. The purpose of the Core Earnings adjustment
to adjust consumer loans to a level yield is to present income recognition across the consumer loan portfolio in the manner
in which it is economically earned, avoid potential delays in loss recognition, and align it with our overall portfolio of
mortgage-related assets which generally record income on a level yield basis. With respect to consumer loans classified
as held-for-sale, the level yield is computed through the expected sale date. With respect to the gains recorded under
GAAP in 2014 and 2016 as a result of a refinancing of, and the consolidation of, the Consumer Loan Companies,
respectively, we continue to record a level yield on those assets based on their original purchase price.
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, as they are considered by management to be similar to realized losses incurred at acquisition. 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).
Management believes that the adjustments to compute “core earnings” specified above allow investors and analysts to
readily identify and track 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 core performance using the same
measure that management uses to operate the business. Management also utilizes core earnings as a measure in its decision-
making process relating to improvements to the underlying fundamental operations of our investments, as well as the
allocation of resources between those investments, and management also relies on core earnings as an indicator of the
results of such decisions. Core earnings excludes certain recurring items, such as gains and losses (including impairment
as well as derivative activities) and non-capitalized transaction-related expenses, because they are not considered by
management to be part of our core operations for the reasons described herein. As such, core earnings is not intended to
reflect all of our activity and should be considered as only one of the factors used by management in assessing our
performance, along with GAAP net income which is inclusive of all of our activities.
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. The Gain on Remeasurement of Consumer Loans Investment was treated as an unrealized gain for the purposes
of calculating incentive compensation and was therefore excluded from such calculation.
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
64
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):
Net income attributable to common stockholders
$ 957,533
$ 504,453
$ 268,636
352,877
$ 265,949
Year Ended December 31,
2017
2016
2015
2014
2013
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
86,092
87,980
24,384
11,282
5,454
(4,322)
7,297
(38,643)
(41,615)
(53,332)
mortgage servicing rights, equity method investees
(12,617)
(16,526)
(31,160)
(57,280)
(50,343)
Change in fair value of investments in mortgage
servicing rights financing receivables
(109,584)
Change in fair value of servicer advance investments
(84,418)
Gain on consumer loans investment
Gain on remeasurement of consumer loans
investment
—
—
(Gain) loss on settlement of investments, net
(10,310)
Earnings from investments in consumer loans, equity
method investees
Unrealized (gain) loss on derivative instruments
Unrealized (gain) loss on other ABS
—
2,190
(2,883)
(Gain) loss on transfer of loans to other assets
Gain on Excess MSR recapture agreements
(Gain) loss on Ocwen common stock
Fee earned on deal termination
Other (income) loss
(488)
(2,384)
(5,346)
—
27,741
—
—
19,626
(31,297)
(52,657)
—
(53,840)
(82,856)
—
7,768
—
57,491
(9,943)
(43,954)
—
(84,217)
(92,020)
(71,250)
48,800
—
(5,774)
2,322
(2,938)
(2,802)
—
—
3,538
(879)
8,847
—
690
—
(2,999)
(1,157)
—
—
—
(5,000)
(20)
9,437
5,529
(Gain) loss on transfer of loans to REO
(22,938)
(18,356)
(2,065)
(17,489)
Total Other Income Adjustments
(225,359)
(51,965)
(32,826)
(375,088)
(241,008)
Other Income and Impairment attributable to non-
controlling interests
Change in fair value of investments in mortgage servicing
rights
Non-capitalized transaction-related expenses
Incentive compensation to affiliate
Deferred taxes
Interest income on residential mortgage loans, held-for sale
Limit on RMBS discount accretion related to called deals
Adjust consumer loans to level yield
Core earnings of equity method investees:
(30,416)
(26,303)
(22,102)
44,961
(155,495)
(103,679)
21,723
81,373
168,518
13,623
(28,652)
(41,250)
9,493
42,197
34,846
18,356
(30,233)
7,470
—
31,002
16,017
(6,633)
22,484
(9,129)
71,070
—
10,281
54,334
16,421
—
—
70,394
53,696
Excess mortgage servicing rights
13,691
18,206
25,853
33,799
23,361
Core Earnings
$ 861,381
$ 510,821
$ 388,756
$ 219,261
$ 129,997
65
—
—
—
—
(1,820)
—
—
—
—
—
—
—
—
—
5,698
16,847
—
—
—
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, 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.”
MARKET CONSIDERATIONS
Developments in the U.S. Housing Market
In response to the changing landscape of the mortgage industry and bank capital requirements, banks have sold MSRs totaling
more than $3.5 trillion since 2010. As of the third quarter of 2017, the top 100 mortgage servicers serviced over $8.5 trillion out
of the $10.5 trillion one-to-four family mortgage debt outstanding, according to Inside Mortgage Finance. Furthermore, according
to Inside Mortgage Finance, approximately 64% was serviced by the top 25 mortgage servicers as of the third quarter of 2017.
Given current market dynamics and an overall challenging servicing environment, we may expect additional market consolidation
amongst non-bank servicers. In addition, we believe non-bank servicers who are constrained by capital limitations will continue
to sell MSRs, Excess MSRs and other servicing assets. As a result, we believe an elevated volume of MSR sales is likely for some
period of time. These factors have resulted in increased opportunities for us to acquire interests in MSRs and to provide capital
to non-bank servicers. In addition, approximately $1.6 trillion of new loans are expected to be originated in 2018, according to
the Mortgage Bankers Association. We believe this creates an opportunity to enter into “flow arrangements,” whereby loan
originators or servicers agree to sell MSRs or Excess MSRs on newly originated loans on a recurring basis (often monthly or
quarterly). While increased competition and market conditions for MSRs have driven prices higher recently, thereby also increasing
the value of the MSRs in which we have invested, we believe MSRs continue to offer attractive returns.
There can be no assurance that we will make additional investments in MSRs or Excess MSRs or that any future investment in
MSRs or Excess MSRs will generate returns similar to the returns on our original investments in MSRs or Excess MSRs. The
timing, size and potential returns of our future investments in MSRs and 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. Such factors include, but are not
limited to, changes in interest rates and recent increased competition for more recently originated MSRs. In addition, the acquisition
of Agency MSRs requires GSE and, in certain cases, other regulatory approval. The process to obtain such approvals is extensive
and will extend transaction settlement times when compared to our experience with the acquisition of Excess MSRs. In general,
regulatory and GSE approval processes have been more extensive and taken longer than the processes and timelines we experienced
in prior periods, which has increased the amount of time and effort required to complete transactions.
Interest Rates and Prepayment Rates
As further described in “Quantitative and Qualitative Disclosures About Market Risk,” increasing interest rates are generally
associated with declining prepayment rates for residential mortgage loans since they increase the cost of borrowing for homeowners.
Declining prepayment rates, in turn, would generally be expected to increase the value of our interests in Excess MSRs, MSRs
and Servicer Advance Investments, which include the right to a portion of the related MSRs, because the duration of the cash
flows we are entitled to receive becomes extended with no reduction in current cash flows. Changes in interest rates will also
directly impact our costs of borrowing either immediately (floating rate debt) or upon refinancing (fixed rate debt) and may also
be associated with changes in credit spreads and/or the discount rates used in valuing investments. Declining prepayment rates
have a negative impact on the value of investments purchased at a significant discount since the recovery of that discount is delayed.
66
In the fourth quarter of 2017, both current interest rates and expected future interest rates generally increased slightly. For instance,
the 10-year treasury yield increased from 2.34% to 2.40%. With respect to our Non-Agency RMBS, which were generally purchased
at a significant discount, while market interest rates increased, market credit spreads for these investments decreased, with the net
result being an increase in value during the quarter.
The value of our MSRs and Excess MSRs is subject to a variety of factors, as described in “Quantitative and Qualitative Disclosures
About Market Risk” and in “Risk Factors.” In the fourth quarter of 2017, 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 $39.3 million
in the aggregate, primarily as a result of a decrease in the weighted average discount rate of the portfolio to 8.9%. In addition, a
decrease in discount rates, as well as contractual changes resulting from the Ocwen Transaction, partially offset by a decrease in
interest rates, caused the fair value of our MSRs, including MSR financing receivables, to increase by approximately $91.8 million
during the period.
Changes in interest rates did not have a meaningful impact on the net interest spread of our Agency and Non-Agency RMBS
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, 2017 was 1.41%, compared to 1.61% as of September 30, 2017. The spread
changed primarily as a result of increased funding costs and lower yields from new securities purchased during the fourth quarter
of 2017. The net interest spread on our Non-Agency RMBS portfolio as of December 31, 2017 was 2.76%, compared to 3.01%
as of September 30, 2017. This spread changed primarily as a result of lower yields from new securities purchased during the
fourth quarter of 2017 and increased funding costs.
General U.S. Economy and Unemployment
During the fourth quarter of 2017, the U.S. unemployment rate generally continued to decline and equity market prices increased,
signaling a general improvement in the U.S. economy. In our view, an improvement in the economy, as demonstrated through
such measures, generally improves the value of housing and the ability of borrowers to make payments on their loans, thereby
decreasing delinquencies and defaults on residential mortgage loans, consumer loans and RMBS. This relationship held true as
the Case Shiller Home Price Index increased from 184 as of the third quarter of 2016 to 195 as of the third quarter of 2017. In
addition, according to CoreLogic, the total number of mortgaged residential properties with negative equity stood at 2.5 million,
or 4.9 percent, as of the third quarter of 2017, down from 3.2 million, or 6.3 percent, as of the second quarter of 2017. This trend
has helped to support the values of our residential mortgage loans, consumer loans and RMBS.
Credit Spreads
Corporate credit spreads generally continued to tighten during the fourth quarter of 2017, which would generally have a favorable
impact on the value of yield driven financial instruments, such as our RMBS and loan portfolios. 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
coupled with the corporate credit spread tightening during the fourth quarter of 2017 caused the value of the portion of this portfolio
that was owned for the entire quarter to increase.
For more information regarding these and other market factors which impact our portfolio, see “Quantitative and Qualitative
Disclosures About Market Risk.”
Our Manager
On December 27, 2017, SoftBank announced that it completed the SoftBank Merger. In connection with the SoftBank Merger,
Fortress will operate within SoftBank as an independent business headquartered in New York. Fortress’s senior investment
professionals will remain in place, including those individuals who perform services for us.
67
OUR PORTFOLIO
Our portfolio is currently composed of mortgage servicing related assets, residential securities and loans and other investments,
as described in more detail below. The assets in our portfolio are described in more detail below (dollars in thousands), as of
December 31, 2017.
Investments in:
Excess MSRs(B)
MSRs(B) (C)
Mortgage Servicing Rights Financing
Receivables(B) (C)
Servicer Advance Investments(B) (D)
Agency RMBS(E)
Non-Agency RMBS(E)
Residential Mortgage Loans
Real Estate Owned
Consumer Loans
Consumer Loans, Equity Method
Investees
Total/Weighted Average
Reconciliation to GAAP total assets:
Cash and restricted cash
Servicer advances receivable
Trades receivable
Deferred tax asset, net
Other assets
GAAP total assets
Outstanding
Face Amount
Amortized
Cost Basis
Percentage of
Total
Amortized
Cost Basis
Carrying
Value
Weighted
Average Life
(years)(A)
$ 267,622,353
$
1,145,271
172,454,150
1,476,330
6.1% $
1,345,478
7.9%
1,735,504
64,344,893
3,581,876
2,065,629
12,757,357
2,713,686
N/A
1,377,792
489,144
3,924,003
2,105,121
5,599,644
2,447,953
137,668
1,380,369
2.6%
21.0%
11.3%
29.9%
13.1%
0.7%
7.4%
598,728
4,027,379
2,096,351
5,974,789
2,416,689
128,295
1,374,263
178,422
N/A
$ 18,705,503
N/A
51,412
100.0% $ 19,748,888
6.3
6.3
5.8
5.1
7.5
7.7
4.6
N/A
3.5
1.4
6.1
446,050
675,593
1,030,850
—
312,181
$ 22,213,562
(A)
(B)
(C)
(D)
(E)
Weighted average life is based on the timing of expected principal reduction on the asset.
The outstanding face amount of Excess MSRs, MSRs, Mortgage Servicing Rights Financing Receivables, and Servicer
Advance Investments is based on 100% of the face amount of the underlying residential mortgage loans and currently
outstanding advances, as applicable.
Represents MSRs where our subsidiary, NRM, is the named servicer.
The value of our Servicer Advance Investments also includes the rights to a portion of the related MSR.
Amortized cost basis is net of impairment.
Servicing Related Assets
MSRs and Mortgage Servicing Rights Financing Receivables
As of December 31, 2017, we had $2,334.2 million carrying value of MSRs and mortgage servicing rights financing receivables
within our servicer subsidiary, NRM.
NRM has contracted with certain subservicers to perform the related servicing duties on the residential mortgage loans underlying
its MSRs. As of December 31, 2017, these subservicers include Nationstar, Ditech, PHH, Ocwen, Flagstar, and Citi, which
subservice 41.2%, 29.9%, 20.9%, 6.3%, 1.1%, and 0.6% of the underlying UPB of the related mortgages, respectively (includes
both Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables). NRM has entered into agreements with
Ditech, Nationstar and PHH whereby NRM is entitled to the MSR on any refinancing by such subservicer of a loan in the related
original portfolio.
68
NRM is, generally, obligated to fund all future servicer advances related to the underlying pools of mortgages on its MSRs and
mortgage servicing rights financing receivables. Generally, NRM will advance funds when the borrower fails to meet contractual
payments (e.g., principal, interest, property taxes, insurance). NRM will also advance funds to maintain and report foreclosed real
estate properties on behalf of investors. Advances are recovered through claims to the related investor and subservicers. Per the
servicing agreements, NRM is obligated to make certain advances on mortgages to be in compliance with applicable requirements.
In certain instances, the subservicer is required to reimburse NRM for any advances that were deemed nonrecoverable or advances
that were not made in accordance with the related servicing contract.
See Note 5 to our Consolidated Financial Statements for further information regarding our investments in mortgage servicing
rights financing receivables.
The table below summarizes the terms of our investments in MSRs and mortgage servicing rights financing receivables completed
as of December 31, 2017.
Mortgage Servicing Rights
Agency
Non-Agency
Mortgage Servicing Rights Financing Receivables
Agency
Non-Agency
Total
Current UPB
(bn)
Weighted
Average
MSR (bps)
Carrying
Value (mm)
$
$
172.4
0.1
49.5
14.8
236.8
27 bps
$
1,735.5
50
27
34
—
476.2
122.5
27 bps
$
2,334.2
The following table summarizes the collateral characteristics of the loans underlying our investments in MSRs and mortgage
servicing rights financing receivables as of December 31, 2017 (dollars in thousands):
Current
Carrying
Amount
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
Mortgage Servicing Rights
Agency
Non-Agency
$
1,735,504
$ 172,392,496
1,233,955
—
61,654
891
Mortgage Servicing Rights
Financing Receivables
Agency
Non-Agency
Total
476,206
122,522
49,498,415
14,846,478
364,791
107,347
$
2,334,232
$ 236,799,043
1,706,984
744
624
744
661
739
4.3%
7.2%
4.2%
5.1%
4.4%
257
194
246
267
255
68
177
74
143
74
3.3%
42.8%
13.3%
15.8%
13.0%
10.4%
7.5%
22.5%
5.4%
13.5%
13.6%
13.4%
12.9%
10.5%
12.9%
0.4%
6.0%
0.6%
3.4%
0.6%
16.3%
—%
14.3%
—%
14.8%
Delinquency
30 Days(F)
Delinquency
60 Days(F)
Collateral Characteristics
Loans in
Delinquency
90+ Days(F)
Foreclosure
Real Estate
Owned
Loans in
Bankruptcy
1.7%
9.2%
1.7%
7.1%
2.0%
0.5%
3.7%
0.4%
4.4%
0.7%
0.8%
2.1%
0.5%
8.0%
1.2%
0.3%
19.3%
0.5%
3.3%
0.5%
—%
—%
—%
2.0%
0.2%
0.3%
1.7%
0.3%
3.0%
0.4%
Mortgage Servicing Rights
Agency
Non-Agency
Mortgage Servicing Rights
Financing Receivables
Agency
Non-Agency
Total
(A)
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 when loans are refinanced or become delinquent.
69
(B)
(C)
(D)
(E)
(F)
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.
The PHH Transaction (Note 5 to our Consolidated Financial Statements) settled in stages during 2017. As of December 31, 2017,
MSRs, and related servicer advances receivable, with respect to private-label residential mortgage loans of approximately $6.0
billion in total UPB with a purchase price of approximately $35.5 million had not been settled. On January 16, 2018, pursuant to
the Walter Purchase Agreement (Note 5 to our Consolidated Financial Statements), NRM purchased MSRs, and related servicer
advances receivable, with respect to certain Freddie Mac residential mortgage loans with a total UPB of $11.5 billion for a purchase
price of approximately $101.5 million. Also see Note 18 to our Consolidated Financial Statements for further information regarding
our investments in mortgage servicing rights and mortgage servicing rights financing receivables subsequent to December 31,
2017.
Excess MSRs
As of December 31, 2017, we had approximately $1.3 billion estimated carrying value of Excess MSRs (held directly and through
joint ventures). As of December 31, 2017, 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 residential mortgage loans with an aggregate UPB of approximately
$267.6 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, in certain cases through co-
investments made by our subsidiaries, may separately agree to do so and have separately purchased Servicer Advance Investments,
including the right to receive the basic fee component of related MSRs, on the Non-Agency portfolios underlying our Excess MSR
investments. See “—Servicer Advance Investments” below.
Nationstar is the servicer of $177.0 billion UPB of the loans underlying our investments in Excess MSRs through December 31,
2017, 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 50% of the Excess MSRs and all of the servicer advances and related basic fee portion
of the MSR, and a portion of the call rights related to a portfolio of residential mortgage loans which is serviced by SLS. Fortress-
managed funds acquired the other 50% of the Excess MSRs. SLS continues to service the loans in exchange for a servicing fee
of 10.75 bps times the UPB of the underlying loans 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.
In April 2015, we acquired Excess MSRs in connection with the HLSS Acquisition (Note 1 to our Consolidated Financial
Statements). Ocwen continues to service the underlying loans in exchange for a servicing fee of 12% times the servicing fee
collections of the underlying loans, which as of December 31, 2017 is equal to 6.1 bps times the UPB of the underlying loans,
and an incentive fee which is reduced by LIBOR plus 2.75% per annum of the amount, if any, of servicer advances outstanding
in excess of a defined target. In July 2017, we entered into the Ocwen Transaction as described in Note 5 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 specified threshold and no payments have been
made to us under such arrangement to date.
70
The tables below summarize the terms of our investments in Excess MSRs completed as of December 31, 2017.
Summary of Direct Excess MSR Investments as of December 31, 2017
Agency
Original and Recaptured Pools
Recapture Agreements
Non-Agency(B)
Nationstar and SLS Serviced:
Original and Recaptured Pools
Recapture Agreements
Ocwen Serviced Pools
Total/Weighted Average
MSR Component(A)
Excess MSR
Current
UPB (bn)
Weighted
Average
MSR (bps)
Weighted
Average
Excess MSR
(bps)
Interest in
Excess MSR (%)
Carrying
Value (mm)
$
$
$
63.8
—
63.8
64.1
—
89.1
153.2
217.0
28 bps
21 bps
32.5% - 66.7%
$
29
28
34
26
46
43
22
21
16
20
14
15
32.5% - 66.7%
33.3% - 100.0%
$
33.3% - 100.0%
100.0%
280.0
44.6
324.6
190.7
19.8
638.6
849.1
39 bps
17 bps
$
1,173.7
(A)
(B)
The MSR is a weighted average as of December 31, 2017, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant).
We also invested in related Servicer Advance Investments, including the basic fee component of the related MSR (Note
6 to our Consolidated Financial Statements) on $139.5 billion UPB underlying these Excess MSRs.
Summary of Excess MSR Investments Through Equity Method Investees as of December 31, 2017
Agency
Original and Recaptured Pools
Recapture Agreements
Total/Weighted Average
MSR Component(A)
Current
UPB (bn)
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)
$
$
50.5
—
50.5
32 bps
21 bps
32
23
32 bps
21 bps
50.0%
50.0%
66.7 %
66.7 %
33.3% $
271.8
33.3%
$
49.4
321.2
(A)
The MSR is a weighted average as of December 31, 2017, and the Excess MSR represents the difference between the
weighted average MSR and the basic fee (which fee remains constant).
The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of
December 31, 2017 (dollars in thousands):
Current
Carrying
Amount
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
Recaptured Loans
Recapture Agreement
Non-Agency(F)
Nationstar and SLS Serviced:
Original Pools
Recaptured Loans
Recapture Agreement
Ocwen Serviced Pools(H)
$
212,755
$ 51,089,370
346,633
67,278
44,603
12,749,911
74,471
—
—
$
324,636
$ 63,839,281
421,104
173,818
60,864,831
333,199
16,878
19,814
3,281,599
14,508
—
—
638,567
89,135,588
621,801
$
849,077
$ 153,282,018
969,508
Total/Weighted Average(I)
$ 1,173,713
$ 217,121,299
1,390,612
708
721
—
711
670
739
—
642
651
664
4.5%
4.1%
—%
4.4%
4.3%
4.0%
—%
4.4%
4.4%
4.4%
71
275
290
—
278
281
290
—
314
305
300
101
29
—
85
143
20
—
146
144
132
9.1%
0.7%
—%
7.5%
38.0%
3.6%
—%
15.6%
24.2%
19.3%
15.2%
10.4%
—%
14.2%
10.1%
—%
14.3%
13.4%
15.9%
11.9%
—%
10.6%
12.0%
12.5%
12.0%
11.9%
—%
7.2%
8.5%
9.5%
1.2%
0.3%
—%
1.0%
4.3%
—%
—%
3.6%
3.8%
3.2%
26.2%
29.0%
—%
26.6%
13.4%
26.9%
—%
—%
4.3%
9.9%
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(I)
4.3%
2.0%
—%
3.8%
10.0%
1.4%
—%
8.3%
8.7%
7.7%
1.7%
0.7%
—%
1.4%
3.2%
0.3%
—%
5.2%
4.6%
4.0%
1.8%
0.8%
—%
1.6%
3.5%
0.3%
—%
7.0%
6.0%
5.1%
1.1%
0.2%
—%
0.9%
7.3%
0.1%
—%
7.4%
7.3%
6.0%
0.3%
0.1%
—%
0.3%
1.3%
—%
—%
2.1%
1.8%
1.5%
0.2%
—%
—%
0.2%
2.1%
—%
—%
1.8%
1.9%
1.5%
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
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 when loans are refinanced or become delinquent.
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.
We also invested in related Servicer Advance Investments, including the basic fee component of the related MSR (Note 6
to our Consolidated Financial Statements) on $139.5 billion UPB underlying these Excess MSRs.
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 $2.1 billion of UPB are as of November 30, 2017.
Weighted averages exclude collateral information for which collateral data was not available as of the report date.
The following table summarizes the collateral characteristics as of December 31, 2017 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
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
Recaptured Loans
$ 160,409
$ 35,038,897
33.3 % 309,839
111,376
15,462,157
33.3 % 106,118
Recapture Agreement
49,412
—
33.3 %
—
Total/Weighted Average
$ 321,197
$ 50,501,054
415,957
691
704
—
695
5.1 %
4.1 %
— %
4.8 %
268
285
—
273
117
35
—
92
9.7%
0.6%
—%
17.2%
11.3%
—%
15.2%
10.9%
—%
2.3%
0.5%
—%
29.5%
36.4%
—%
6.9%
15.5%
14.0%
1.8%
31.1%
72
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(G)
5.9%
3.4%
—%
5.2%
2.1%
1.2%
—%
1.9%
1.9%
1.0%
—%
1.6%
1.7%
0.3%
—%
1.2%
0.5%
0.1%
—%
0.4%
0.3%
0.1%
—%
0.2%
(A)
(B)
(C)
(D)
(E)
(F)
(G)
The WA FICO score is based on the weighted average of information provided by the loan servicer on a monthly basis.
The loan servicer generally updates the FICO score on a monthly basis.
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.
Weighted averages exclude collateral information for which collateral data was not available as of the report date.
Servicer Advance Investments
In December 2013, we made our first Servicer Advance Investments, including the basic fee component of the related MSRs,
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
a pool of 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. 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 approvals 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 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 acquired Servicer Advance Investments from SLS, as described under “—Excess MSRs” above.
On April 6, 2015, we acquired Servicer Advance Investments in connection with the HLSS Acquisition, as described under “—
Excess MSRs” above. In July 2017, we entered into the Ocwen Transaction as described in Note 5 to our Consolidated Financial
Statements.
73
The following is a summary of our Servicer Advance Investments, including the right to the basic fee component of the related
MSRs (dollars in thousands):
Amortized
Cost Basis
Carrying
Value(A)
December 31, 2017
UPB of
Underlying
Residential
Mortgage
Loans
Outstanding
Servicer
Advances
Servicer
Advances to UPB
of Underlying
Residential
Mortgage Loans
$
$
1,016,344
2,907,659
3,924,003
$
$
1,047,136
$
50,363,639
2,980,243
89,096,733
4,027,379
$ 139,460,372
$
$
883,031
2,698,845
3,581,876
1.8%
3.0%
2.6%
Servicer Advance Investments
Nationstar and SLS serviced pools
Ocwen serviced pools
Total
(A)
Carrying value represents the fair value of the Servicer Advance Investments, including the basic fee component of the
related MSRs.
The following is additional information regarding our Servicer Advance Investments, and related financing, as of and for the year
ended, December 31, 2017 (dollars in thousands):
Year Ended
December 31, 2017
Loan-to-Value
(“LTV”)(A)
Cost of Funds(B)
Weighted
Average
Discount Rate
Weighted
Average Life
(Years)(C)
Change in Fair
Value Recorded in
Other Income
Face Amount
of Notes and
Bonds Payable
Gross
Net(D)
Gross
Net
Servicer Advance Investments(E)
6.8%
5.1
$
84,418
$
3,461,718
93.2%
92.0%
3.3%
3.0%
(A)
(B)
(C)
(D)
(E)
Based on outstanding servicer advances, excluding purchased but unsettled servicer advances and certain deferred
servicing fees (“DSF”) which we received financing on. If we were to include these DSF in the servicer advance balance,
gross and net LTV as of December 31, 2017 would be 87.4% and 86.3%, respectively. Also excludes retained Non-
Agency bonds with a current face amount of $80.0 million from the outstanding servicer advances debt. If we were to
sell these bonds, gross and net LTV as of December 31, 2017 would be 95.3% and 94.1%, respectively.
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.
Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this
investment.
Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve.
The following types of advances are included in Servicer Advance Investments:
Principal and interest advances
Escrow advances (taxes and insurance advances)
Foreclosure advances
Total
$
$
909,133
1,636,381
1,036,362
3,581,876
December 31, 2017
The Buyer
We, through a wholly owned subsidiary, are the managing member of the Buyer. As of December 31, 2017, we owned an
approximately 72.8% interest in the Buyer.
In the event that any member of the Buyer 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 residential mortgage loans. The Buyer, or the related New Residential subsidiary, as applicable,
74
has the right, but not the obligation, to become the named servicer with respect to its investments, subject to obtaining consents
and ratings agency approvals required for a formal change of the named servicer. 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 of the amounts from the purchased basic fee. This percentage was
equal to approximately 9.3%, which is equal to (i) 2 bps divided by (ii) the basic fee, which is 21.6 bps, on a weighted average
basis as of December 31, 2017. 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 6.1 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 (Note 6 to our Consolidated Financial Statements). 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 $37.6 million, $39.0 million and $48.4 million during the years ended December 31,
2017, 2016 and 2015, respectively.
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 bps) per annum of the amount of any such excess servicer advances.
A further discussion of the sensitivity of these incentive fees to changes in LIBOR is included below under “Quantitative and
Qualitative Disclosures About Market Risk.”
75
Residential Securities and Loans
Real Estate Securities
Agency RMBS
The following table summarizes our Agency RMBS portfolio as of December 31, 2017 (dollars in thousands):
Gross Unrealized
Asset Type
Outstanding
Face
Amount
Amortized
Cost Basis
Percentage
of Total
Amortized
Cost Basis
Gains
Losses
Carrying
Value(A)
Count
Weighted
Average Life
(Years)
3-Month
CPR
Outstanding
Repurchase
Agreements
Agency ARM RMBS
$
105,777
$
115,180
9.2% $
— $
(4,649)
$
110,531
Agency Specified Pools
1,097,852
1,131,913
90.8%
1,176
(3)
1,133,086
Agency RMBS
$
1,203,629
$ 1,247,093
100.0% $
1,176
$
(4,652)
$ 1,243,617
26
72
98
3.7
7.4
7.0
19.8% $
119,335
0.6%
8,017
2.3% $
127,352
(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, 2017 (dollars in thousands):
Weighted Average
Periodic Cap
Months to Next Reset(A)
Number of
Securities
Outstanding
Face Amount
Amortized
Cost Basis
Percentage of
Total
Amortized
Cost Basis
Carrying
Value
Coupon Margin
1st Coupon
Adjustment(B)
Subsequent
Coupon
Adjustment(C)
Lifetime
Cap(D)
Months to
Reset(E)
1 - 12
(A)
(B)
(C)
(D)
(E)
26
$
105,777
$
115,180
100.0% $
110,531
3.5%
1.7%
N/A
1.9%
8.9%
6
Of these investments, 94.5% reset based on 12-month LIBOR index, 3.3% reset based on one-month LIBOR, and 2.2%
reset based on the one-year Treasury Constant Maturity Rate.
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 net interest spread of our Agency RMBS portfolio as of December 31, 2017:
Net Interest Spread(A)
Weighted Average Asset Yield
Weighted Average Funding Cost
Net Interest Spread
2.83%
1.42%
1.41%
(A)
The Agency RMBS portfolio consists of 9.2% floating rate securities and 90.8% fixed rate securities (based on amortized
cost basis). See table above for details on rate resets of the floating rate securities.
We also hold $862.0 million face amount of Treasury securities with an amortized cost basis of $858.0 million and a carrying
value of $852.7 million as of December 31, 2017.
Non-Agency RMBS
The following table summarizes our Non-Agency RMBS portfolio as of December 31, 2017 (dollars in thousands):
Asset Type
Outstanding
Face
Amount
Amortized
Cost Basis
Gross Unrealized
Gains
Losses
Carrying
Value(A)
Outstanding
Repurchase
Agreements
Non-Agency RMBS
$ 12,757,357
$ 5,599,644
$
423,504
$
(48,359) $ 5,974,789
$ 4,720,290
76
(A)
Fair value, which is equal to carrying value for all securities.
The following tables summarize the characteristics of our Non-Agency RMBS portfolio and of the collateral underlying our
Non-Agency RMBS as of December 31, 2017 (dollars in thousands):
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)
Non- Agency RMBS Characteristics(A)
Vintage(B)
Pre 2006
2006
2007
CC
CC
CC
393
120
89
146
$ 1,958,012
$ 1,415,651
25.4% $ 1,579,898
2,618,417
1,646,999
3,192,167
1,841,903
4,959,071
665,311
29.6%
33.1%
11.9%
1,768,446
1,934,340
661,882
13.2%
7.0%
6.1%
8.6%
1.6%
1.9%
1.3%
—%
2008 and later
BBB-
Total/Weighted
Average
CCC-
748
$ 12,727,667
$ 5,569,864
100.0% $ 5,944,566
8.5%
1.4%
Weighted
Average
Life
(Years)
Weighted
Average
Coupon(F)
8.6
8.5
7.3
5.1
7.7
2.6%
1.9%
2.2%
2.8%
2.3%
Vintage(B)
Pre 2006
2006
2007
2008 and later
Total/Weighted Average
Collateral Characteristics(A) (G)
Average
Loan Age
(years)
13.0
11.7
10.9
12.2
11.8
Collateral
Factor(H)
0.08
0.14
0.27
0.74
0.24
3-Month
CPR(I)
10.7%
10.4%
12.2%
12.9%
11.4%
Delinquency(J)
12.9%
14.3%
13.8%
4.0%
12.5%
Cumulative
Losses to
Date
12.7%
30.6%
35.0%
2.0%
24.1%
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
Excludes $29.7 million face amount of bonds backed by consumer loans.
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 204 bonds with a
carrying value of $380.5 million which either have never been rated or for which rating information is no longer provided.
We had no assets that were on negative watch for possible downgrade by at least one rating agency as of December 31,
2017.
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, 2017.
Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $186.0 million and $0.0 million,
respectively, for which no coupon payment is expected.
The weighted average loan size of the underlying collateral is $172.5 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, 2017:
Net Interest Spread(A)
Weighted Average Asset Yield
Weighted Average Funding Cost
Net Interest Spread
5.66%
2.90%
2.76%
(A)
The Non-Agency RMBS portfolio consists of 90.5% floating rate securities and 9.5% fixed rate securities (based on
amortized cost basis).
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Call Rights
We hold a limited right to cleanup call options with respect to certain securitization trusts serviced or master serviced by Nationstar
whereby, when the UPB of the underlying residential mortgage loans falls below a pre-determined threshold, we can effectively
purchase the underlying residential mortgage loans at par, plus unreimbursed servicer advances, resulting in the repayment of all
of the outstanding securitization financing at par, in exchange for a fee of 0.75% of UPB paid to Nationstar at the time of exercise.
We similarly hold a limited right to cleanup call options with respect to certain securitization trusts master serviced by SLS for
no fee, and also with respect to certain securitization trusts serviced or master serviced by Ocwen subject to a fee of 0.5% of UPB
on loans that are current or thirty (30) days or less delinquent, paid to Ocwen at the time of exercise. The aggregate UPB of the
underlying residential mortgage loans within these various securitization trusts is approximately $144.9 billion.
We continue to evaluate the call rights we acquired from each of 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.” The actual UPB of the residential mortgage loans on which we can successfully exercise call rights and realize the
benefits therefrom may differ materially from our initial assumptions.
We have exercised our call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing
residential mortgage loans and 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.
Residential Mortgage Loans
As of December 31, 2017, we had approximately $2.7 billion outstanding face amount of residential mortgage loans. These
investments were financed with repurchase agreements with an aggregate face amount of approximately $1.9 billion and notes
and bonds payable with an aggregate face amount of approximately $137.2 million. We acquired these loans through open market
purchases, as well as through the exercise of call rights.
The following table presents the total residential mortgage loans outstanding by loan type at December 31, 2017 (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
LTV
Ratio(C)
Weighted Avg.
Delinquency(D)
Weighted
Average
FICO(E)
Performing Loans(H)
Purchased Credit Deteriorated Loans(I)
Total Residential Mortgage Loans, held-for-
investment
Reverse Mortgage Loans(F) (G)
Performing Loans(H) (J)
Non-Performing Loans(I) (J)
$
557,381
$
507,615
249,254
183,540
8,876
2,142
$
$
806,635
$
691,155
11,018
16,755
$
6,870
48
1,044,116
1,071,371
15,464
846,181
647,293
5,597
Residential Mortgage Loans, held- for-sale
$
1,907,052
$ 1,725,534
21,109
8.0%
7.2%
7.7%
7.5%
4.0%
5.6%
4.8%
5.5
3.1
4.8
4.5
4.8
4.3
4.6
22.1%
14.7%
76.4%
84.2%
8.7%
75.8%
19.8%
78.8%
29.4%
15.9%
10.2%
18.7%
14.0%
141.2%
53.2%
94.4%
72.2%
77.8%
7.0%
63.3%
32.6%
649
597
633
N/A
654
581
622
(A)
(B)
(C)
(D)
(E)
(F)
(G)
Includes residential mortgage loans with a United States federal income tax basis of $2,414.4 million as of December 31,
2017.
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 is 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% participation interest we hold in a portfolio of reverse mortgage loans. The average loan balance
outstanding based on total UPB was $0.5 million at December 31, 2017. Approximately 54.3% of these loans outstanding
have reached a termination event. As a result of the termination event, each such loan has matured and the borrower can
no longer make draws on these loans.
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
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(H)
(I)
(J)
Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due.
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, 2017, we have placed all Non-Performing
Loans, held-for-sale on nonaccrual status, except as described in (J) below.
Includes $33.7 million and $66.5 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively,
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. 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 funds managed by Blackstone Tactical Opportunities Advisors LLC acquired 23%.
OneMain acted as the managing 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. On October 3, 2014, the Consumer
Loan Companies refinanced the portfolio with an asset-backed securitization, resulting in proceeds in excess of the refinanced
debt which were distributed to the co-investors. This reduced our basis in the consumer loans investment to $0.0 million and
resulted in a gain. Subsequent to this refinancing, we discontinued recording our share of the underlying earnings of the Consumer
Loan Companies.
On March 31, 2016, we entered into the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements). As a result,
we own 53.5% of, and consolidate, the Consumer Loan Companies.
In 2016, we agreed to purchase newly originated consumer loans from a third party (“Consumer Loan Seller”). In the aggregate,
as of December 31, 2016, we had purchased $177.4 million UPB of loans for an aggregate purchase price of $176.2 million from
Consumer Loan Seller. These loans are not held in the Consumer Loan Companies and have been designated as performing
consumer loans, held-for-investment.
The table below summarizes the collateral characteristics of the consumer loans as of December 31, 2017 (dollars in thousands):
Personal
Unsecured
Loans %
Personal
Homeowner
Loans %
Number
of
Loans
UPB
Collateral Characteristics
Weighted
Average
Original
FICO
Score(A)
Weighted
Average
Coupon
Adjustable
Rate Loan %
Average
Loan Age
(months)
Average
Expected
Life
(Years)
Delinquency
30 Days(B)
Delinquency
60 Days(B)
Delinquency
90+ Days(B)
12-
Month
CRR(C)
12-
Month
CDR(D)
Consumer loans,
held-for-
investment
$ 1,377,792
69.5%
30.5% 174,843
639
17.9%
10.7%
144
3.5
3.1%
1.7%
2.5%
17.4%
6.2%
(A)
(B)
(C)
(D)
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.
12-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.
12-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.
In February 2017, we completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC (“LoanCo”), to purchase
up to $5.0 billion worth of newly originated consumer loans from Consumer Loan Seller over a two year term. We, along with
three co-investors, each acquired 25% membership interests in LoanCo. For further information, see Note 9 to our Consolidated
Financial Statements.
79
The following is a summary of LoanCo’s consumer loan investments:
Unpaid
Principal
Balance
Interest in
Consumer
Loans
Carrying
Value
Weighted
Average
Coupon
Weighted
Average
Expected Life
(Years)(A)
December 31, 2017 (C)
$
178,422
25.0% $
178,422
15.1%
1.4
Weighted
Average
Delinquency(B)
0.4%
(A)
(B)
(C)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the
primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
Data as of November 30, 2017 as a result of the one month reporting lag.
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.
Excess MSRs
Upon acquisition, we elected to record each investment 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 rate, 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. We review any changes to the valuation methodology 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 MSR 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
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.
80
MSRs
As an approved owner of MSRs, upon acquisition, we account for our MSRs as servicing assets or servicing liabilities as we have
undertaken an obligation to service financial assets. We measure our MSRs at fair value at acquisition and elect to subsequently
measure at fair value at each reporting date using the fair value measurement method. The variables and methodology involved
in valuing MSRs are similar to those involved in valuing Excess MSRs, with the addition of the estimation of a market level of
future costs to service a given portfolio of underlying residential mortgage loans. This cost estimate is primarily based on current
market data obtained from servicers and other third parties, which may be adjusted based on our expectations for the future, and
requires significant judgement with respect to selecting an appropriate level of estimated future cost from within the range of data
obtained and with respect to formulating future expectations. We believe the assumptions we use are within the range that a market
participant would use.
For these reasons, as well as the reasons described in “Excess MSRs” above, the determination of the estimated fair value of MSRs
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. 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 MSRs, similar to our Excess MSRs.
Servicing Revenue, Net is comprised of the following components: (i) income from the MSRs, less (ii) amortization of the basis
of the MSRs, plus or minus (iii) the mark-to-market on the MSRs. Amortization of the basis of the MSRs is based on the remaining
UPB of the residential mortgage loans underlying the MSRs relative to their UPB at acquisition.
Mortgage Servicing Rights Financing Receivables
As a result of the length of the initial term of the related subservicing agreements between NRM and PHH, and NRM and Ocwen
(Note 5 to our Consolidated Financial Statements), although the MSRs were legally sold, solely for accounting purposes we
determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that
the purchase agreements would not be treated as sales under GAAP. Therefore, rather than recording investments in MSRs, we
recorded investments in mortgage servicing rights financing receivables. Income from these investments is recorded as interest
income, and we have elected to measure these investments at fair value, with changes in fair value flowing through Change in fair
value of investments in mortgage servicing rights financing receivables in the Consolidated Statements of Income.
Servicer Advance Investments
We account for Servicer Advance Investments, which include the basic fee component of the related MSR, as financial instruments,
in instances where our subsidiary, NRM, is not the named 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 Advance Investments.
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 $0.4 billion per year on average over the weighted average life of the investment held as of
December 31, 2017, (ii) the duration of outstanding servicer advances, which we estimate is approximately nine months on average
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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 Advance Investments, 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
rates, 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. We review any changes to the valuation methodology 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
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
82
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.
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.
83
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.
Consumer Loans
Prior to the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements), we accounted for our investment in the
Consumer Loan Companies pursuant to the equity method of accounting because we could exercise significant influence over the
Consumer Loan Companies, but the requirements for consolidation were not met. Our share of earnings and losses in these equity
method investees was recorded 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.
Subsequent to the SpringCastle Transaction, we consolidate the Consumer Loan Companies. 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 LoanCo and WarrantCo (Note 9 to our Consolidated Financial Statements) pursuant to the
equity method of accounting because we can exercise significant influence over LoanCo and WarrantCo, 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. LoanCo has elected
to measure its investment in consumer loans at fair value and WarrantCo has elected to measure its investments in warrants at fair
value.
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 our assumptions, 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.
84
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 Advance Investments, 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, 2017, we owned an approximately 72.8% interest in the Buyer,
and the 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.
As a result of the SpringCastle Transaction, we have a 53.5% interest in and are the managing member of the Consumer Loan
Companies. The Consumer Loan Companies were formed as joint ventures, designed by the members to share risks and rewards
and provide each member with a certain level of participation in the overall management. The Consumer Loan Companies have
demonstrated their ability to finance activities without additional subordinated financial support and were organized with
substantive voting rights and the holders of the equity investment at risk, as a group, have the characteristics of a controlling
financial interest. Therefore, we have determined that the Consumer Loan Companies are voting interest entities. As the holder
of 53.5% of the voting equity and managing member, we have determined that we own a controlling financial interest and, as the
third party investor does not possess substantive participating rights, we have consolidated the Consumer Loan Companies. We
reflect the 46.5% membership interest held by the third party as a noncontrolling interest.
In May 2017, we securitized a pool of reperforming residential mortgage loans through certain subsidiaries (the “RPL Borrowers”
- see Note 9 to our Consolidated Financial Statements). As a result of controlling an optional redemption feature in the securitization,
although the loans were legally sold, solely for accounting purposes we determined that substantially all of the risks and rewards
inherent in owning the loans had not been transferred through the securitization, and that it would not be treated as a sale under
GAAP. Furthermore, we have determined that the RPL Borrowers are VIEs and that we are their primary beneficiary, and consolidate
them, as a result of controlling the optional redemption feature and owning certain notes issued by the RPL Borrowers.
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 MSRs and Servicer Advance
Investments, through TRSs and are subject to regular corporate income taxes on these investments.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements.
Accounting Impact of Valuation Changes
New Residential’s assets fall into three general categories as disclosed in the table below. These categories are:
1) Marked to Market Assets (“MTM Assets”): Assets that are marked to market through the statement of income. Changes
in the value of these assets (a) are recorded on the statement of income, as unrealized gains or losses that impact net
income, and (b) impact our Total New Residential Stockholders’ Equity (net book value).
2) Other Comprehensive Income Assets (“OCI Assets”): Assets that are marked to market through the statement of
comprehensive income. Changes in the value of these assets (a) are recorded on the statement of comprehensive income,
as unrealized gains or losses, and therefore do not impact net income on the statement of income, and (b) impact our
Total New Residential Stockholders’ Equity (net book value).
85
3) Cost Assets: Assets that are not marked to market. Changes in value of these assets do not impact net income on the
statement of income nor do they impact our Total New Residential Stockholders’ Equity (net book value).
An exception to these descriptions results from changes in value that represent impairment. Any such change (a) is recorded on
the statement of income, as impairment that impacts net income, and (b) impacts our Total New Residential Stockholders’ Equity
(net book value). In the case of residential mortgage loans, held-for-sale, any reductions in value are considered impairment.
Impairment on loans and REO is subject to reversal if values subsequently increase; impairment on securities is not subject to
reversal.
All of New Residential’s liabilities, with the exception of derivatives (which are marked to market through the statement of income),
are recorded at their amortized cost basis.
MTM Assets
OCI Assets
Cost Assets
Excess MSRs
Excess MSRs, equity method investees
MSRs
MSR Financing Receivables
Servicer Advance Investments
Certain assets within Other Assets,
primarily derivatives
Real estate and other securities,
Residential mortgage loans, held-for-
available-for-sale
investment
Residential mortgage loans, held-for-sale
Real estate owned (REO)
Consumer loans, held-for-investment
Consumer loans, equity method investees
Servicer advances receivable
Trades receivable
Deferred tax asset, net
Other assets, except as described above
86
RESULTS OF OPERATIONS
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, 2017 and 2016
Interest income
Interest expense
Net Interest Income
Impairment
Year Ended December 31,
Increase (Decrease)
2017
$ 1,519,679
2016
$ 1,076,735
Amount
$
442,944
460,865
1,058,814
373,424
703,311
87,441
355,503
%
41.1 %
23.4 %
50.5 %
Other-than-temporary impairment (OTTI) on securities
10,334
10,264
70
0.7 %
Valuation and loss provision (reversal) on loans and real
estate owned
Net interest income after impairment
Servicing revenue, net
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 mortgage servicing
rights financing receivables
Change in fair value of servicer advance investments
Gain on consumer loans investment
Gain on remeasurement of consumer loans investment
Gain (loss) on settlement of investments, net
Earnings from investments in consumer loans, equity
method investees
Other income (loss), net
Operating Expenses
General and administrative expenses
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
Subservicing 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
75,758
86,092
972,722
424,349
77,716
87,980
615,331
118,169
(1,958)
(1,888)
357,391
306,180
(2.5)%
(2.1)%
58.1 %
259.1 %
4,322
(7,297)
11,619
(159.2)%
12,617
16,526
(3,909)
(23.7)%
66,394
84,418
—
—
10,310
25,617
4,108
207,786
67,159
55,634
81,373
52,330
166,081
422,577
1,182,280
167,628
$ 1,014,652
$
$
57,119
957,533
$
$
$
—
(7,768)
9,943
71,250
(48,800)
—
28,483
62,337
38,570
41,610
42,197
44,001
7,832
174,210
621,627
38,911
582,716
78,263
504,453
$
$
$
66,394
92,186
(9,943)
(71,250)
59,110
25,617
(24,375)
145,449
28,589
14,024
39,176
8,329
158,249
248,367
560,653
128,717
431,936
(21,144)
453,080
100.0 %
(1,186.7)%
(100.0)%
(100.0)%
(121.1)%
100.0 %
(85.6)%
233.3 %
74.1 %
33.7 %
92.8 %
18.9 %
2,020.5 %
142.6 %
90.2 %
330.8 %
74.1 %
(27.0)%
89.8 %
Interest income increased by $442.9 million primarily attributable to incremental interest income of (i) $165.8 million from an
increase in the size of Real Estate Securities portfolio and accelerated accretion on Real Estate Securities owned in Non-Agency
87
RMBS trusts that were terminated upon the execution of calls, (ii) $161.8 million from Servicer Advance Investments, primarily
due to a $204.1 million increase from HLSS Servicer Advance Investments driven by retrospective adjustments resulting from a
change in cash flow assumptions, partially offset by faster prepayment speeds and a lower forward LIBOR curve as compared to
prior projections, (iii) $78.7 million from Mortgage Servicing Rights Financing Receivables due to the PHH and Ocwen
Transactions (Note 5 to our Consolidated Financial Statements), (iv) $53.8 million from the Residential Mortgage Loans portfolio
due to the acquisition of loans through the execution of calls, and (v) $31.1 million from Consumer Loans acquired as a result of
the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements) on March 31, 2016. The increase was partially
offset by (vi) a $47.0 million decrease from Excess MSR investments attributable to a step up in prepayment rates relative to the
prior year, and (vii) a $1.3 million decrease in interest income related to recoveries from certain GNMA EBO servicer advances.
Interest Expense
Interest expense increased by $87.4 million primarily attributable to increases of (i) $73.7 million of interest expense on repurchase
agreements and financings on Real Estate Securities in which we made additional levered investments subsequent to December 31,
2016, (ii) $43.3 million of interest expense on MSRs and related servicer advances financing obtained subsequent to December 31,
2016, (iii) $25.8 million on Residential Mortgage Loans due to an increase in the underlying principal balance of the portfolio
levered with repurchase agreements, and (iv) $16.9 million on debt collateralized by Excess MSRs issued subsequent to
December 31, 2016. The increase was partially offset by (v) a $70.7 million decrease in interest on financings related to Servicer
Advance Investments due to debt extinguishment and refinancing subsequent to December 31, 2016, and (vi) $1.6 million on
Consumer Loans due to a decrease in the levered portfolio.
Other than Temporary Impairment (OTTI) on Securities
The other-than-temporary impairment on securities increased by $0.1 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, 2017.
Valuation and Loss Provision (Reversal) on Loans and Real Estate Owned
The $2.0 million decrease in the valuation and loss provision (reversal) on loans and real estate owned resulted from (i) a $15.1
million decrease in impairment on Residential Mortgage Loans and REO due primarily to improved performance on certain non-
performing loans and a reduction in impairment on REOs during the year ended December 31, 2017. The decrease was partially
offset by (ii) a $9.3 million increase in consumer loan provision expense on loans recorded as a result of the SpringCastle Transaction
(Note 9 to our Consolidated Financial Statements) and certain newly originated consumer loans acquired subsequent to
December 31, 2016, and (iii) a $3.8 million increase of reserve related to certain GNMA EBO servicer advances receivable.
Servicing Revenue, Net
The component of servicing revenue, net related to changes in valuation inputs and assumptions related to the following:
Changes in interest rates and prepayment rates
Changes in discount rates
Changes in other factors
Total
Year Ended December 31,
$
2017
(38,848) $
165,496
28,847
$
155,495
$
2016
120,602
(1,767)
(15,156)
103,679
Increase
(Decrease)
Amount
$ (159,450)
167,263
44,003
$
51,816
Servicing revenue, net increased $306.2 million during the year ended December 31, 2017 compared to the year ended
December 31, 2016 as a result of MSR acquisitions by our servicer subsidiary, NRM, the majority of which closed subsequent to
December 31, 2016 (Note 5 to our Consolidated Financial Statements). $51.8 million of the increase was related to changes in
valuation inputs and assumptions, primarily driven by a decrease in discount rates, partially offset by faster prepayment speeds.
88
Change in Fair Value of Investments in Excess Mortgage Servicing Rights
Changes in the fair value of investments in Excess MSRs related to the following:
Year Ended December 31,
Increase
(Decrease)
Changes in interest rates and prepayment rates
Changes in discount rates
Changes in other factors
Total
2017
(41,410) $
41,526
4,206
4,322
$
$
$
2016
Amount
(2,080) $ (39,330)
41,526
—
(5,217)
(7,297) $
9,423
11,619
The increase in mark-to-market fair value adjustments during the year ended December 31, 2017 consisted primarily of an increase
in value on the Excess MSR pools driven by a decrease in average discount rate on the portfolio, offset by an increase in projected
prepayment speeds and faster actual prepayment rates throughout the year.
Change in Fair Value of Investments in Excess Mortgage Servicing Rights, Equity Method Investees
Changes in the fair value of investments in Excess MSRs, equity method investees related to the following:
Changes in interest rates and prepayment rates
Changes in discount rates
Changes in other factors
Total
Year Ended December 31,
Increase
(Decrease)
2017
2016
Amount
$
$
(3,420) $
4,840
11,197
2,669
$
—
13,857
12,617
$
16,526
$
(6,089)
4,840
(2,660)
(3,909)
The decrease in positive mark-to-market adjustments during the year ended December 31, 2017 were mainly driven by interest
income net of expenses recorded at the investee level and other market factors, which totaled $11.2 million during the year ended
December 31, 2017, compared to $13.9 million during the year ended December 31, 2016.
Change in Fair Value of Investments in Mortgage Servicing Rights Financing Receivables
The component of changes in the fair value of investments in mortgage servicing rights financing receivables related to changes
in valuation inputs and assumptions related to the following:
Year Ended December 31,
Increase
(Decrease)
2017
2016
Amount
Changes in interest rates and prepayment rates
Changes in discount rates
Changes in other factors
Total
$
$
(259) $
115,840
(5,997)
109,584
$
—
— $
(259)
115,840
(5,997)
— $ 109,584
—
The change in fair value of investments in mortgage servicing rights financing receivables of $66.4 million during the year ended
December 31, 2017 is due to the acquisition of mortgage servicing rights financing receivables as a result of the PHH Transaction
and Ocwen Transaction (Note 5 to our Consolidated Financial Statements), which are measured at fair value on a recurring basis.
$109.6 million of the increase was related to changes in valuation inputs and assumptions, primarily discount rates, which was
offset by $43.2 million of amortization of servicing rights.
89
Change in Fair Value of Servicer Advance Investments
Changes in the fair value of Servicer Advance Investments related to the following:
Changes in interest rates and prepayment rates
Changes in discount rates
Changes in other factors
Total
Year Ended December 31,
Increase
(Decrease)
2017
(16,109) $
(128,336)
228,863
84,418
$
2016
(23,806) $
7,864
8,174
(7,768) $
Amount
7,697
(136,200)
220,689
92,186
$
$
The positive mark-to-market adjustments during the year ended December 31, 2017 were mainly driven by a change in valuation
assumptions related to the HLSS portfolio. Primarily, we reduced our assumption related to the cost of subservicing in periods
subsequent to the expiration of the related contract to reflect the current characteristics of, and market for, this investment. This
change in assumption resulted in a positive mark-to-market adjustment of $193.8 million. Changes in valuation inputs and
assumptions related to the Ocwen Transaction (Note 5 to our Consolidated Financial Statements) further increased the fair value
by $41.5 million. The increase was partially offset by a negative mark-to-market adjustment of $128.3 million driven by a discount
rate change related to the HLSS portfolio.
Gain on Consumer Loans Investment
The gain on consumer loans investment decreased $9.9 million during the year ended December 31, 2017 compared to the year
ended December 31, 2016. This decrease was due to the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements)
on March 31, 2016, triggering a change in accounting to income recognition based on the consolidated assets and liabilities rather
than recognition of income based on the distributions in excess of basis for prior periods.
Gain on Remeasurement of Consumer Loans Investment
Gain on remeasurement of consumer loans investment of $71.3 million during the year ended December 31, 2016 represents the
remeasurement of New Residential’s previously held equity method investment in the Consumer Loan Companies as a result of
obtaining a controlling financial interest through the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements).
Gain (Loss) on Settlement of Investments, Net
Loss on settlement of investments, net increased by $59.1 million, primarily related to (i) $48.1 million change in loss on sale of
real estate securities to gain on sale of real estate securities, (ii) increased gain on sale of residential mortgage loans of $27.6
million, (iii) $11.3 million realized gain related to the Ocwen Transaction (Note 5 to our Consolidated Financial Statements), and
(iv) decreased loss on extinguishment of debt and writeoff financing fees of $6.0 million. This increase was partially offset by (v)
$13.9 million change in gain on sale of REO to loss on sale of REO, (vi) $11.7 million increase in loss on settlement of derivatives,
and (vii) $8.4 million increase in loss on liquidated residential mortgage loans, during the year ended December 31, 2017 compared
to the year ended December 31, 2016.
Earnings from Investments in Consumer Loans, Equity Method Investees
Earnings from investments in Consumer Loans, Equity Method Investees of $25.6 million during the year ended December 31,
2017 represents earnings generated by our 25% member interest in LoanCo and WarrantCo (Note 9 to our Consolidated Financial
Statements).
Other Income (Loss), Net
Other income (loss), net decreased by $24.4 million, primarily attributable to (i) a $16.1 million increase in REO expense and
servicer advance expenses, (ii) a $10.4 million decrease in Ocwen downgrade reimbursement income, (iii) a $8.0 million change
in unrealized gain on derivative instruments to unrealized loss on derivative instruments, (iv) a $2.4 million decrease in gain on
transfers of EBO and reverse mortgage loans to HUD claim receivables, and (v) a $1.4 million increase in reserve on collapse
holdback during the year ended December 31, 2017 compared to the year ended December 31, 2016. This decrease was partially
offset by (vi) a $5.3 million gain on Ocwen common stock, (vii) a $5.2 million change in unrealized loss on other ABS to unrealized
90
gain on other ABS, and (viii) an increased gain on transfer of loans to REO of $4.6 million during the year ended December 31,
2017 compared to the year ended December 31, 2016.
General and Administrative Expenses
General and administrative expenses increased by $28.6 million primarily attributable to (i) a $7.1 million increase in expenses
related to newly acquired Residential Mortgage Loans, (ii) a $6.8 million increase in deal related expense, (iii) a $5.4 million
increase in securitization fees, (iv) a $5.1 million increase in custodian expense and professional fees related to servicing compliance
as a result of MSR acquisitions by our servicer subsidiary, NRM, the majority of which closed subsequent to December 31, 2016
(Note 5 to our Consolidated Financial Statements), (v) a $2.4 million increase in professional fees related to legal, and (vi) a $1.1
million increase in trustee fees during the year ended December 31, 2017.
Management Fee to Affiliate
Management fee to affiliate increased by $14.0 million as a result of increases to our gross equity subsequent to December 31,
2016.
Incentive Compensation to Affiliate
Incentive compensation to affiliate increased by $39.2 million due to an increase 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 during the year ended December 31, 2017 compared to the year ended
December 31, 2016.
Loan Servicing Expense
Loan servicing expense increased by $8.3 million primarily attributable to (i) a $6.5 million increase of loan servicing expense
on Consumer Loans, held for investment as a result of the SpringCastle Transaction (Note 9 to our Consolidated Financial
Statements), and (ii) a $2.1 million increase in servicing expense on the Residential Mortgage Loans, partially offset by (iii) a
$0.3 million decrease in servicing expense on Real Estate Securities.
Subservicing Expense
Subservicing expense increased $158.2 million during the year ended December 31, 2017 compared to the year ended December 31,
2016 as a result of transactions that closed subsequent to December 31, 2016 within our servicer subsidiary, NRM (Note 5 to our
Consolidated Financial Statements).
Income Tax Expense (Benefit)
Income tax expense (benefit) increased by $128.7 million primarily due to (i) the increase in the net deferred tax expense resulting
from changes in assumptions impacting interest income and mark-to-market on Servicer Advance Investments and (ii) taxable
income at NRM as a mortgage servicer subsequent to December 31, 2016.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Noncontrolling interests in income (loss) of consolidated subsidiaries decreased by $21.1 million primarily due to (i) a $28.9
million decrease in other’s interest in the net income of the Buyer as a result of a decrease in ownership from 54.2% to 27.2%, as
well as a net decrease in net interest income earned on the Buyer’s levered assets and in the change in fair value of the Buyer’s
assets, during the year ended December 31, 2017, which was partially offset by (ii) an increase of $7.8 million from the consolidation
of the Consumer Loan Companies as part of the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements).
Other Comprehensive Income. See “—Accumulated Other Comprehensive Income (Loss)” below.
91
Comparison of Results of Operations for the years ended December 31, 2016 and 2015
Interest income
Interest expense
Net Interest Income
Impairment
Year Ended December 31,
Increase (Decrease)
2016
$ 1,076,735
$
373,424
703,311
2015
645,072
274,013
371,059
Amount
$
431,663
99,411
332,252
%
66.9 %
36.3 %
89.5 %
Other-than-temporary impairment (OTTI) on securities
10,264
5,788
4,476
77.3 %
Valuation and loss provision (reversal) on loans and real
estate owned
Net interest income after impairment
Servicing revenue, net
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 servicer advance investments
Gain on consumer loans investment
Gain on remeasurement of 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
Subservicing 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
77,716
87,980
615,331
118,169
18,596
24,384
346,675
—
59,120
63,596
268,656
118,169
317.9 %
260.8 %
77.5 %
— %
(7,297)
38,643
(45,940)
(118.9)%
16,526
(7,768)
9,943
71,250
(48,800)
28,483
62,337
38,570
41,610
42,197
44,001
7,832
174,210
621,627
38,911
582,716
78,263
504,453
$
$
$
31,160
(57,491)
43,954
—
(19,626)
5,389
42,029
61,862
33,475
16,017
6,469
—
117,823
270,881
(11,001)
281,882
13,246
268,636
$
$
$
(14,634)
49,723
(34,011)
71,250
(29,174)
23,094
20,308
(23,292)
8,135
26,180
37,532
7,832
56,387
350,746
49,912
300,834
65,017
235,817
$
$
$
(47.0)%
(86.5)%
(77.4)%
— %
148.6 %
428.5 %
48.3 %
(37.7)%
24.3 %
163.5 %
580.2 %
— %
47.9 %
129.5 %
(453.7)%
106.7 %
490.8 %
87.8 %
Interest income increased by $431.7 million primarily attributable to incremental interest income of (i) $232.7 million mainly
from Consumer Loans acquired as a result of the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements) on
March 31, 2016, (ii) $15.6 million from Excess MSR investments and $15.2 million from Servicer Advance Investments due to
holding Excess MSR and Servicer Advance Investments acquired through the HLSS Acquisition on April 6, 2015 for a full year
in 2016. Interest income further increased by (iii) $155.7 million largely due to an increase in the size of Real Estate Securities
portfolio and accelerated accretion on Real Estate Securities owned in Non-Agency RMBS trusts that were terminated upon the
exercise of call rights, and (iv) $13.1 million from Residential Mortgage Loans due to an increase in the underlying principal
balance of the portfolio during the year ended December 31, 2016, specifically the Fannie Mae loan pool acquired in December
2015. The increase was partially offset by a $0.7 million decrease in interest income on Ginnie Mae EBO servicer advances funded
by HLSS and accounted for as a financing transaction due to a decrease in the underlying balance of the portfolio during the year
ended December 31, 2016.
92
Interest Expense
Interest expense increased by $99.4 million primarily attributable to increases of (i) $8.0 million of interest on financings related
to servicer advances primarily acquired through the HLSS Acquisition on April 6, 2015, (ii) $52.8 million on the Consumer Loan
segment including the securitization notes assumed as a result of the SpringCastle Transaction (Note 9 to our Consolidated Financial
Statements) on March 31, 2016, (iii) $31.1 million of interest on repurchase agreements and financings on Real Estate Securities
in which we made additional levered investments subsequent to December 31, 2015, (iv) $4.2 million of interest expense on
Residential Mortgage Loans due to an increase in the underlying principal balance of the levered portfolio, and (v) $7.5 million
of interest on corporate loans secured by Excess MSRs as a result of a higher average outstanding debt balance during the year
ended December 31, 2016. The increase was partially offset by a $4.2 million decrease in interest on corporate loans assumed as
part of HLSS Acquisition and subsequently repaid in full in 2015.
Other than Temporary Impairment (OTTI) on Securities
The other-than-temporary impairment on securities increased by $4.5 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, 2016.
Valuation and Loss Provision (Reversal) on Loans and Real Estate Owned
The $59.1 million increase in the valuation provision on residential mortgage loans, held-for-sale and real estate owned resulted
from (i) consumer loan provision expense of $53.8 million on loans acquired as a result of the SpringCastle Transaction (Note 9
to our Consolidated Financial Statements) on March 31, 2016 and certain newly originated consumer loans acquired during the
second half of 2016 and (ii) an REO impairment increase of $10.2 million due primarily to a decline in home prices. This increase
was partially offset by (iii) a decrease of $4.9 million of reserve related to certain GNMO EBO servicer advances receivable during
the year ended December 31, 2016.
Servicing Revenue, Net
Servicing revenue, net increased $118.2 million during the year ended December 31, 2016 compared to the year ended December 31,
2015 as a result of MSR acquisitions by our servicer subsidiary, NRM, which closed in the fourth quarter of 2016 (Note 5 in our
Consolidated Financial Statements).
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 $45.9 million during the year ended
December 31, 2016 compared to the year ended December 31, 2015. This decrease relates to mark-to-market fair value decreases
of $7.3 million during the year ended December 31, 2016, compared to fair value increases of $38.6 million during the year ended
December 31, 2015. The mark-to-market fair value adjustments during the year ended December 31, 2016 consisted primarily of
a decrease in value on the legacy Excess MSR pools which is driven by lower future projected recapture rates, amortization of
the legacy assets, and faster actual prepayment rates throughout the year, offset by slower future projected prepayment rates.
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 $14.6 million
during the year ended December 31, 2016 compared to the year ended December 31, 2015. This decrease relates to mark-to-market
fair value increases of $16.5 million during the year ended December 31, 2016, compared to fair value increases of $31.1 million
during the year ended December 31, 2015. The mark-to-market fair value adjustments during the year ended December 31, 2016
consist primarily of slower future projected prepayment rates, offset by faster actual prepayment rates throughout the year. The
mark-to-market adjustments during the year ended December 31, 2015 were driven by increased servicing fees and a cumulative
positive adjustment resulting from changes to certain modeling assumptions. Additionally, two Excess MSR joint ventures were
restructured into directly owned assets during the first quarter of the year ended December 31, 2015.
Change in Fair Value of Servicer Advance Investments
The change in fair value of Servicer Advance Investments decreased $49.7 million during the year ended December 31, 2016
compared to the year ended December 31, 2015. This decrease relates to asset mark-downs of $7.8 million during the year ended
December 31, 2016 compared to mark-downs of $57.5 million during the year ended December 31, 2015. The net decrease in fair
93
value of Servicer Advance Investments for the year ended December 31, 2016 was due to the increases in discount rate assumptions
partially offset by a higher forward LIBOR curve as compared to prior projections. The net decrease in fair value of Servicer
Advance Investments for the year ended December 31, 2015 was primarily due to a lower performance fee adjustment related to
HLSS servicer advances resulting from a lower forward LIBOR curve as compared to prior projections and increases in discount
rate assumptions.
Gain on Consumer Loans Investment
The gain on consumer loans investment decreased $34.0 million during the year ended December 31, 2016 compared to the year
ended December 31, 2015. This decrease was due to the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements)
on March 31, 2016, triggering a change in accounting to income recognition based on the consolidated assets and liabilities rather
than recognition of income based on the distributions in excess of basis for prior periods.
Gain on Remeasurement of Consumer Loans Investment
Gain on remeasurement of consumer loans investment of $71.3 million represents the remeasurement of New Residential’s
previously held equity method investment in the Consumer Loan Companies as a result of obtaining a controlling financial interest
through the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements) on March 31, 2016.
Gain (Loss) on Settlement of Investments, Net
Loss on settlement of investments, net increased by $29.2 million, primarily related to (i) decreased gain on sale of residential
mortgage loans of $23.0 million, as the first two quarters of 2015 included the sale of the majority of the existing portfolio, (ii)
loss on sale of real estate securities of $27.5 million relative to a gain of $13.1 million in 2015, and (iii) increased other losses of
$0.9 million driven by interest rate cap unwind and increased loss on extinguishment of debt as a result of servicer advance term
note repayment and facility downsize. These amounts were partially offset by (iv) decreased loss on settlement of derivatives of
$19.5 million, (v) increased gain on sale of REO of $15.4 million, and (vi) decreased loss on liquidated residential mortgage loans
of $0.4 million, during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Other Income (Loss), Net
Other income (loss), net increased by $23.1 million, primarily attributable to (i) a $9.3 million net increase in unrealized gains on
interest rate swaps and interest rate caps, and a decrease in unrealized losses on TBAs, (ii) an increased gain on transfer of loans
to REO of $16.3 million, and (iii) increased gain on transfer of loans to other assets of $3.6 million, partially offset by (iv) increased
unrealized loss on other ABS of $3.2 million, (v) decreased gain on Excess MSR recapture agreements of $0.2 million, and (vi)
$2.7 million decrease in other income during the year ended December 31, 2016 compared to the year ended December 31, 2015.
General and Administrative Expenses
General and administrative expenses decreased by $23.3 million primarily attributable to (i) $6.0 million and $1.4 million in
retention bonus and severance, and payroll expenses, respectively, related to HLSS employees associated with our acquisition of
HLSS on April 6, 2015, (ii) $11.0 million of acquisition-related legal deal expenses due to our acquisition of HLSS, and (iii) $9.1
million related to a settlement agreement with certain HSART Bondholders during the year ended December 31, 2015, partially
offset by (iv) $3.0 million legal deal expenses related to the SpringCastle Transaction and transactions that closed in the fourth
quarter within our servicer subsidiary, NRM, and (v) $1.7 million of expenses related to technology enhancements during the year
ended December 31, 2016.
Management Fee to Affiliate
Management fee to affiliate increased by $8.1 million as a result of increases to our gross equity subsequent to December 31,
2015.
Incentive Compensation to Affiliate
Incentive compensation to affiliate increased by $26.2 million due to an increase 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 during the year ended December 31, 2016 compared to the year ended
December 31, 2015.
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Loan Servicing Expense
Loan servicing expense increased by $37.5 million primarily attributable to (i) $34.8 million of loan servicing expense on Consumer
Loans, held for investment as a result of the SpringCastle Transaction (Note 9 to our Consolidated Financial Statements) on March
31, 2016, and (ii) a $2.5 million increase in servicing expense on the Residential Mortgage Loans and Real Estate Securities due
to a larger average portfolio during the year ended December 31, 2016 compared to the year ended December 31, 2015.
Subservicing Expense
Subservicing expense increased $7.8 million during the year ended December 31, 2016 compared to the year ended December 31,
2015 as a result of transactions that closed in the fourth quarter within our servicer subsidiary, NRM (Note 5 in our Consolidated
Financial Statements).
Income Tax Expense (Benefit)
Income tax expense (benefit) increased by $49.9 million, from $11.0 million of income tax benefit for the year ended December 31,
2015 to $38.9 million of income tax expense for the year ended December 31, 2016, relating to certain of our taxable subsidiaries.
This change is primarily due to the increase in net income attributable to our taxable subsidiaries by $109.6 million from the year
ended December 31, 2015.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Noncontrolling interests in income (loss) of consolidated subsidiaries increased by $65.0 million primarily due to (i) $38.1 million
from the consolidation of the Consumer Loan Companies as part of the SpringCastle Transaction (Note 9 to our Consolidated
Financial Statements) during the year ended December 31, 2016, which are 46.5% owned by third parties, (ii) $21.8 million from
a net decrease in the change in fair value of the Buyer’s assets and a decrease in interest expense, partially offset by a net decrease
in interest income earned on the Buyer’s levered assets, and (iii) $5.1 million from HLSS shareholders’ interests in the net loss of
HLSS Ltd during the year ended December 31, 2015.
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, MSRs, Servicer Advance Investments, 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 ability to utilize funds generated by the MSRs held in our servicer subsidiary, NRM, is subject to regulatory
requirements regarding NRM’s liquidity. As of December 31, 2017, approximately $104.5 million of our cash and cash equivalents
was held at NRM, of which $20.0 million was in excess of regulatory liquidity requirements and available for deployment. Our
primary uses of funds are the payment of interest, management fees, incentive compensation, servicing and subservicing expenses,
outstanding commitments (including margins) and other operating expenses, and the repayment of borrowings and hedge
obligations, as well as dividends. Although we have other sources of liquidity, such as sales of and repayments from our investments,
potential debt financing sources and the issuance of equity securities, there can be no assurance that we will generate sufficient
cash or 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. We have also committed to purchase certain future servicer advances. Currently, we expect that
net recoveries of servicer advances will exceed net fundings for the foreseeable future. However, in the event of a significant
economic downturn, net fundings could exceed net recoveries, which could have a materially adverse impact on our liquidity and
could also result in additional expenses, primarily interest expense on any related financings of incremental advances.
Currently, our primary sources of financing are notes and bonds 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, 2017, we had outstanding repurchase agreements with an aggregate face amount of
approximately $8.7 billion to finance our investments. 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
95
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
4%-5% for Agency RMBS, 0%-1% for treasury securities, 10%-60% for Non-Agency RMBS, and 3%-30% for residential mortgage
loans. During the term of the repurchase agreement, the counterparty holds the security as collateral. If the agreement is subject
to margin calls, the counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the
agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral
(or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form
of cash and cash equivalents. Furthermore, we may, from time to time, be a party to derivative agreements or financing arrangements
that may be subject to margin calls based on the value of such instruments. In addition, $1.6 billion face amount of our MSR and
Excess MSR financing is subject to mandatory monthly repayment to the extent that the outstanding balance exceeds the market
value (as defined in the related agreement) of the financed asset multiplied by the contractual maximum loan-to-value ratio. We
seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls or related requirements
resulting from decreases in value related to a reasonably possible (in our opinion) 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 12 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.
Our ability to roll over short-term borrowings is critical to our liquidity outlook. While it is inherently more difficult to forecast
beyond the next 12 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
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) the difference between (a)
accretion and amortization and unrealized gains and losses recorded with respect to our investments and (b) cash received therefrom,
(ii) unrealized gains and losses on our derivatives, and recorded impairments, if any, (iii) deferred taxes, and (iv) 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.
•
96
Debt Obligations
The following table presents certain information regarding our debt obligations (dollars in thousands):
December 31, 2017
Collateral
Outstanding
Face
Amount
Carrying
Value(A)
Final Stated
Maturity(B)
Weighted
Average
Funding
Cost
Weighted
Average
Life (Years)
Outstanding
Face
Amortized
Cost Basis
Carrying
Value
Weighted
Average
Life (Years)
$
1,974,164
$
1,974,164
Jan-18
0.1
$
1,951,238
$
2,014,038
$
1,997,348
Debt Obligations/Collateral
Repurchase Agreements(C)
Agency RMBS(D)
Non-Agency RMBS(E)
4,720,290
4,720,290
Residential Mortgage Loans(F)
1,850,515
1,849,004
Real Estate Owned(G) (H)
Total Repurchase Agreements
Notes and Bonds Payable
Excess MSRs(I)
MSRs(J)
118,778
118,681
8,663,747
8,662,139
484,199
483,978
1,158,085
1,157,179
Servicer Advances(K)
4,066,567
4,060,156
Residential Mortgage Loans(L)
137,196
137,196
Consumer Loans(M)
1,248,050
1,242,756
Jan-18 to
Mar-18
Feb-18 to
Dec-19
Feb-18 to
Dec-19
Jun-19 to
Jul-22
Feb-18 to
Dec-22
Mar-18 to
Dec-21
Oct-18 to
Apr-20
Dec-21 to
Mar-24
Receivable from government agency(L)
3,126
3,126
Oct-18
Total Notes and Bonds Payable
7,097,223
7,084,391
Total/Weighted Average
$
15,760,970
$ 15,746,530
1.37%
2.90%
3.73%
3.70%
2.74%
5.31%
5.44%
3.26%
3.61%
3.36%
3.90%
3.78%
3.21%
0.1
0.9
0.8
0.3
2.8
2.2
2.0
2.3
3.1
0.8
2.3
1.2
3.7
7.7
4.3
11,899,935
5,467,187
5,839,524
2,364,874
2,165,584
2,135,698
N/A
N/A
142,404
N/A
264,504,619
1,107,042
1,328,008
221,952,565
1,904,987
2,211,710
4,255,047
4,596,042
4,699,418
229,522
179,812
179,812
1,377,625
1,380,202
1,374,097
6.1
6.2
4.5
8.0
3.5
N/A
N/A
2,782
N/A
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
Net of deferred financing costs.
All debt obligations with a stated maturity through February 13, 2018 were refinanced, extended or repaid.
These repurchase agreements had approximately $16.9 million of associated accrued interest payable as of December 31,
2017.
All of the Agency RMBS repurchase agreements have a fixed rate. Collateral amounts include approximately $1.0 billion
of related trade and other receivables and $0.9 billion of treasury securities.
All of the Non-Agency RMBS repurchase agreements have LIBOR-based floating interest rates. This includes repurchase
agreements of $160.2 million on retained servicer advance and consumer loan 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.
Includes $204.2 million of corporate loans which bear interest equal to the sum of (i) a floating rate index equal to one-
month LIBOR and (ii) a margin of 3.75%, and includes $280.0 million of corporate loans which bear interest equal to
the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 3.75%. The outstanding face amount
of the collateral represents the UPB of the residential mortgage loans underlying the interests in MSRs that secure these
notes.
Includes: $290.0 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-
month LIBOR and (ii) a margin of 4.25%, $232.9 million of MSR notes which bear interest equal to the sum of (i) a
floating rate index equal to one-month LIBOR and (ii) a margin of 3.75%, $74.0 million of MSR notes which bear interest
equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 3.50%; $487.2 million of
MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin
of 4.00%; and $74.0 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-
month LIBOR and (ii) a margin of 3.13%. The outstanding face amount of the collateral represents the UPB of the
residential mortgage loans underlying the MSRs and mortgage servicing rights financing receivables that secure these
notes.
$3.5 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 equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from 1.5%
to 2.4%. Collateral includes Servicer Advance Investments, as well as servicer advances receivable related to the mortgage
servicing rights and mortgage servicing rights financing receivables owned by NRM.
97
(L)
(M)
Represents: (i) a $10.3 million note payable to Nationstar that bears interest equal to one-month LIBOR plus 2.88% and
(ii) $130.0 million of asset-backed notes held by third parties which bear interest equal to 3.60%.
Includes the SpringCastle debt, which is comprised of the following classes of asset-backed notes held by third parties:
$927.0 million UPB of Class A notes with a coupon of 3.05% and a stated maturity date in November 2023; $210.8
million UPB of Class B notes with a coupon of 4.10% and a stated maturity date in March 2024; $18.3 million UPB of
Class C-1 notes with a coupon of 5.63% and a stated maturity date in March 2024; $18.3 million UPB of Class C-2 notes
with a coupon of 5.63% and a stated maturity date in March 2024. Also includes a $73.6 million face amount note
collateralized by newly originated consumer loans which bears interest equal to 4.00%.
Certain of the debt obligations included above are obligations of our consolidated subsidiaries, which own the related collateral.
In some cases, such collateral is not available to other creditors of ours.
We have margin exposure on $8.7 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 and Bonds Payable
Excess MSRs
MSRs
Servicer advances
Residential mortgage loans
Real estate owned
Total/Weighted Average
Year Ended December 31, 2017
Outstanding
Balance at
December 31,
2017
Average Daily
Amount
Outstanding(A)
Maximum
Amount
Outstanding
Weighted
Average Daily
Interest Rate
$
$
1,974,164
4,720,290
1,601,593
116,902
—
—
596,898
1,160,873
7,173
3,126
10,181,019
$
$
$
2,074,376
3,886,420
1,145,357
88,428
—
217,114
484,161
365,030
7,725
2,758
8,271,369
2,727,309
4,738,144
1,979,070
163,264
—
220,000
596,898
1,244,107
8,819
3,237
1.12%
2.67%
3.66%
3.62%
—%
5.84%
5.16%
3.00%
3.88%
3.90%
2.72%
(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, 2017
June 30, 2017
September 30,
2017
December 31,
2017
$
$
1,905,559
2,891,179
785,283
92,169
—
$
2,531,373
3,713,734
1,020,082
83,235
—
$
1,961,597
4,319,758
1,170,488
75,870
—
1,900,271
4,584,859
1,596,385
102,464
—
98
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, 2016
June 30, 2016
September 30,
2016
December 31,
2016
$
$
1,637,506
1,369,703
889,834
87,270
34,569
$
1,650,738
1,959,069
672,344
99,796
35,609
$
1,636,200
2,259,505
692,282
102,896
22,153
1,530,739
2,653,867
578,532
60,494
30,565
(A)
Represents the average for the period the debt was outstanding.
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 following table sets forth information
regarding these revolving periods as of December 31, 2017 (dollars in thousands):
Servicer Advance
Note Amount
Revolving Period Ends(A)
$
353,383 March 2018
61,072 May 2018
746,418 November 2018
249,141
January 2019
94,442 March 2019
259,846
750,000 October 2019
38,565 November 2019
376,246 December 2020
374,207 February 2021
400,000 October 2021
363,247 December 2021
June 2019
$
4,066,567
(A)
On the earlier of this date or 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
99
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
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 (Note 11 to our Consolidated Financial Statements). 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.
100
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.
Consumer Loans
In October 2016, the Consumer Loan Companies refinanced their outstanding asset-backed notes with a new asset-backed
securitization. The issuance consisted of $1.7 billion face amount of asset-backed notes comprised of six classes with maturity
dates in November 2023 and March 2024, of which approximately $157.6 million face amount was retained by the Consumer
Loan Companies and subsequently distributed to their members including New Residential. New Residential’s $79.9 million
portion of these bonds is not treated as outstanding debt in consolidation. In connection with the refinancing, the Consumer Loan
Companies recorded approximately $4.7 million of loss on extinguishment of debt related to an unamortized discount.
SpringCastle Debt (the “SpringCastle Notes”)
Principal will be paid on the SpringCastle Notes to the extent of available funds and in accordance with the priorities of payments
set forth in the related securitization transaction documents. Prior to the occurrence of an event of default under such documents,
payments of principal on the SpringCastle Notes are made in amounts necessary to maintain the prescribed relationship among
the senior and subordinated notes balances relative to the principal balance of the underlying consumer loans, with any excess
available funds flowing back to the co-issuers or as the co-issuers may direct. After the occurrence of an event of default, available
funds are applied to pay the SpringCastle Notes sequentially in full before any distribution to the co-issuer or as the co-issuers
may direct.
The definitive documents related to the SpringCastle Notes contain customary events of default, including, among others, (i) non-
payment of principal, interest or other amounts when due, (ii) insolvency of any co-issuer; (iii) any co-issuer becoming subject
to registration as an “investment company” within the meaning of the Investment Company Act of 1940; (iv) any co-issuer shall
become taxable as an association, taxable mortgage pool or publicly traded partnership taxable as a corporation under the Internal
Revenue Code; and (v) breaches of representations, warranties and covenants, subject to certain cure periods. 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 SpringCastle Notes and all other obligations of the co-issuers immediately due and payable. A bankruptcy event of default
causes such obligations automatically to become immediately due and payable and the commitments automatically to terminate.
The definitive documents related to the SpringCastle Notes contain customary representations and warranties, as well as covenants.
Covenants include, among others, reporting requirements, provision of notices of material events, maintenance of existence,
maintenance of books and records and compliance with laws.
Both the SpringCastle Notes and the underlying consumer loans accrue interest at fixed rates.
101
NRZ Excess Spread-Collateralized Notes (the “Excess Spread Notes”)
Principal will be paid on the Excess Spread Notes in accordance with the priorities of payments set forth in the related transaction
documents. The following table sets forth information regarding the note amounts for the Excess Spread Notes as of December
31, 2017 (in thousands):
PLS1
Agency MSRs Loan
Transaction
Outstanding
Note Amount
$
$
280,000
204,199
484,199
Maturity
Date
June 2019(A)
July 2022(B)
(A)
(B)
The PLS1 Excess Spread Notes may be paid off on any payment date occurring on or after December 2017 upon 180
days written notice from the Borrowers or Noteholders.
The Agency MSRs Loan has a loan repayment date of July 11, 2022.
At closing, the PLS1 Excess Spread Notes had a note amount of $126.2 million, but are subject to increase on any funding date
upon 1 business days’ notice and if there is sufficient collateral value to support such increase. The related MSR valuation agent
may, at its sole discretion, recalculate the market value of the excess servicing fees and generate a market value report. If the
collateral value (using the market value from the most recent market value report) multiplied by the advance rate is determined
to be less than the note amount, the borrowers will be required to make a principal payment to the extent necessary to cure such
imbalance. The borrowers are required to pay the outstanding principal balance of the PLS1 Excess Spread Notes on the maturity
date set forth in the table above. Prior to the maturity date, upon the occurrence of an event of default, the PLS1 Excess Spread
Notes become immediately due and payable. For the PLS1 Excess Spread Notes, New Residential Investment Corp. guarantees
the payment of all amounts payable when due.
At closing, the Agency MSRs Loan, had a loan amount of $213.7 million. Beginning on the first monthly settlement date (August
25, 2017) following the anniversary of the funding date (July 11, 2017), the borrowers are required to pay any unpaid principal
in equal parts on each remaining monthly payment date occurring prior to the loan repayment date (July 11, 2022). The lender
shall have the right to determine the collateral value at any time in its sole good faith discretion. If, on any determination date, the
outstanding aggregate loan amount exceeds the borrowing base, the borrowers shall, on the next monthly settlement date, repay
the loan in an amount equal to the borrowing base deficiency. Prior to the loan repayment date, upon the occurrence of an event
of default, the Agency MSRs Loan becomes immediately due and payable.
The definitive documents related to the Excess Spread 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, delivery of financial statements, use of proceeds, maintenance of deposit accounts,
maintenance of books and records, compliance with laws, compliance with covenants in the transaction/facility documents, and
financial covenants. Negative covenants include, among others, impairment on the value of the collateral, limitations on liens on
the collateral, limitations on other indebtedness or business activity, and changes in state of organization without notice.
The definitive documents related to the Excess Spread Notes also contain customary events of default, including, among others,
(i) non-payment of principal, interest or other amounts when due, (ii) material misrepresentations in the transaction/facility
documents, (iii) failure to maintain a first priority security interest in the collateral, (iv) change of control, (v) insolvency, (vi)
judgments, (vii) the failure of New Residential to be listed on the NYSE or have a public debt rating by at least one of S&P,
Moody’s or Fitch, (viii) the failure of the underlying servicer to be an approved servicer under the guidelines of the applicable
agency and (ix) the failure of New Residential to maintain its status as a REIT or failure of certain specified financial tests or a
servicer termination event trigger occurs. Upon the occurrence and during the continuance of an event of default under any facility,
the noteholders may declare the Excess Spread Notes and all other obligations immediately due and payable and may terminate
the commitments.
102
Maturities
Our debt obligations as of December 31, 2017, as summarized in Note 11 to our Consolidated Financial Statements, had contractual
maturities as follows (in thousands):
Year
2018
2019
2020
2021
2022
2023 and thereafter
Nonrecourse(A)
1,160,873
$
Recourse(B)
Total
$
9,020,147
$
10,181,020
1,391,994
506,269
1,211,100
74,000
1,174,408
530,794
—
—
691,385
—
1,922,788
506,269
1,211,100
765,385
1,174,408
$
5,518,644
$
10,242,326
$
15,760,970
(A)
(B)
Includes repurchase agreements and notes and bonds payable of $0.0 million and $5,519.0 million, respectively.
Includes repurchase agreements and notes and bonds payable of $8,664.0 million and $1,578.0 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 Trades Receivable and Treasury securities) and Non-Agency RMBS
repurchase agreements were 1.2% and 19.2%, respectively, and for Residential Mortgage Loans and Real Estate Owned were
13.4% and 16.6%, respectively, during the year ended December 31, 2017.
Borrowing Capacity
The following table represents our borrowing capacity as of December 31, 2017 (in thousands):
Debt Obligations/ Collateral
Repurchase Agreements
Borrowing
Capacity
Balance
Outstanding
Available
Financing
Residential mortgage loans and REO
$
2,735,000
$
1,969,293
$
765,707
Notes and Bonds Payable
Excess MSRs
MSRs
Servicer advances(A)
Consumer loans
750,000
775,000
1,910,120
150,000
280,000
670,898
1,585,069
73,646
470,000
104,102
325,051
76,354
$
6,320,120
$
4,578,906
$
1,741,214
(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 0.02%
fee on the unused borrowing capacity. Excludes borrowing capacity and outstanding debt for retained Non-Agency bonds
collateralized by servicer advances with a current face amount of $93.5 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 certain specified declines in our equity or failure to maintain a specified tangible net worth, liquidity, or
indebtedness to tangible net worth ratio. We were in compliance with all of our debt covenants as of December 31, 2017.
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.
103
Approximately 2.4 million shares of our common stock were held by Fortress, through its affiliates, and its principals as of
December 31, 2017.
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. To compensate 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. To compensate 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.
In August 2016, we issued 20.0 million shares of our common stock in a public offering at a price to the public of $14.20 per share
for net proceeds of approximately $278.8 million. To compensate the Manager for its successful efforts in raising capital for us,
in connection with this offering, we granted options to the Manager relating to 2.0 million shares of our common stock at the
public offering price, which had a fair value of approximately $2.3 million as of the grant date. The assumptions used in valuing
the options were: a 1.45% risk-free rate, a 11.80% dividend yield, 27.57% volatility and a 10-year term.
In February 2017, we issued 56.5 million shares of our common stock in a public offering at a price to the public of $15.00 per
share for net proceeds of approximately $834.5 million. One of our executive officers participated in this offering and purchased
18,600 shares at the public offering price. To compensate the Manager for its successful efforts in raising capital for us, in connection
with this offering, we granted options to the Manager relating to 5.7 million shares of our common stock at the public offering
price, which had a fair value of approximately $8.1 million as of the grant date. The assumptions used in valuing the options were:
a 2.38% risk-free rate, a 10.82% dividend yield, 28.64% volatility and a P10Y-year term.
In July 2015, a former employee of the Manager exercised 37,500 options with a weighted average exercise price of $7.19 and
received 20,227 shares of our common stock. In August 2016, employees of the Manager exercised an aggregate of 1,100,497
options with a weighted average exercise price of $10.59 per share and received 280,111 shares of our common stock.
As of December 31, 2017, our outstanding options had a weighted average exercise price of $14.74. Our outstanding options as
of December 31, 2017 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
16,387,480
2,108,708
6,000
18,502,188
104
Accumulated Other Comprehensive Income (Loss)
During the year ended December 31, 2017, our accumulated other comprehensive income (loss) changed due to the following
factors (in thousands):
Accumulated other comprehensive income, December 31, 2016
Net unrealized gain (loss) on securities
Reclassification of net realized (gain) loss on securities into earnings
Accumulated other comprehensive income, December 31, 2017
Total Accumulated
Other Comprehensive
Income
$
$
126,363
248,412
(10,308)
364,467
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, 2017, we
recorded unrealized gains on our real estate securities primarily caused by performance, liquidity and other factors related
specifically to certain investments, coupled with a net tightening of credit spreads. We recorded OTTI charges of $10.3 million
with respect to real estate securities and realized gains of $20.6 million on sales of real estate securities.
See “—Market Considerations” above for a further discussion of recent trends and events affecting our unrealized gains and losses
as well as our liquidity.
Common Dividends
We are organized and intend to conduct our operations to qualify as a REIT for U.S. federal income tax purposes. We intend to
make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT
distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net
capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable
income. We intend to make regular quarterly distributions of our taxable income to holders of our common stock out of assets
legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether
for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our
repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be
required to sell assets or raise capital to make cash distributions or we may make a portion of the required distribution in the form
of a taxable stock distribution or distribution of debt securities.
We make distributions based on a number of factors, including an estimate of taxable earnings per common share. Dividends
distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium
amortization and discount accretion, other differences in method of accounting, non-deductible general and administrative
expenses, taxable income arising from certain modifications of debt instruments, and investments held in TRSs. 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
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2017
June 30, 2017
September 30, 2017
December 31, 2017
Paid/Payable
April 2015
July 2015
October 2015
January 2016
April 2016
July 2016
October 2016
January 2017
April 2017
July 2017
October 2017
January 2018
Amount Per Share
0.38
$
0.45
$
0.46
$
0.46
$
0.46
$
0.46
$
0.46
$
0.46
$
0.48
$
0.50
$
0.50
$
0.50
$
105
Cash Flow
Operating Activities
2017 vs. 2016
Net cash flows provided by operating activities decreased approximately $1.5 billion for the year ended December 31, 2017 as
compared to the year ended December 31, 2016. Operating cash inflows for the year ended December 31, 2017 primarily consisted
of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of $3.6 billion, servicing
fees received of $424.2 million, collections on receivables and other assets of $46.0 million, net interest income received of $493.6
million, and distributions of earnings from equity method investees of $19.9 million. Operating cash outflows primarily consisted
of purchases of residential mortgage loans, held-for-sale of $5.1 billion, net funding of servicer advances receivable of $30.7
million, incentive compensation and management fees paid to the Manager of $96.8 million, income taxes paid of $5.0 million,
subservicing fees paid of $100.8 million and other outflows of approximately $134.8 million that primarily consisted of general
and administrative costs and loan servicing fees.
2016 vs. 2015
Net cash flows provided by operating activities increased approximately $254.3 million for the year ended December 31, 2016
as compared to the year ended December 31, 2015. Operating cash flows for the year ended December 31, 2016 primarily consisted
of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of $1.2 billion, collections
on receivables and other assets of $218.1 million, net interest income received of $492.7 million, distributions of earnings from
equity method investees of $22.0 million, and distributions from equity method investees in excess of our basis of $9.9 million.
Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of $1.2 billion, net funding
of servicer advances receivable of $2.5 million, incentive compensation and management fees paid to the Manager of $60.6 million,
income taxes paid of $1.1 million and other outflows of approximately $92.9 million that primarily consisted of general and
administrative costs.
Investing Activities
Cash flows provided by (used in) investing activities were ($1.8 billion), ($182.6 million) and ($233.2 million) for the years ended
December 31, 2017, 2016 and 2015, respectively. Investing activities consisted primarily of the acquisition of MSRs, Excess
MSRs, real estate securities, and loans, and the funding of servicer advances, net of principal repayments from Servicer Advance
Investments, MSRs, Excess MSRs, real estate securities and loans as well as proceeds from the sale of real estate securities, loans
and REO, and derivative cash flows.
Financing Activities
Cash flows provided by (used in) financing activities were approximately $2.7 billion, ($269.2 million) and $28.9 million during
the years ended December 31, 2017, 2016 and 2015, respectively. Financing activities consisted primarily of borrowings net of
repayments under debt obligations, equity offerings, capital contributions net of distributions from noncontrolling interests in the
equity of consolidated subsidiaries, 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
“Quantitative and Qualitative Disclosures About Market Risk.”
OFF-BALANCE SHEET ARRANGEMENTS
We have material off-balance sheet arrangements related to our non-consolidated securitizations of residential 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 $467.0 million. As of December 31, 2017, there was $4,837.3 million in total outstanding unpaid principal balance
of residential mortgage loans underlying such securitization trusts that represent off-balance sheet financings.
106
As described in Note 9 to our Consolidated Financial Statements, we have a co-investment in a portfolio of consumer loans held
through an entity (“LoanCo”) which we account for under the equity method. LoanCo had outstanding debt of $117.9 million as
of November 30, 2017. We have not guaranteed this debt.
We did not have any other off-balance sheet arrangements as of December 31, 2017. 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 entities described above. 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, 2017, we had the following material contractual obligations (payments in thousands):
Contract
Debt Obligations
Repurchase Agreements
Notes and Bonds Payable
Other Contractual Obligations
Management Agreement
Terms
Described under Note 11 to our Consolidated Financial Statements.
Described under Note 11 to our Consolidated Financial Statements.
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.
Contract
Debt Obligations
Repurchase Agreements(A)
Notes and Bonds Payable(A)
Other Contractual Obligations
Management Agreement(B)
Total
Fixed and Determinable Payments Due by Period
2021 - 2022
2019 - 2020
Thereafter
2018
Total
$ 10,268,942
$
520,960
$
— $
— $ 10,789,902
1,992,543
2,497,302
2,152,936
1,215,086
7,857,867
138,621
114,495
114,495
1,431,194
1,798,805
$ 12,400,106
$ 3,132,757
$ 2,267,431
$ 2,646,280
$ 20,446,574
(A)
(B)
Interest is included based on the expected LIBOR curve that existed at December 31, 2017 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, 2017.
See Notes 14 and 18 to our Consolidated Financial Statements for information regarding commitments and material contracts
entered into subsequent to December 31, 2017, if any. As described in Note 14, we have committed to purchase certain future
servicer advances. 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 Advance Investments.” In addition, the Consumer Loan Companies have invested in loans with
an aggregate of $152.0 million of unfunded and available revolving credit privileges as of December 31, 2017. However, under
the terms of these loans, requests for draws may be denied and unfunded availability may be terminated at management’s discretion.
As described in Note 5 to our Consolidated Financial Statements, we have entered into the Ocwen Transaction.
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.
107
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, on our investments. “Core earnings” is a non-GAAP measure of our
operating performance, excluding the fourth variable above and adjusts the earnings from the consumer loan investment to a level
yield basis. Core earnings 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 generally limited to 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.
Our definition of core earnings includes 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. In addition, our definition of core earnings excludes 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. Our definition of core
earnings also limits 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, net of related costs including advances. We created this limit in order to be able
to accrete to the lower of par or the net value of the underlying collateral, in instances where the net 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.
Our investments in consumer loans are accounted for under ASC No. 310-20 and ASC No. 310-30, including certain non-performing
consumer loans with revolving privileges that are explicitly excluded from being accounted for under ASC No. 310-30. Under
ASC No. 310-20, the recognition of expected losses on these non-performing consumer loans is delayed in comparison to the
level yield methodology under ASC No. 310-30, which recognizes income based on an expected cash flow model reflecting an
investment’s lifetime expected losses. The purpose of the Core Earnings adjustment to adjust consumer loans to a level yield is
to present income recognition across the consumer loan portfolio in the manner in which it is economically earned, avoid potential
delays in loss recognition, and align it with our overall portfolio of mortgage-related assets which generally record income on a
level yield basis. With respect to consumer loans classified as held-for-sale, the level yield is computed through the expected sale
date. With respect to the gains recorded under GAAP in 2014 and 2016 as a result of a refinancing of, and the consolidation of,
the Consumer Loan Companies, respectively, we continue to record a level yield on those assets based on their original purchase
price.
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,
as they are considered by management to be similar to realized losses incurred at acquisition. 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
108
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).
Management believes that the adjustments to compute “core earnings” specified above allow investors and analysts to readily
identify and track 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 core performance using the same measure that management
uses to operate the business. Management also utilizes core earnings as a measure in its decision-making process relating to
improvements to the underlying fundamental operations of our investments, as well as the allocation of resources between those
investments, and management also relies on core earnings as an indicator of the results of such decisions. Core earnings excludes
certain recurring items, such as gains and losses (including impairment as well as derivative activities) and non-capitalized
transaction-related expenses, because they are not considered by management to be part of our core operations for the reasons
described herein. As such, core earnings is not intended to reflect all of our activity and should be considered as only one of the
factors used by management in assessing our performance, along with GAAP net income which is inclusive of all of our activities.
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. The Gain on Remeasurement of Consumer Loans
Investment was treated as an unrealized gain for the purposes of calculating incentive compensation and was therefore excluded
from such calculation.
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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):
Year Ended December 31,
2016
2015
2017
Net income attributable to common stockholders
Impairment
Other Income adjustments:
Other Income
$
957,533
$
504,453
$
268,636
86,092
87,980
24,384
Change in fair value of investments in excess mortgage servicing rights
(4,322)
7,297
(38,643)
Change in fair value of investments in excess mortgage servicing rights,
equity method investees
Change in fair value of investments in mortgage servicing rights financing
receivables
Change in fair value of servicer advance investments
Gain on consumer loans investment
Gain on remeasurement of consumer loans investment
(Gain) loss on settlement of investments, net
Unrealized (gain) loss on derivative instruments
Unrealized (gain) loss on other ABS
(Gain) loss on transfer of loans to REO
(Gain) loss on transfer of loans to other assets
Gain on Excess MSR recapture agreements
Gain (loss) on Ocwen common stock
Other (income) loss
Total Other Income Adjustments
Other Income and Impairment attributable to non-controlling interests
Change in fair value of investments in mortgage servicing rights
Non-capitalized transaction-related expenses
Incentive compensation to affiliate
Deferred taxes
Interest income on residential mortgage loans, held-for sale
Limit on RMBS discount accretion related to called deals
Adjust consumer loans to level yield
Core earnings of equity method investees:
Excess mortgage servicing rights
Core Earnings
(12,617)
(16,526)
(31,160)
(109,584)
(84,418)
—
—
(10,310)
2,190
(2,883)
(22,938)
(488)
(2,384)
(5,346)
27,741
(225,359)
(30,416)
(155,495)
21,723
81,373
168,518
13,623
(28,652)
(41,250)
—
7,768
(9,943)
(71,250)
48,800
(5,774)
2,322
(18,356)
(2,938)
(2,802)
—
9,437
(51,965)
(26,303)
(103,679)
9,493
42,197
34,846
18,356
(30,233)
7,470
—
57,491
(43,954)
—
19,626
3,538
(879)
(2,065)
690
(2,999)
—
5,529
(32,826)
(22,102)
—
31,002
16,017
(6,633)
22,484
(9,129)
71,070
13,691
18,206
25,853
$
861,381
$
510,821
$
388,756
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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 rate 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 various ways,
the most significant of which are discussed below.
Cash Flow Impact
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 may 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 may 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 certain reset terms and “Management’s Discussion and Analysis of Financial Condition and 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 Servicer Advance Investments (including the
basic fee component of the related MSRs), 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. Conversely, 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 may impact Nationstar’s 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. Conversely, 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 Servicer Advance Investments, including the right to the basic fee component of the related MSRs,
at fair value. Therefore, any changes to our projected payments to/from our related servicers 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, 2017, an immediate 50 basis point increase in short term interest rates, based on a shift in the yield curve,
would decrease our cash flows by approximately $11.4 million in 2018, whereas a 50 basis point decrease in short term interest
rates would increase our cash flows by approximately $13.7 million in 2018, based solely on our current net floating rate exposure
and assuming a static portfolio of investments (including fixed rate repurchase agreements that mature within 60 days of
111
December 31, 2017 and assuming a LIBOR floor of 0.0%). As of December 31, 2016, an immediate 50 basis point increase in
interest rates would have increased our cash flows over the next year by approximately $19.5 million, whereas an immediate 50
basis point decrease in interest rates would have increased our cash flows over the next year by approximately $15.2 million.
Other Impacts
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 and continue to perform as expected, as their fair
value is not relevant to their underlying cash flows. 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.
Changes in interest rates can also have ancillary impacts on our investments. Generally, in a declining interest rate environment,
residential mortgage loan prepayment rates increase which in turn would cause the value of MSRs, mortgage servicing rights
financing receivables, Excess MSRs and the rights to the basic fee components of MSRs to decrease, because the duration of the
cash flows we are entitled to receive becomes shortened, and the value of loans and Non-Agency RMBS to increase, because we
generally acquired these investments at a discount whose recovery would be accelerated. With respect to a significant portion of
our investments in MSRs and Excess MSRs, we have recapture agreements, as described in Notes 4 and 5 to our Consolidated
Financial Statements. These recapture agreements help to protect these investments from the impact of increasing prepayment
rates. In addition, to the extent that the loans underlying our investments in MSRs, mortgage servicing rights financing receivables,
Excess MSRs and the rights to the basic fee components of MSRs are well-seasoned with credit-impaired borrowers who may
have limited refinancing options, we believe the impact of interest rates on prepayments would be reduced. Conversely, in an
increasing interest rate environment, prepayment rates decrease which in turn would cause the value of MSRs, mortgage servicing
rights financing receivables, Excess MSRs and the rights to the basic fee components of MSRs to increase and the value of loans
and Non-Agency RMBS 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 Rate 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, or repay debt, and affect our ability to refinance such assets
upon the maturity of the related financings, adversely impacting our rate of return on such investments.
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, or mandatory repayment, 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, or
required repayments, resulting from decreases in value related to a reasonably possible (in our opinion) change in interest rates
but there can be no assurance that our cash reserves will be sufficient.
In addition, changes in interest rates may impact our ability to exercise our call rights and to realize or maximize potential profits
from them. A significant portion of the residential mortgage loans underlying our call rights bear fixed rates and may decline in
value during a period of rising market interest rates. Furthermore, rising rates could cause prepayment rates on these loans to
decline, which would delay our ability to exercise our call rights. These impacts could be at least partially offset by potential
declines in the value of Non-Agency RMBS related to the call rights, which could then be acquired more cheaply, and in credit
spreads, which could offset the impact of rising market interest rates on the value of fixed rate loans to some degree. Conversely,
declining interest rates could increase the value of our call rights by increasing the value of the underlying loans.
We believe our consumer loan investments generally have limited interest rate sensitivity given that our portfolio is mostly composed
of very seasoned loans with credit-impaired borrowers who are paying fixed rates, who we believe are relatively unlikely to change
their prepayment patterns based on changes in interest rates.
As of December 31, 2017, 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 $255.2 million, whereas a 50 basis point decrease in short term interest rates
112
would decrease our net book value by approximately $348.3 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, 2016, an immediate 50 basis point increase in interest rates
would have increased our net book value by approximately $135.9 million, whereas an immediate 50 basis point decrease in
interest rates would have decreased our net book value by approximately $170.4 million.
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 on the sensitivity of our book value to changes in yields required by the marketplace on interest bearing
investments is included below under “—Credit Spread Risk.”
Prepayment Rate Exposure
Prepayment rates significantly affect the value of MSRs, mortgage servicing rights financing receivables, Excess MSRs, the basic
fee component of MSRs (which we own as part of our Servicer Advance Investments), Non-Agency RMBS and loans, including
consumer loans. Prepayment rate 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 rates
is a significant assumption underlying those cash flow projections. If the fair value of MSRs, mortgage servicing rights financing
receivables, Excess MSRs or the basic fee component of 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 rates could
materially reduce the ultimate cash flows we receive from MSRs, mortgage servicing rights financing receivables, 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 rates with respect to our loans or RMBS 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 MSR and Excess
MSR investments, we seek to enter into “recapture agreements” whereby our MSR or Excess MSR is retained if the applicable
servicer or subservicer originates a new loan the proceeds of which are used to repay a loan underlying an MSR or Excess MSR
in our portfolio. We seek to enter into such recapture agreements in order to protect our returns in the event of a rise in voluntary
prepayment rates.
Please refer to the table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application
of Critical Accounting Policies—Excess MSRs” for an analysis of the sensitivity of these investments to changes in certain market
factors.
Credit Spread Risk
Credit spreads measure the yield demanded on financial instruments by the market based on their credit relative to U.S. Treasuries,
for fixed rate credit, or LIBOR, for floating rate credit. Excessive supply of such 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, 2017, a 25 basis point increase in credit spreads would decrease our net book value by approximately $186.4
million, and a 25 basis point decrease in credit spreads would increase our net book value by approximately $190.3 million, based
on a static portfolio of investments, but would not directly affect our earnings or cash flow. As of December 31, 2016, a 25 basis
point increase in credit spreads would have decreased our net book value by approximately $114.1 million, and a 25 basis point
decrease in credit spreads would have increased our net book value by approximately $110.5 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.
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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 MSRs, mortgage servicing rights financing receivables, Excess MSRs, Servicer Advance
Investments, 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, as would our financing cost thereof.
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.
For our MSRs, mortgage servicing rights financing receivables, and 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
directly affected by delinquency rates because the servicer continues to advance principal and interest until a default occurs on
the applicable loan, so delinquencies decrease prepayments therefore having a positive impact on fair value, while increased
defaults have an effect similar to increased prepayments. For our Non-Agency RMBS and loans, higher default rates can lead to
greater loss of principal. For our call rights, higher delinquencies and defaults could reduce the value of the underlying loans,
therefore reducing or eliminating the related potential profit.
Market factors that could influence the degree of the impact of credit risk on our investments include (i) unemployment and the
general economy, which impact borrowers’ ability to make payments on their loans, (ii) home prices, which impact the value of
collateral underlying residential mortgage loans, (iii) the availability of credit, which impacts borrowers’ ability to refinance, and
(iv) other factors, all of which are beyond our control.
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.
114
Investment Specific Sensitivity Analyses
Excess MSRs
The following table summarizes the estimated change in fair value of our interests in the Agency Excess MSRs owned directly
as of December 31, 2017 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate
(dollars in thousands):
Fair value at December 31, 2017
$
324,636
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%
352,763
28,127
8.7 %
-20%
348,427
23,791
7.3 %
-20%
328,006
3,370
1.0 %
-20%
315,362
(9,274)
(2.9)%
$
$
$
$
$
$
$
$
-10%
338,192
13,556
4.2 %
-10%
336,342
11,706
3.6 %
-10%
326,318
1,682
0.5 %
-10%
320,044
(4,592)
(1.4)%
$
$
$
$
$
$
$
$
10%
312,416
(12,220)
(3.8)%
10%
313,754
(10,882)
(3.4)%
10%
322,957
(1,679)
(0.5)%
10%
329,606
4,970
1.5 %
$
$
$
$
$
$
$
$
20%
300,970
(23,666)
(7.3)%
20%
303,216
(21,420)
(6.6)%
20%
321,271
(3,365)
(1.0)%
20%
334,502
9,866
3.0 %
115
The following table summarizes the estimated change in fair value of our interests in the Non-Agency Excess MSRs owned directly
as of December 31, 2017 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate
(dollars in thousands):
Fair value at December 31, 2017
$
849,077
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%
914,252
65,175
7.7 %
-20%
926,541
77,464
9.1 %
-20%
849,077
$
$
$
$
$
-10%
880,227
31,150
3.7 %
-10%
886,205
37,128
4.4 %
-10%
849,077
$
$
$
$
$
10%
819,703
(29,374)
(3.5)%
10%
813,951
(35,126)
(4.1)%
10%
849,077
$
$
$
$
$
20%
792,695
(56,382)
(6.6)%
20%
781,519
(67,558)
(8.0)%
20%
849,077
— $
— %
— $
— %
— $
— %
—
— %
-20%
844,563
(4,514)
(0.5)%
$
$
-10%
846,650
(2,427)
(0.3)%
$
$
10%
850,914
1,837
0.2 %
$
$
20%
853,098
4,021
0.5 %
116
The following table summarizes the estimated change in fair value of our interests in the Agency Excess MSRs owned through
equity method investees as of December 31, 2017 given several parallel shifts in the discount rate, prepayment rate, delinquency
rate and recapture rate (dollars in thousands):
Fair value at December 31, 2017
$
171,765
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%
185,367
13,602
7.9 %
-20%
183,062
11,297
6.6 %
-20%
174,360
2,595
1.5 %
-20%
166,540
(5,225)
(3.0)%
$
$
$
$
$
$
$
$
-10%
178,285
6,520
3.8 %
-10%
177,295
5,530
3.2 %
-10%
173,061
1,296
0.8 %
-10%
169,137
(2,628)
(1.5)%
$
$
$
$
$
$
$
$
10%
165,754
(6,011)
(3.5)%
10%
166,480
(5,285)
(3.1)%
10%
170,468
(1,297)
(0.8)%
10%
174,439
2,674
1.6 %
$
$
$
$
$
$
$
$
20%
160,188
(11,577)
(6.7)%
20%
161,420
(10,345)
(6.0)%
20%
169,168
(2,597)
(1.5)%
20%
177,152
5,387
3.1 %
117
MSRs
The following table summarizes the estimated change in fair value of our interests in the Agency MSRs, including mortgage
servicing rights financing receivables, owned as of December 31, 2017 given several parallel shifts in the discount rate, prepayment
rate, delinquency rate and recapture rate (dollars in thousands):
Fair value at December 31, 2017
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
%
$ 2,211,710
-20%
$ 2,387,170
-10%
$ 2,296,034
10%
$ 2,133,510
20%
$ 2,060,819
$
175,460
$
84,324
$
(78,200)
$
(150,891)
7.9 %
3.8 %
(3.5)%
(6.8)%
-20%
$ 2,376,247
-10%
$ 2,291,864
10%
$ 2,135,532
20%
$ 2,063,113
$
164,537
$
80,154
$
(76,178)
$
(148,597)
7.4 %
3.6 %
(3.4)%
(6.7)%
-20%
$ 2,229,044
-10%
$ 2,220,379
10%
$ 2,203,046
20%
$ 2,194,382
$
17,334
$
8,669
$
(8,664)
$
(17,328)
0.8 %
0.4 %
(0.4)%
(0.8)%
-20%
$ 2,159,047
-10%
$ 2,185,378
10%
$ 2,238,048
20%
$ 2,264,390
$
(52,663)
$
(26,332)
$
26,338
$
52,680
(2.4)%
(1.2)%
1.2 %
2.4 %
118
The following table summarizes the estimated change in fair value of our interests in the Non-Agency MSRs, including mortgage
servicing rights financing receivables, owned as of December 31, 2017 given several parallel shifts in the discount rate, prepayment
rate, delinquency rate and recapture rate (dollars in thousands):
Fair value at December 31, 2017
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
%
$
$
$
$
$
$
$
$
$
122,522
-20%
135,223
12,701
10.4%
-20%
124,996
2,474
2.0%
-20%
122,910
388
0.3%
-20%
122,522
$
$
$
$
$
$
$
-10%
128,605
6,083
5.0%
-10%
123,725
1,203
1.0%
-10%
122,716
194
0.2%
-10%
122,522
$
$
$
$
$
$
$
10%
116,914
(5,608)
(4.6)%
10%
121,379
(1,143)
(0.9)%
10%
122,327
(195)
(0.2)%
10%
122,522
$
$
$
$
$
$
$
20%
111,730
(10,792)
(8.8)%
20%
120,291
(2,231)
(1.8)%
20%
122,133
(389)
(0.3)%
20%
122,522
— $
—%
— $
—%
— $
— %
—
— %
Each of the preceding sensitivity analyses 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.
119
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, 2017 and 2016
Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
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.
120
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of New Residential Investment Corp. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of New Residential Investment Corp. and Subsidiaries (the
Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders’
equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2017, 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)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, 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 14, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2012.
New York, New York
February 14, 2018
121
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of New Residential Investment Corp. and Subsidiaries
Opinion on Internal Control over Financial Reporting
We have audited New Residential Investment Corp. and Subsidiaries’ internal control over financial reporting as of December 31,
2017, 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). In our opinion, New Residential Investment
Corp. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of New Residential Investment Corp. and Subsidiaries as of December 31, 2017 and
2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of
the three years in the period ended December 31, 2017 and the related notes of the Company and our report dated February 14,
2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s 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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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.
Definition and Limitations of Internal Control Over Financial Reporting
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.
/s/ Ernst & Young LLP
New York, New York
February 14, 2018
122
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Assets
Investments in:
Excess mortgage servicing rights, at fair value
$
1,173,713
$
1,399,455
December 31,
2017
2016
Excess mortgage servicing rights, equity method investees, at fair value
Mortgage servicing rights, at fair value
Mortgage servicing rights financing receivables, at fair value
Servicer advance investments, at fair value(A)
Real estate and other securities, available-for-sale
Residential mortgage loans, held-for-investment
Residential mortgage loans, held-for-sale(A)
Real estate owned
Consumer loans, held-for-investment(A)
Consumer loans, equity method investees
Cash and cash equivalents(A)
Restricted cash
Servicer advances receivable
Trades receivable
Deferred tax asset, net
Other assets
Liabilities and Equity
Liabilities
Repurchase agreements
Notes and bonds payable(A)
Trades payable
Due to affiliates
Dividends payable
Deferred tax liability, net
Accrued expenses and other liabilities
Commitments and Contingencies
Equity
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 307,361,309 and 250,773,117 issued and
outstanding at December 31, 2017 and December 31, 2016, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total New Residential stockholders’ equity
Noncontrolling interests in equity of consolidated subsidiaries
Total Equity
171,765
1,735,504
598,728
4,027,379
8,071,140
691,155
1,725,534
128,295
1,374,263
51,412
295,798
150,252
675,593
1,030,850
—
312,181
194,788
659,483
—
5,706,593
5,073,858
190,761
696,665
59,591
1,799,486
—
290,602
163,095
81,582
1,687,788
151,284
244,498
$
22,213,562
$
18,399,529
$
8,662,139
$
7,084,391
1,169,896
88,961
153,681
19,218
239,114
17,417,400
3,074
3,763,188
559,476
364,467
4,690,205
105,957
4,796,162
5,190,631
7,990,605
1,381,968
47,348
115,356
—
205,444
14,931,352
2,507
2,920,730
210,500
126,363
3,260,100
208,077
3,468,177
$
22,213,562
$
18,399,529
(A)
New Residential’s Consolidated Balance Sheets include the assets and liabilities of certain consolidated VIEs, the Buyer (Note 6), the RPL Borrowers
(Note 8), and the Consumer Loan SPVs (Note 9), which primarily hold investments in Servicer Advance Investments, residential mortgage loans, and
consumer loans, respectively, financed with notes and bonds payable. The balance sheets of the Buyer, the RPL Borrowers, and the Consumer Loan
SPVs are included in Notes 6, 8, and 9, respectively. The creditors of the Buyer, the RPL Borrowers, and the Consumer Loan SPVs do not have recourse
to the general credit of New Residential and the assets of the Buyer, the RPL Borrowers, and the Consumer Loan SPVs are not directly available to
satisfy New Residential’s obligations.
See notes to consolidated financial statements.
123
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except share and per share data)
Interest income
Interest expense
Net Interest Income
Impairment
Other-than-temporary impairment (OTTI) on securities
Valuation and loss provision (reversal) on loans and real estate owned
Year Ended December 31,
2017
2016
2015
$
1,519,679
$
1,076,735
$
460,865
1,058,814
373,424
703,311
10,334
75,758
86,092
10,264
77,716
87,980
645,072
274,013
371,059
5,788
18,596
24,384
Net interest income after impairment
972,722
615,331
346,675
Servicing revenue, net
Other Income
424,349
118,169
—
Change in fair value of investments in excess mortgage servicing rights
4,322
(7,297)
38,643
Change in fair value of investments in excess mortgage servicing rights, equity
method investees
Change in fair value of investments in mortgage servicing rights financing
receivables
Change in fair value of servicer advance investments
Gain on consumer loans investment
Gain on remeasurement of consumer loans investment
Gain (loss) on settlement of investments, net
Earnings from investments in consumer loans, equity method investees
Other income (loss), net
Operating Expenses
General and administrative expenses
Management fee to affiliate
Incentive compensation to affiliate
Loan servicing expense
Subservicing expense
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
See notes to consolidated financial statements.
124
12,617
66,394
84,418
—
—
10,310
25,617
4,108
207,786
67,159
55,634
81,373
52,330
166,081
422,577
1,182,280
167,628
1,014,652
57,119
957,533
3.17
3.15
$
$
$
$
$
16,526
31,160
—
(7,768)
9,943
71,250
(48,800)
—
28,483
62,337
38,570
41,610
42,197
44,001
7,832
174,210
621,627
38,911
582,716
78,263
504,453
2.12
2.12
$
$
$
$
$
—
(57,491)
43,954
—
(19,626)
—
5,389
42,029
61,862
33,475
16,017
6,469
—
117,823
270,881
(11,001)
281,882
13,246
268,636
1.34
1.32
302,238,065
238,122,665
200,739,809
304,381,388
238,486,772
202,907,605
1.98
$
1.84
$
1.75
$
$
$
$
$
$
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 attributable to noncontrolling interests
Comprehensive income attributable to common stockholders
See notes to consolidated financial statements.
2017
December 31,
2016
2015
$ 1,014,652
$
582,716
$
281,882
248,412
(10,308)
238,104
$ 1,252,756
$
57,119
$ 1,195,637
$
$
$
84,703
37,724
122,427
705,143
78,263
626,880
$
$
$
(17,075)
(7,308)
(24,383)
257,499
13,246
244,253
125
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016 and 2015
(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, 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 exercise
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
Dividends declared
SpringCastle Transaction (Note 9)
Capital contributions
Capital distributions
—
—
—
—
—
—
—
—
—
—
—
—
Issuance of common stock
20,000,000
200
278,575
Option exercise
Purchase of noncontrolling interests in the
Buyer
Director share grants
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)
280,111
—
21,804
—
—
—
3
—
—
—
—
—
(3)
965
300
—
—
—
(442,753)
—
—
—
—
—
—
—
504,453
—
—
—
—
—
—
—
—
—
—
—
84,703
37,724
(442,753)
—
(442,753)
—
—
—
278,775
—
965
300
504,453
84,703
37,724
626,880
110,438
110,438
—
—
(167,026)
(167,026)
—
—
(4,245)
—
78,263
—
—
78,263
278,775
—
(3,280)
300
582,716
84,703
37,724
705,143
Equity - December 31, 2016
250,773,117
$
2,507
$ 2,920,730
$ 210,500
$
126,363
$
3,260,100
$
208,077
$ 3,468,177
Dividends declared
Capital contributions
Capital distributions
—
—
—
—
—
—
—
—
—
Issuance of common stock
56,545,787
566
833,963
Purchase of noncontrolling interests in the
Buyer
Other dilution
Director share grants
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)
—
—
42,405
—
—
—
—
—
1
—
—
—
(608,557)
—
—
—
—
—
—
9,183
(1,386)
698
—
—
—
957,533
—
—
—
—
—
—
—
—
—
—
248,412
(608,557)
—
—
834,529
9,183
(1,386)
699
957,533
248,412
(10,308)
(10,308)
—
—
(84,196)
—
(75,043)
—
—
(608,557)
—
(84,196)
834,529
(65,860)
(1,386)
699
57,119
1,014,652
—
—
248,412
(10,308)
1,195,637
57,119
1,252,756
Equity - December 31, 2017
307,361,309
$
3,074
$ 3,763,188
$ 559,476
$
364,467
$
4,690,205
$
105,957
$ 4,796,162
See notes to consolidated financial statements.
126
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash Flows From Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Year Ended December 31,
2017
2016
2015
$
1,014,652
$
582,716
$
281,882
Change in fair value of investments in excess mortgage servicing rights
(4,322)
7,297
(38,643)
Change in fair value of investments in excess mortgage servicer rights, equity
method investees
Change in fair value of investments in mortgage servicing rights financing
receivables
Change in fair value of servicer advance investments
(Gain) / loss on remeasurement of consumer loans investment
(Gain) / loss on settlement of investments (net)
Earnings from investments consumer loans, equity method investees
Unrealized (gain) / loss on derivative instruments
Unrealized (gain) / loss on other ABS
(Gain) / loss on transfer of loans to REO
(Gain) / loss on transfer of loans to other assets
(Gain) / loss on Excess MSR recapture agreements
(Gain) / loss on Ocwen common stock
Accretion and other amortization
Other-than-temporary impairment
Valuation and loss provision on loans and real estate owned
Non-cash portions of servicing revenue, net
Non-cash directors’ compensation
Deferred tax provision
Changes in:
Servicer advances receivable
Other assets
Due to affiliates
Accrued expenses and other liabilities
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
Interest received from PCD consumer loans, held-for-investment
Distributions of earnings from excess mortgage servicing rights, equity method
investees
Distributions of earnings from consumer loan equity method investees
(12,617)
(16,526)
(31,160)
(66,394)
(84,418)
—
(10,310)
(25,617)
2,190
(2,883)
(22,938)
(488)
(2,384)
(5,346)
—
7,768
(71,250)
48,800
—
(5,774)
2,322
(18,356)
(2,938)
(2,802)
—
—
57,491
—
19,626
—
3,538
(879)
(2,065)
690
(2,999)
—
(1,031,384)
(747,932)
(525,298)
10,334
75,758
67,672
699
168,518
(30,688)
(32,174)
41,613
26,081
79,612
168,595
211,599
8,021
52,372
13,668
6,240
10,264
77,716
(88,325)
300
34,846
(2,503)
229,916
23,563
3,223
152,589
185,204
100,883
2,815
49,582
22,046
—
5,788
18,596
—
450
(6,633)
—
216,778
(33,639)
(42,494)
127,131
172,711
43,824
—
—
37,874
—
Purchases of residential mortgage loans, held-for-sale
(5,135,700)
(1,196,018)
(1,278,322)
Proceeds from sales of purchased residential mortgage loans, held-for-sale
3,514,108
1,109,876
1,226,442
Principal repayments from purchased residential mortgage loans, held-for-sale
Net cash provided by (used in) operating activities
106,213
(899,718)
61,494
560,796
55,804
306,493
127
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Cash Flows From Investing Activities
Acquisition of investments in excess mortgage servicing rights
Acquisition of HLSS (Note 1), net of cash acquired
SpringCastle Transaction (Note 9), net of cash acquired
Restricted cash acquired from SpringCastle Transaction
Year Ended December 31,
2017
2016
2015
—
—
—
—
(2,146)
—
(55,523)
74,604
(252,127)
(881,165)
—
—
Purchase of servicer advance investments
(12,168,519)
(15,266,816)
(14,945,858)
Purchase of MSRs, MSR financing receivables and servicer advances receivable
(1,661,608)
(526,653)
—
Purchase of Agency RMBS
Purchase of Non-Agency RMBS
Purchase of residential mortgage loans
Purchase of derivatives
Purchase of real estate owned and other assets
Purchase of consumer loans
Purchase of investment in consumer loans, equity method investees
Draws on revolving consumer loans
Payments for settlement of derivatives
Return of investments in excess mortgage servicing rights
Return of investments in excess mortgage servicing rights, equity method
investees
Return of investments in consumer loans, equity method investees
(9,165,868)
(6,812,258)
(4,610,680)
(2,570,753)
(2,577,625)
(1,252,516)
(609,627)
(191,081)
(290,652)
(2,350)
(38,127)
(8,292)
(14,097)
—
(176,107)
(470,344)
(56,321)
(164,025)
172,395
21,972
393,722
—
(49,289)
(84,587)
175,243
16,913
—
(5,830)
(26,208)
—
—
—
(85,493)
154,777
8,683
—
Principal repayments from servicer advance investments
13,820,019
17,158,395
16,008,741
Principal repayments from Agency RMBS
Principal repayments from Non-Agency RMBS
Principal repayments from residential mortgage loans
Proceeds from sale of residential mortgage loans
Principal repayments from consumer loans
Proceeds from sale of excess mortgage servicing rights
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
107,666
815,451
94,807
13,313
401,403
13,505
8,880,766
182,384
126,319
86,241
95,030
726,176
38,700
11,176
301,876
—
6,594,868
261,489
55,851
71,570
129,112
135,948
46,496
643,788
—
—
4,468,398
425,761
37,938
57,699
Net cash provided by (used in) investing activities
(1,777,579)
(182,583)
(233,188)
128
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(dollars in thousands)
Cash Flows From Financing Activities
Repayments of repurchase agreements
Year Ended December 31,
2017
2016
2015
(54,289,124)
(29,866,052)
(8,798,578)
Margin deposits under repurchase agreements and derivatives
(1,056,408)
(487,072)
(387,143)
Repayments of notes and bonds 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 and bonds payable
Issuance of common stock
Costs related to issuance of common stock
Noncontrolling interest in equity of consolidated subsidiaries - contributions
Noncontrolling interest in equity of consolidated subsidiaries - distributions
Purchase of noncontrolling interests in the Buyer
Net cash provided by (used in) financing activities
(8,971,523)
(10,843,732)
(7,286,860)
(6,610)
(570,232)
(37,908)
(433,414)
57,762,563
31,015,797
1,058,791
8,057,720
835,465
(936)
—
(84,196)
(65,860)
2,669,650
486,050
9,719,242
279,600
(825)
—
(97,560)
(3,280)
(269,154)
(45,654)
(303,023)
9,607,475
391,705
6,053,950
882,166
(3,512)
—
(81,596)
—
28,930
Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash
(7,647)
109,059
102,235
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period
453,697
344,638
242,403
Cash, Cash Equivalents, and Restricted Cash, End of Period
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest
Cash paid during the period for income taxes
$
$
446,050
$
453,697
$
344,638
442,287
$
350,028
$
244,188
5,021
1,109
535
Supplemental Schedule of Non-Cash Investing and Financing Activities
Dividends declared but not paid
Reclassification resulting from the application of ASU No. 2014-11
Purchase of Agency and Non-Agency RMBS, settled after year end
Sale of investments, primarily Agency RMBS, settled after year 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 distributions from Consumer Loan Companies
Non-cash distributions from LoanCo
Non-cash distributions to noncontrolling interest
Portion of HLSS Acquisition (Note 1) paid in common stock
Capital contributions by HLSS Ltd.
MSR purchase price holdback
Real estate securities retained from loan securitizations
Remeasurement of Consumer Loan Companies noncontrolling interest
Ocwen transaction (Note 5) - excess mortgage servicing rights
Ocwen transaction (Note 5) - servicer advance investments
Ocwen transaction (Note 5) - mortgage servicing rights financing receivables, at
fair value
See notes to consolidated financial statements.
129
153,681
—
1,169,896
1,030,850
141,968
23,080
—
44,587
—
—
—
40,854
403,270
—
71,982
481,220
64,450
115,356
—
1,381,968
1,687,788
249,497
316,199
25
—
69,466
—
—
90,058
165,782
110,438
—
—
—
106,017
85,955
725,672
1,538,481
90,414
—
585
—
—
434,092
5,161
—
36,967
—
—
—
—
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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. Drive Shack Inc.
(“Drive Shack”), formerly Newcastle Investment Corp., was the sole stockholder of New Residential until the spin-off, 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 managed Drive Shack, and manages
investment funds that indirectly own a majority of the outstanding interests in Nationstar Mortgage LLC (“Nationstar”), a leading
residential mortgage servicer, and investment funds that own a majority of the outstanding common stock of OneMain Holdings,
Inc. (formerly Springleaf Holdings, Inc.) (together with its subsidiaries, “OneMain”), former managing member of the Consumer
Loan Companies (Note 9).
As of December 31, 2017, New Residential conducted its business through the following segments: (i) investments in excess
mortgage servicing rights (“Excess MSRs”), (ii) investments in mortgage servicing rights (“MSRs”), (iii) Servicer Advance
Investments (including the basic fee component of the related MSRs), (iv) investments in real estate securities, (v) investments in
residential mortgage loans, (vi) investments in consumer loans and (vii) 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, 2017. In addition, Fortress, through its affiliates, held options relating to approximately 16.4 million shares
of New Residential’s common stock as of December 31, 2017.
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”). 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.
130
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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, 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 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 HLSS Acquisition 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 $5.1 million.
131
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
New Residential has performed an allocation of the purchase price to HLSS’s assets and liabilities, as set forth below.
Total Consideration ($ in millions)
Assets
Cash and cash equivalents
Servicer advance investments, 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 and bonds payable
Accrued expenses and other liabilities(D)(E)
Total Liabilities Assumed
Net Assets
$
$
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
$
$
(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 which arose from contingencies regarding HLSS matters.
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
were triggered by a change in control and continued employment for a specified period post-acquisition. As future service was
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.
132
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 year ended December 31, 2015 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)
$
731,660
322,365
The 2015 unaudited supplemental pro forma financial information has been adjusted to exclude 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 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 between
April 6, 2015 and December 31, 2015 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 remained
in effect following the HLSS Acquisition. Pursuant to the Ocwen Purchase Agreement, HLSS and HLSS Holdings, LLC 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 an “Ocwen Sale Supplement” and together, the “Ocwen Sale Supplements”). As of March 31, 2015, the UPB of the residential
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.
The Ocwen Sale Supplements have an initial term of up to eight years (commencing on the date of the applicable Ocwen 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 residential 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 agreed, subject to certain limitations, not to cause Ocwen to use
133
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
commercially reasonable efforts to transfer servicing of the related residential mortgage loans to a third-party servicer with respect
to such downgrades before April 6, 2017.
The Ocwen Purchase Agreement and Ocwen 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 Ocwen 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 Ocwen Sale
Supplement thereto, (ii) provide that HLSS Holdings, LLC 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 Supplement until the earlier of eight years from the date of the related Ocwen 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
Ocwen Sale Supplement, in which case the related term would expire on such anniversary, and (iv) provide that Ocwen will
reimburse HLSS Holdings, LLC, 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 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.
See Note 5 regarding the Ocwen Transaction which occurred in July 2017. See Note 18 regarding the New Ocwen Agreements
entered into in January 2018.
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. Distributions from equity method investees are classified in the Statements of Cash Flows based on the cumulative
earnings approach, where all distributions up to cumulative earnings are classified as distributions of earnings.
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
134
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 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) 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.
New Residential has determined that the RPL Borrowers (Note 8) should be evaluated for consolidation under the VIE model
rather than the voting interest entity model as the equity holders as a group lack the characteristics of a controlling financial interest.
Under the VIE model, New Residential’s consolidated subsidiaries have both 1) the power to direct the most significant activities
of the RPL Borrowers and 2) significant variable interests in each of the RPL Borrowers, through their control of the related
optional redemption feature and their ownership of certain notes issued by the RPL Borrowers and, therefore, meet the primary
beneficiary criterion and consolidate the RPL Borrowers. The RPL Borrowers’ summary balance sheet is included in Note 8.
New Residential has determined that the Consumer Loan SPVs (Note 9) should be evaluated for consolidation under the VIE
model rather than the voting interest entity model as the equity holders, individually and as a group, lack the characteristics of a
controlling financial interest. Under the VIE model, New Residential’s consolidated subsidiaries, the Consumer Loan Companies
(Note 9), have both 1) the power to direct the most significant activities of the Consumer Loan SPVs and 2) significant variable
interests in each of the Consumer Loan SPVs, through their control of the related optional redemption feature and their ownership
of certain notes issued by the Consumer Loan SPVs and, therefore, meet the primary beneficiary criterion and consolidate the
Consumer Loan SPVs. The Consumer Loan SPVs’ summary balance sheet is included in Note 9.
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
Servicer Advance Investments (Note 6) and Consumer Loans (Note 9), as well as HLSS for the period of April 6, 2015 through
October 23, 2015.
Certain prior period amounts have been reclassified to conform to the current period’s presentation.
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 rates, interest rates, spreads or other market factors, including risks that impact the
value of the collateral underlying New Residential’s investments. New Residential 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 its servicers’ and subservicers’ ability to perform their obligations servicing the loans underlying New
Residential’s Excess MSRs, MSRs, MSR Financing Receivables, Servicer Advance Investments, Non-Agency RMBS and loans.
If a servicer is terminated, New Residential’s right to receive its portion of the cash flows related to interests in MSRs may also
be terminated.
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.
135
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 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 MSRs — MSRs are aggregated into pools as applicable; each pool of MSRs is accounted for in the aggregate.
Income from MSRs is recorded in “Servicing revenue, net” and is comprised of three components: (i) income receivable from the
MSRs, less (ii) amortization of the basis of the MSRs, plus or minus (iii) the mark-to-market on the MSRs. Amortization of the
basis of the MSRs is based on the remaining UPB of the residential mortgage loans underlying the MSRs relative to their UPB at
acquisition. 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 MSRs.
Investments in MSR Financing Receivables — As a result of the length of the initial term of the related subservicing agreements
(Note 5), although these MSRs were legally sold, solely for accounting purposes New Residential determined that substantially
all of the risks and rewards inherent in owning the MSRs had not been transferred, and that the purchase agreements would not
be treated as sales under GAAP. Therefore, rather than recording investments in MSRs, New Residential recorded investments in
mortgage servicing rights financing receivables. Income from these investments is recorded as interest income, and New Residential
has elected to measure these investments at fair value, with changes in fair value flowing through Change in fair value of investments
in mortgage servicing rights financing receivables.
Servicer Advance Investments — New Residential accounts for its Servicer Advance Investments similarly to its investments in
Excess MSRs. Interest income for Servicer Advance Investments is accreted into interest income on an effective yield or “interest”
method, based upon the expected aggregate cash flows of the Servicer Advance Investments, 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 Advance Investments, 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
136
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
securities acquired at a discount for credit quality (i.e., where it is probable at acquisition that New Residential will not collect all
contractually required interest and principal repayments), the difference between contractual cash flows and expected cash flows
at acquisition is not accreted (non-accretable difference). For these securities, the excess of expected cash flows over the carrying
value (accretable yield) is recognized as interest income on an effective yield basis.
Depending on the nature of the investment, changes to expected cash flows may result in a prospective change to yield or a
retrospective change which would include a catch up adjustment. Deferred fees and costs, if any, are recognized as a reduction to
the interest income over the terms of the securities using the interest method. Upon settlement of securities, the specific identification
method is used to determine the excess (or deficiency) of net proceeds over the net carrying value of such security recognized as
a realized gain (or loss) in the period of settlement.
Investments in Residential Mortgage Loans, REO and Consumer Loans — 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, and considers
anticipated prepayment rates.
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
137
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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, if any, the key terms of the loans and historical
and anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used
to estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining
impairment and in estimating the resulting loss allowance.
For 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:
Year Ended December 31,
2016
2015
2017
Accretion of servicer advance investment and receivable interest income
$
542,983
$
364,350
$
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 and bonds payable
103,053
398,213
(12,076)
(789)
1,031,384
$
$
150,141
253,243
(18,326)
(1,476)
747,932
$
352,316
134,565
65,925
(26,036)
(1,472)
525,298
(A)
Includes accretion of the accretable yield on PCD loans.
138
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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
Gain (loss) on transfer of loans to other assets
Gain on Excess MSR recapture agreements
Gain (loss) on Ocwen common stock
Other income (loss)
Year Ended December 31,
2016
2015
2017
$
$
(2,190) $
2,883
22,938
488
2,384
5,346
(27,741)
4,108
$
5,774
(2,322)
18,356
2,938
2,802
—
935
28,483
$
$
(3,538)
879
2,065
(690)
2,999
—
3,674
5,389
Gain (Loss) on Settlement of Investments, Net — This item is comprised of the following:
Year Ended December 31,
2016
2015
2017
Gain (loss) on sale of real estate securities, net
$
20,642
$
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
39,731
(39,214)
(10,201)
(9,215)
8,567
$
10,310
$
(27,460) $
12,142
(27,491)
(1,810)
4,690
(8,871)
(48,800) $
13,096
35,175
(46,982)
(2,170)
(10,742)
(8,003)
(19,626)
Interest Expense — New Residential finances certain investments using floating rate repurchase agreements and loans. Interest
is expensed as incurred.
General and Administrative Expenses, Loan Servicing Expense and Subservicing Expense — General and administrative
expenses, including legal fees, audit fees, insurance premiums, and other costs, as well as loan servicing and subservicing 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 Excess MSRs, MSRs, MSR
Financing Receivables, and Servicer Advance Investments. 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,” “Income Recognition — Investments in MSRs” and “Income Recognition — Servicer Advance Investments.”
Investments in Real Estate and Other Securities — New Residential has classified its investments in real estate and other 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.
139
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Investments in Residential Mortgage Loans and Consumer Loans — 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
institutions exceed insured limits. As of December 31, 2017 and 2016, New Residential held: (i) $62.4 million and $82.1 million,
respectively, of restricted cash related to the financing of servicer advances that has been pledged to the note holders for interest
and fees payable, (ii) $9.9 million and $22.3 million, respectively, of restricted cash related to financing requirements of the
corporate notes secured by Excess MSRs (Note 11), (iii) $3.3 million and $2.2 million, respectively, of restricted cash related to
Ginnie Mae Excess MSRs, (iv) $46.1 million and $56.4 million, respectively, of restricted cash related to the financing of consumer
loans, and (iv) $28.6 million and $0.0 million, respectively, of restricted cash related to MSRs.
Derivatives — New Residential has 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 (subject to certain
adjustments). Distributions 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.
140
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Other Assets and Other Liabilities — Other assets and liabilities are comprised of the following:
Other Assets
December 31,
2017
2016
Accrued Expenses and Other
Liabilities
December 31,
2017
2016
$
53,150
$
55,481
Interest payable
$
28,821
$
Margin receivable, net
Other receivables
Principal and interest receivable
Receivable from government agency(A)
Call rights
Derivative assets (Note 10)
Servicing fee receivables
Ginnie Mae EBO servicer advances
receivable, net(B)
Due from servicers
Ocwen common stock, at fair value
Prepaid expenses
Other assets
10,635
48,373
41,429
327
2,423
60,520
8,916
38,601
19,259
7,308
21,240
16,350 Accounts payable
Derivative liabilities
52,738
(Note 10)
54,706 Current taxes payable
337 Due to servicers
MSRs purchase price
6,762
holdback
7,405 Other liabilities
73,017
697
—
24,571
101,290
10,718
23,108
31,299
3,021
2,314
77,148
60,436
8,118
$
239,114
$
205,444
14,829
22,134
—
9,487
4,269
$
312,181
$
244,498
(A)
(B)
Represents claims receivable from the 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.
Represents an HLSS (Note 1) loan to a counterparty collateralized by servicer advances on Ginnie Mae EBO loans.
Servicer Advances Receivable — Represents servicer advances due to New Residential’s servicer subsidiary, NRM (Note 5). The
servicer advances receivable purchased in conjunction with MSRs are recorded with purchase discounts. Subsequent advances
are recorded at cost, subject to impairment. Any related purchase discounts are accreted into servicing revenue, net (MSRs) or
interest income (MSR financing receivables) on a straight-line basis over the estimated weighted average life of the advances.
Repurchase Agreements and Notes and Bonds Payable — New Residential’s repurchase agreements are generally short-term
debt that expire within one year. Such agreements and notes and bonds 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 only permitted after
December 31, 2016. 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 has evaluated the new guidance and determined that interest income, gains and losses on
financial instruments and income from servicing residential mortgage loans are outside the scope of ASC No. 606. For income
from servicing residential mortgage loans, New Residential considered that the FASB Transition Resource Group members
generally agreed that an entity should look to ASC No. 860, Transfers and Servicing, to determine the appropriate accounting for
these fees and ASC No. 606 contains a scope exception for contracts that fall under ASC No. 860. As a result, New Residential
does not expect the adoption of ASU No. 2014-09 to have a material impact on its consolidated financial statements.
141
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 does not expect the adoption of ASU No. 2016-01 to have a material impact on its consolidated
financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit
Losses on Financial Instruments. The standard requires that a financial asset measured at amortized cost basis be presented at the
net amount expected to be collected, net of an allowance for all expected (rather than incurred) credit losses. The measurement of
expected credit losses is based on relevant information about past events, including historical experience, current conditions, and
reasonable and supportable forecasts that affect the collectibility of the reported amount. The standard also changes the accounting
for purchased credit deteriorated assets and available-for-sale securities, which will require the recognition of credit losses through
a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-
than-temporary. ASU No. 2016-13 is effective for New Residential in the first quarter of 2020. Early adoption is permitted beginning
in 2019. An entity should apply ASU No. 2016-13 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, which at the date of adoption is expected to increase the allowance for credit losses
with a resulting negative adjustment to retained earnings.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts
and Cash Payments. The standard provides guidance on the treatment of certain transactions within the statement of cash flows.
ASU No. 2016-15 is effective for New Residential in the first quarter of 2018. Early adoption is permitted. New Residential adopted
ASU No. 2016-15 in the third quarter of 2016 and it did not have an impact on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than
Inventory. The standard requires recognition of the income tax consequences of an intra-entity transfer of an asset other than
inventory when the transfer occurs. ASU No. 2016-16 is effective for New Residential in the first quarter of 2018. Early adoption
is permitted as of the beginning of an annual reporting period for which financial statements have not been issued. New Residential
does not expect the adoption of ASU No. 2016-16 to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. The standard
requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash. ASU No. 2016-18 is effective for New Residential in the first quarter of 2018. Early adoption
is permitted. New Residential adopted ASU No. 2016-18 in the fourth quarter of 2016 and has included changes in restricted cash
in its statements of cash flows for all periods presented.
3. SEGMENT REPORTING
New Residential conducts its business through the following segments: (i) investments in Excess MSRs, (ii) investments in MSRs,
(iii) Servicer Advance Investments, (iv) investments in real estate securities, (v) investments in residential mortgage loans,
(vi) investments in consumer loans, and (vii) corporate. The corporate segment consists primarily of (i) general and administrative
expenses, (ii) the management fees and incentive compensation related to the Management Agreement and (iii) corporate cash
and related interest income. Securities owned by New Residential (Note 7) that are collateralized by servicer advances and consumer
loans are included in the Servicer Advances and Consumer Loans segments, respectively. Secured corporate loans effectively
collateralized by Excess MSRs are included in the Excess MSRs segment.
142
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Summary financial data on New Residential’s segments is given below, together with a reconciliation to the same data for New
Residential as a whole:
Year Ended December 31, 2017
Interest income
Interest expense
Net interest income (expense)
Impairment
Servicing revenue, net
Other income (loss)
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
$
$
$
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
MSRs
Servicer
Advances
Real Estate
Securities
Residential
Mortgage
Loans
Consumer
Loans
Corporate
Total
$ 103,053
$
78,715
$
531,645
$
431,706
$ 110,087
$
263,844
$
629
$ 1,519,679
36,086
66,967
—
—
18,919
606
85,280
—
43,327
35,388
—
424,349
66,608
180,604
345,741
22,393
154,174
377,471
—
—
89,034
5,120
461,385
143,793
122,997
308,709
10,334
—
(16,371)
1,471
280,533
—
51,473
58,614
12,593
—
16,175
31,529
30,667
1,272
52,808
211,036
63,165
—
28,075
43,552
—
629
—
—
5,346
159,695
460,865
1,058,814
86,092
424,349
207,786
422,577
132,394
(153,720)
1,182,280
170
—
167,628
85,280
$
323,348
$
317,592
— $
— $
11,227
85,280
$
323,348
$
306,365
$
$
$
280,533
$
29,395
$
132,224
$ (153,720) $ 1,014,652
— $
— $
45,892
$
— $
57,119
280,533
$
29,395
$
86,332
$ (153,720) $
957,533
December 31, 2017
Investments
Cash and cash equivalents
Restricted cash
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total equity
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
MSRs
Servicer
Advances
Real Estate
Securities
Residential
Mortgage
Loans
Consumer
Loans
Corporate
Total
$ 1,345,478
$ 2,334,232
$ 4,027,379
$ 8,071,140
$ 2,544,984
$ 1,425,675
$
— $ 19,748,888
408
104,545
13,153
2,891
30,454
726,530
78,353
60,516
18,576
38,728
15,483
—
—
1,098,921
113,035
40,687
46,129
28,621
$ 1,361,930
$ 3,195,761
$ 4,184,824
$ 9,208,789
$ 2,673,502
$ 1,541,112
$
483,978
$ 1,761,011
$ 3,526,380
$ 6,534,300
$ 2,108,007
$ 1,332,854
17,594
—
295,798
150,252
30,050
2,018,624
47,644
$ 22,213,562
— $ 15,746,530
$
$
1,033
194,465
(5,658)
1,200,905
23,917
6,596
249,612
1,670,870
485,011
1,955,476
3,520,722
7,735,205
2,131,924
1,339,450
249,612
17,417,400
876,919
1,240,285
664,102
1,473,584
541,578
201,662
(201,968)
4,796,162
Noncontrolling interests in equity of
consolidated subsidiaries
—
—
71,491
—
—
34,466
—
105,957
Total New Residential stockholders’ equity
Investments in equity method investees
$
$
876,919
$ 1,240,285
$
592,611
$ 1,473,584
$
541,578
$
167,196
$ (201,968) $
4,690,205
171,765
$
— $
— $
— $
— $
51,412
$
— $
223,177
143
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Year Ended December 31, 2016
Interest income
Interest expense
Net interest income (expense)
Impairment
Servicing revenue, net
Other income (loss)
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
$
$
$
December 31, 2016
Investments
Cash and cash equivalents
Restricted cash
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total equity
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
MSRs
Servicer
Advances
Real Estate
Securities
Residential
Mortgage
Loans
Consumer
Loans
Corporate
Total
$
150,141
$
— $
369,809
$
265,862
$
56,249
$
232,750
$
1,924
$ 1,076,735
19,160
130,981
—
—
11,398
1,259
141,120
—
—
—
—
118,169
—
10,693
107,476
15,683
224,879
144,930
—
—
(4,624)
3,724
136,582
21,036
49,283
216,579
10,264
—
(47,747)
1,480
157,088
—
25,675
30,574
23,870
—
26,779
14,961
18,522
2,117
54,427
178,323
53,846
—
76,518
39,466
—
1,924
—
—
13
102,627
161,529
(100,690)
75
—
373,424
703,311
87,980
118,169
62,337
174,210
621,627
38,911
141,120
$
91,793
$
115,546
— $
— $
40,136
141,120
$
91,793
$
75,410
$
$
$
157,088
$
16,405
$
161,454
— $
— $
38,127
157,088
$
16,405
$
123,327
$
$
$
(100,690) $
582,716
— $
78,263
(100,690) $
504,453
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
MSRs
Servicer
Advances
Real Estate
Securities
Residential
Mortgage
Loans
Consumer
Loans
Corporate
Total
$ 1,594,243
$
659,483
$ 5,806,740
$ 4,973,711
$
947,017
$ 1,799,486
$
— $ 15,780,680
2,225
24,538
2,404
95,840
—
94,368
82,122
8,405
—
5,366
—
75,102
180,705
1,753,076
100,951
27,962
56,435
35,921
$ 1,623,410
$
729,145
$
$
830,425
$ 6,163,935
$ 6,735,192
$ 1,053,334
$ 1,919,804
— $ 5,698,160
$ 4,203,249
$
783,006
$ 1,767,676
56,436
—
290,602
163,095
16,993
2,165,152
73,429
$ 18,399,529
— $ 13,181,236
$
$
2,189
132,417
24,123
1,394,682
22,689
6,382
167,634
1,750,116
731,334
892,076
132,417
5,722,283
5,597,931
805,695
1,774,058
167,634
14,931,352
698,008
441,652
1,137,261
247,639
145,746
(94,205)
3,468,177
Noncontrolling interests in equity of
consolidated subsidiaries
—
—
173,057
—
—
35,020
—
208,077
Total New Residential stockholders’ equity
Investments in equity method investees
$
$
892,076
194,788
$
$
698,008
$
268,595
$ 1,137,261
$
247,639
$
110,726
$
(94,205)
$ 3,260,100
— $
— $
— $
— $
— $
— $
194,788
144
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Servicing Related Assets
Residential Securities
and Loans
Excess MSRs
Servicer
Advances
Real Estate
Securities
Residential
Mortgage
Loans
Consumer
Loans
Corporate
Total
Year Ended December 31, 2015
Interest income
Interest expense
Net interest income (expense)
Impairment
Other income (loss)
Operating expenses
Income (Loss) Before Income Taxes
Income tax expense (benefit)
Net Income (Loss)
Noncontrolling interests in income of
consolidated subsidiaries
Net income (loss) attributable to common
stockholders
$
134,565
$
354,616
$
110,123
$
43,180
$
1
$
2,587
$
645,072
11,625
122,940
—
72,802
1,101
194,641
—
216,837
137,779
—
18,230
91,893
5,788
(53,426)
(33,604)
14,316
70,037
(8,127)
1,227
51,274
—
21,510
21,670
18,596
15,405
13,415
5,064
1,615
(1,614)
—
43,954
228
4,196
(1,609)
—
(3,102)
87,536
42,112
(92,247)
274,013
371,059
24,384
42,029
117,823
270,881
(3,199)
325
—
(11,001)
$
$
$
194,641
$
78,164
— $
18,407
194,641
$
59,757
$
$
$
51,274
$
8,263
$
41,787
$
(92,247) $
281,882
— $
— $
— $
(5,161) $
13,246
51,274
$
8,263
$
41,787
$
(87,086) $
268,636
4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
The following table presents activity related to the carrying value of New Residential’s direct investments in Excess MSRs:
Balance as of December 31, 2015
Purchases
Interest income
Other income
Proceeds from repayments
Change in fair value
Balance as of December 31, 2016
Purchases
Interest income
Other income
Proceeds from repayments
Proceeds from sales
Change in fair value
Ocwen Transaction (Note 5)
Balance as of December 31, 2017
Servicer
Nationstar
SLS(A)
$
698,304
$
5,307
Ocwen(B)
877,906
$
Total
$ 1,581,517
—
63,772
2,802
(145,186)
(8,399)
611,293
—
46,393
2,384
(120,485)
(13,505)
6,153
—
124
(244)
—
(1,015)
(237)
3,935
—
(191)
—
(1,400)
—
569
—
$
532,233
$
2,913
$
—
124
86,613
150,141
—
(181,631)
1,339
784,227
—
2,802
(327,832)
(7,297)
1,399,455
—
56,851
103,053
1,993
(130,122)
—
(2,400)
(71,982)
638,567
4,377
(252,007)
(13,505)
4,322
(71,982)
$ 1,173,713
(A)
(B)
Specialized Loan Servicing LLC (“SLS”).
Ocwen Loan Servicing LLC, a subsidiary of Ocwen, services the loans underlying the Excess MSRs and Servicer
Advance Investments acquired from HLSS (Note 1).
In July 2017, New Residential entered into the Ocwen Transaction as described in Note 5. Subsequent to the Ocwen Transaction,
the Excess MSRs formerly serviced by Ocwen become reclassified, as described in Note 5, as the underlying MSRs are transferred
to NRM.
145
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Nationstar, SLS, or Ocwen, as applicable, as servicer, performs all of the servicing and advancing functions, and retains the ancillary
income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.
New Residential has entered into a “recapture agreement” with respect to each of the Excess MSR investments serviced by
Nationstar and SLS. Under such arrangements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on
any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. 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 Servicer Advance Investments (Note 6).
New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial
instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk
and other market factors on the Excess MSRs.
The following is a summary of New Residential’s direct investments in Excess MSRs:
UPB of
Underlying
Mortgages
December 31, 2017
Interest in Excess MSR
New
Residential(D)
Fortress-
managed funds
Nationstar
Weighted
Average Life
Years(A)
Amortized
Cost Basis(B)
Carrying
Value(C)
Agency
Original and Recaptured Pools
$
63,839,281
Recapture Agreements
—
63,839,281
32.5% - 66.7%
(53.5%)
32.5% - 66.7%
(53.5%)
0.0% - 40.0%
20.0% - 35.0%
5.8
$
249,003
$
280,033
0.0% - 40.0%
20.0% - 35.0%
11.4
6.2
18,944
267,947
44,603
324,636
Non-Agency(E)
Nationstar and SLS Serviced:
Original and Recaptured Pools $
64,146,430
33.3% - 100.0%
(59.6%)
0.0% - 50.0%
0.0% - 33.3%
5.4
$
154,938
$
190,696
Recapture Agreements
33.3% - 100.0%
(59.6%)
—
0.0% - 50.0%
0.0% - 33.3%
Ocwen Serviced Pools
89,135,588
100.0%
—%
—%
Total
153,282,018
$
217,121,299
11.3
6.5
6.3
6.3
7,489
598,149
760,576
19,814
638,567
849,077
$
1,028,523
$ 1,173,713
146
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
UPB of
Underlying
Mortgages
December 31, 2016
Interest in Excess MSR
New
Residential(D)
Fortress-
managed funds
Nationstar
Weighted
Average Life
Years(A)
Amortized
Cost Basis(B)
Carrying
Value(C)
Agency
Original and Recaptured Pools
$
78,295,454
Recapture Agreements
—
78,295,454
32.5% - 66.7%
(53.3%)
32.5% - 66.7%
(53.3%)
0.0% - 40.0%
20.0% - 35.0%
5.9
$
296,508
$
330,323
0.0% - 40.0%
20.0% - 35.0%
12.3
6.4
25,524
322,032
51,434
381,757
Non-Agency(E)
Nationstar and SLS Serviced:
Original and Recaptured Pools $
78,209,375
33.3% - 100.0%
(59.4%)
0.0% - 50.0%
0.0% - 33.3%
5.2
$
183,775
$
219,980
Recapture Agreements
33.3% - 100.0%
(59.4%)
—
0.0% - 50.0%
0.0% - 33.3%
Ocwen Serviced Pools
121,471,168
100.0%
—%
—%
12.2
6.6
6.4
6.4
11,370
741,411
936,556
13,491
784,227
1,017,698
$
1,258,588
$ 1,399,455
199,680,543
$
277,975,997
Total
(A)
(B)
(C)
(D)
(E)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this
investment.
The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture
agreements and related Excess MSRs at the time they were acquired.
Carrying Value represents the fair value of the pools or recapture agreements, as applicable.
Amounts in parentheses represent weighted averages.
New Residential also invested in related Servicer Advance Investments, including the basic fee component of the related
MSR as of December 31, 2017 and 2016 (Note 6) on $139.5 billion and $186.4 billion UPB, respectively, underlying
these Excess MSRs.
Changes in fair value recorded in other income is comprised of the following:
Original and Recaptured Pools
Recapture Agreements
Year Ended December 31,
2017
2016
2015
$
$
(5,630) $
9,952
4,322
$
(11,221) $
3,924
(7,297) $
34,936
3,707
38,643
As of December 31, 2017 and 2016, weighted average discount rates of 8.9% and 9.8%, respectively, were used to value New
Residential’s investments in Excess MSRs (directly and through equity method investees).
New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential
and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant
to the fair value option for financial instruments to provide users of the financial statements with better information regarding the
effects of prepayment risk and other market factors.
147
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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,
2017
321,197
22,333
—
343,530
171,765
$
$
$
2016
372,391
17,184
—
389,575
194,788
$
$
$
50.0%
50.0%
Year Ended December 31,
2016
2015
2017
$
$
27,450
(2,149)
(68)
25,233
$
$
36,502
(3,359)
(91)
33,052
$
$
51,811
10,615
(107)
62,319
New Residential’s investments in equity method investees changed during the years ended December 31, 2017 and 2016 as follows:
Balance at beginning of period
Contributions to equity method investees
Distributions of earnings from equity method investees
Distributions of capital from equity method investees
Change in fair value of investments in equity method investees
Balance at end of period
2017
2016
$
$
194,788
—
(13,668)
(21,972)
12,617
171,765
$
$
217,221
—
(22,046)
(16,913)
16,526
194,788
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
Agency
Original and Recaptured Pools
Recapture Agreements
December 31, 2017
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)
$ 50,501,054
—
$ 50,501,054
66.7%
66.7%
50.0%
50.0%
$
$
209,924
23,571
233,495
$
$
271,785
49,412
321,197
5.7
11.4
6.3
December 31, 2016
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)
$ 60,677,300
—
$ 60,677,300
66.7%
66.7%
50.0%
50.0%
$
$
247,105
29,974
277,079
$
$
314,401
57,990
372,391
5.8
12.2
6.5
148
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(A)
(B)
(C)
(D)
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.
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR
investments:
State Concentration
California
Florida
New York
Texas
New Jersey
Maryland
Illinois
Georgia
Virginia
Massachusetts
Pennsylvania
Arizona
Other U.S.
Aggregate Direct and
Equity Method Investees
Percentage of Total
Outstanding Unpaid
Principal Amount
December 31,
2017
2016
24.0%
24.1%
8.7%
8.5%
4.6%
4.1%
3.7%
3.5%
3.1%
3.0%
2.7%
2.6%
2.5%
8.6%
7.9%
4.6%
4.2%
3.7%
3.5%
3.1%
3.1%
2.7%
2.5%
2.5%
29.0%
100.0%
29.5%
100.0%
Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states.
Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability
to make mortgage payments and therefore could have a meaningful, negative impact on the Excess MSRs.
See Note 11 regarding the financing of Excess MSRs.
5. INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING
RECEIVABLES
Mortgage Servicing Rights
In 2016, a subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), became a licensed or otherwise eligible
mortgage servicer. NRM is presently licensed or otherwise eligible to hold MSRs in all states within the United States and the
District of Columbia. Additionally, NRM has received approval from the FHA to hold MSRs associated with FHA-insured mortgage
loans, from the Federal National Mortgage Association (“Fannie Mae”) to hold MSRs associated with loans owned by Fannie
Mae, and from the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to hold MSRs associated with loans owned by
Freddie Mac. Fannie Mae and Freddie Mac are collectively referred to as the Government Sponsored Enterprises (“GSEs”). As
an approved Fannie Mae Servicer, Freddie Mac Servicer and FHA-approved mortgagee, NRM is required to conduct aspects of
149
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
its operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to
maintain those approvals. As of December 31, 2017, NRM is in compliance with such policies and guidelines, as well as with
other ongoing requirements applicable to mortgage loan servicers under applicable state and federal laws. NRM engages third
party licensed mortgage servicers as subservicers to perform the operational servicing duties in connection with the MSRs it
acquires, in exchange for a subservicing fee which is recorded as “Subservicing expense” on New Residential’s Consolidated
Statements of Income. As of December 31, 2017, these subservicers include Nationstar, Ditech, PHH, Ocwen, Flagstar, and Citi,
which subservice 41.2%, 29.9%, 20.9%, 6.3%, 1.1%, and 0.6% of the underlying UPB of the related mortgages, respectively
(includes both Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables).
New Residential has entered into recapture agreements with respect to each of its MSR investments subserviced by Ditech (defined
below) and Nationstar. Under the recapture agreements, New Residential is generally entitled to the MSRs on any initial or
subsequent refinancing by Ditech or Nationstar of a loan in the original portfolios.
Walter MSRs
On August 8, 2016, NRM entered into a flow and bulk agreement for the purchase and sale of mortgage servicing rights (the
“Walter Purchase Agreement”) with Ditech Financial LLC (“Ditech”), a subsidiary of Walter Investment Management Corp. During
the year ended December 31, 2016, pursuant to the Walter Purchase Agreement, NRM purchased MSRs, and related servicer
advances receivable, with respect to certain Fannie Mae residential mortgage loans with a total UPB of $32.3 billion for a purchase
price of approximately $211.4 million. During the year ended December 31, 2017, pursuant to the Walter Purchase Agreement,
NRM purchased Walter Flow MSRs with respect to certain Fannie Mae and Freddie Mac residential mortgage loans with a total
UPB of $9.3 billion for a purchase price of approximately $73.3 million. Ditech subservices the related residential mortgage loans.
On November 10, 2016, NRM and Walter Capital Opportunity, LP and its subsidiaries entered into an agreement to purchase the
MSRs, and related servicer advances receivable, with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage
loans with a total UPB of approximately $32.5 billion for a purchase price of approximately $244.3 million. Ditech subservices
the related residential mortgage loans.
FirstKey MSRs
On December 1, 2016, NRM and FirstKey Mortgage, LLC (“FirstKey”) entered into an agreement (the “FirstKey Purchase
Agreement”) to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Fannie Mae and
Freddie Mac residential mortgage loans with an aggregate total UPB of approximately $12.5 billion for a purchase price of
approximately $89.1 million. The purchase settled in December 2016. Flagstar and Nationstar subservice the related residential
mortgage loans, as described below.
Citi MSRs
On January 27, 2017, NRM entered into an agreement with CitiMortgage, Inc. (“Citi”) to purchase the MSRs and related servicer
advances receivable (the “Citi Transaction”) with respect to a pool of seasoned Fannie Mae and Freddie Mac residential mortgage
loans with approximately $92.5 billion in total UPB for a purchase price of approximately $906.0 million, with a purchase price
holdback of approximately $45.3 million. The purchase settled in March 2017. As of December 31, 2017, Nationstar subservices
primarily all of the related residential mortgage loans.
United Shore MSRs
On January 31, 2017, NRM entered into an agreement with United Shore Financial Services, LLC (“United Shore”) to purchase
the MSRs, and related servicer advances receivable, with respect to a pool of existing Fannie Mae and Freddie Mac residential
mortgage loans with approximately $9.8 billion in total UPB for a purchase price of approximately $94.8 million, with a purchase
price holdback of approximately $9.5 million. The purchase settled in February 2017, and subservicing transferred to Nationstar
during March and April 2017. On August 8, 2017, NRM entered into an agreement with United Shore to purchase the MSRs, and
related servicer advances receivable, with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage loans
with approximately $2.1 billion in total UPB for a purchase price of approximately $19.7 million, with a purchase price holdback
of approximately $2.0 million. The purchase settled in August 2017. Nationstar subservices the related residential mortgage loans,
as described below.
150
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
RCS Transaction
On February 17, 2017, NRM entered into an agreement with Residential Credit Solutions, Inc. (“RCS”) to purchase the MSRs,
and related servicer advances receivable, with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage
loans with approximately $5.2 billion in total UPB for a purchase price of approximately $48.6 million with a purchase price
holdback of approximately $4.9 million. The purchase settled in February and March 2017. Ditech subservices the related residential
mortgage loans.
Subservicing Agreements
On January 27, 2017, NRM entered into agreements pursuant to which Nationstar will subservice certain MSR portfolios on behalf
of NRM, subject to GSE and other regulatory approvals. In 2017, subservicing duties for a portion of the residential mortgage
loans related to the FirstKey MSRs and Citi MSRs, respectively, were transferred to Nationstar from FirstKey and Citi, respectively.
On May 16, 2017, NRM entered into a subservicing agreement with Flagstar Bank, FSB (“Flagstar”). Flagstar was the predecessor
subservicer of the remaining portion of the residential mortgage loans related to the FirstKey MSRs. The subservicing duties
transferred to Flagstar in May 2017.
New Residential records its investments in MSRs at fair value at acquisition and has elected to subsequently measure at fair value
pursuant to the fair value measurement method.
Servicing revenue, net recognized by New Residential related to its investments in MSRs was comprised of the following:
Servicing fee revenue
Ancillary and other fees
Servicing fee revenue and fees
Amortization of servicing rights
Change in valuation inputs and assumptions
Servicing revenue, net
Year Ended December 31,
2017
2016
$
412,971
$
79,050
492,021
(223,167)
155,495
$
424,349
$
29,168
676
29,844
(15,354)
103,679
118,169
The following table presents activity related to the carrying value of New Residential’s investments in MSRs:
Balance as of December 31, 2015
Purchases
Amortization of servicing rights(A)
Change in valuation inputs and assumptions
Balance as of December 31, 2016
Purchases
Amortization of servicing rights(A)
Change in valuation inputs and assumptions
Balance as of December 31, 2017
$
$
$
—
571,158
(15,354)
103,679
659,483
1,143,693
(223,167)
155,495
1,735,504
(A)
Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the
underlying residential mortgage loans.
151
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following is a summary of New Residential’s investments in MSRs as of December 31, 2017 and 2016:
2017
Agency
Non-Agency
Total
2016
Agency
UPB of
Underlying
Mortgages
Weighted
Average Life
(Years)(A)
Amortized
Cost Basis
Carrying
Value(B)
$ 172,392,496
61,654
$ 172,454,150
6.3
5.6
6.3
$
$
1,476,330
—
1,476,330
$ 79,935,302
7.0
$
555,804
$
$
$
1,735,504
—
1,735,504
659,483
(A)
(B)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this
investment.
Carrying Value represents fair value. As of December 31, 2017 and 2016, weighted average discount rates of 9.1% and
12.0%, respectively, were used to value New Residential’s investments in MSRs.
Mortgage Servicing Rights Financing Receivables
PHH Transaction
On December 28, 2016, NRM entered into an agreement with PHH Corporation (together with its subsidiaries, including PHH
Mortgage Corporation, “PHH”) to purchase the MSRs, and related servicer advances receivables, with respect to approximately
$60.1 billion in total UPB of seasoned Agency and private-label residential mortgage loans for a purchase price of approximately
$502.5 million. The purchase settled in stages during 2017. As of December 31, 2017, MSRs, and related servicer advances
receivables, with respect to private-label residential mortgage loans of approximately $6.0 billion in total UPB with a purchase
price of approximately $35.5 million had not been settled. Concurrently with the purchase agreement, NRM entered into a
subservicing agreement with PHH, pursuant to which PHH Mortgage, a wholly owned subsidiary of PHH, subservices the residential
mortgage loans underlying the MSRs acquired by NRM for an initial term of three years, subject to certain conditions. New
Residential has entered into a recapture agreement with respect to each of its MSR investments subserviced by PHH. Under the
recapture agreement, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by PHH of a loan
in the original portfolio.
As a result of the length of the initial term of the related subservicing agreement between NRM and PHH, although the MSRs
were legally sold, solely for accounting purposes New Residential determined that substantially all of the risks and rewards inherent
in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP.
Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in mortgage servicing rights
financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential
has elected to measure the investment at fair value, with changes in fair value flowing through Change in fair value of investments
in mortgage servicing rights financing receivables in the Consolidated Statements of Income.
152
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Ocwen Transaction
On July 23, 2017, New Residential entered into a series of agreements with Ocwen that supersede the arrangements among the
parties set forth in (i) the Master Servicing Rights Purchase Agreement, dated as of October 1, 2012, as amended by Amendment
No. 1 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of December 26, 2012, and Amendment
No. 2 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of April 6, 2015 (as so amended, the “Original
Ocwen MSR Purchase Agreement”), and (ii) certain sale supplements to the Original Ocwen MSR Purchase Agreement, as amended
by Amendment No. 1 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of December 26, 2012,
Amendment to Sale Supplements dated as of July 1, 2013, Amendment to Sale Supplement, dated as of September 30, 2013,
Amendment to Sale Supplements, dated as of February 4, 2014, Amendment No. 2 to Master Servicing Rights Purchase Agreement
and Sale Supplements, dated as of April 6, 2015, and February Amendment, dated as of February 17, 2017 (as so amended, the
“Original Ocwen Sale Supplements” and, together with the Original Ocwen MSR Purchase Agreement, the “Original Ocwen
Agreements”). These transactions (collectively, the “Ocwen Transaction”) are described in further detail below.
In addition, pursuant to a Transaction Agreement dated July 23, 2017, New Residential acquired from Ocwen in a private placement
6,075,510 shares of Ocwen common stock, par value $0.01 per share, at a price per share of $2.29, for a total of approximately
$13.9 million (Note 2).
On July 23, 2017, Ocwen and New Residential entered into a Master Agreement (the “Ocwen Master Agreement”) and a Transfer
Agreement (the “Ocwen Transfer Agreement”) pursuant to which Ocwen and New Residential agreed to undertake certain actions
to facilitate the transfer from Ocwen to New Residential of Ocwen’s remaining interests in the mortgage servicing rights relating
to loans with an aggregate unpaid principal balance of approximately $110.0 billion that are subject to the Original Ocwen
Agreements (the “Ocwen Subject MSRs”) and with respect to which New Residential holds the Rights to MSRs (as defined in the
Original Ocwen Agreements).
The Ocwen Master Agreement provides for, among other things, the following:
• The parties will cooperate to obtain any third party consents required to transfer Ocwen’s remaining interests in the Ocwen
Subject MSRs to New Residential.
• Upon obtaining the required third party consents and each Ocwen Subject MSR ceasing to be a Deferred Servicing
Agreement (as defined in the Original Ocwen Agreements) covered under the Original Ocwen Agreements, New
Residential will make a lump sum payment to Ocwen. These lump sum payments may total up to approximately $400.0
million in the aggregate if all of the Ocwen Subject MSRs are transferred to New Residential.
• Upon transfer, Ocwen will subservice the mortgage loans related to such Ocwen Subject MSRs pursuant to the Ocwen
•
Subservicing Agreement (as defined below).
In the event that the required third party consents are not obtained within one year (by July 23, 2018) or such earlier date
mutually agreed to by the parties, the applicable Ocwen Subject MSRs may (i) become subject to a new mortgage servicing
rights agreement to be negotiated between Ocwen and New Residential, (ii) be acquired by Ocwen at a price determined
in accordance with the terms of the Ocwen Master Agreement, (iii) be sold to one or more third parties in accordance
with the terms of the Ocwen Master Agreement, or (iv) remain subject to the Original Ocwen Agreements.
• New Residential agrees to up to an eighteen month standstill (until January 23, 2019), subject to certain conditions, of
its rights with respect to certain Ocwen Subject MSRs under the Original Ocwen Agreements to replace Ocwen as named
servicer upon the occurrence of certain specified termination events. New Residential will permanently waive such rights
if a specified percentage of the Ocwen Subject MSRs have been transferred to NRM or are not otherwise subject to the
Original Ocwen Agreements before the end of the period contemplated by the Ocwen Master Agreement.
• The resolution of certain payment obligations by New Residential and Ocwen under the terms of the Original Ocwen
Agreements.
Pursuant to the Ocwen Transfer Agreement, Ocwen agreed to transfer its legal title and any other remaining interest in certain
mortgage servicing rights to New Residential upon satisfaction of customary conditions precedent. The Ocwen Transfer Agreement
contains customary representations, warranties, covenants and indemnification obligations of Ocwen as transferor of the Ocwen
Subject MSRs.
On July 23, 2017, New Residential and Ocwen entered into a subservicing agreement (the “Ocwen Subservicing Agreement”)
pursuant to which Ocwen will subservice the mortgage loans related to the Ocwen Subject MSRs that are transferred to New
153
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Residential pursuant to the Ocwen Master Agreement and Ocwen Transfer Agreement. The Ocwen Subservicing Agreement
contains customary representations, warranties, covenants and indemnification obligations of Ocwen as subservicer and prior
servicer. In consideration for subservicing such mortgage loans, Ocwen will receive a fixed subservicing fee and certain other
customary ancillary compensation as set forth in the Ocwen Subservicing Agreement. The initial term of the Ocwen Subservicing
Agreement is five years. At any time during the initial term, New Residential may terminate the agreement for convenience, subject
to Ocwen’s right to receive a termination fee (amortizing monthly during the initial term) and proper notice. Following the initial
term, New Residential may extend the term of the Ocwen Subservicing Agreement for additional three month periods by delivering
written notice to Ocwen of its desire to extend such contract thirty days prior to the end of such three month period. Furthermore,
at any time following the initial term, the Ocwen Subservicing Agreement may be canceled by Ocwen at the end of each twelve
month period following the initial term by delivering proper notice. In addition, New Residential and Ocwen each have the ability
to terminate the agreement for cause if certain events specified in the Ocwen Subservicing Agreement occur. If either New
Residential or Ocwen terminates the agreement for cause, the other party is required to pay certain fees and costs as set forth in
the agreement. If New Residential exercises an early termination provision in a securitization transaction during the initial term
and elects not to retain Ocwen as servicer following such early termination with respect to the related mortgage loans, New
Residential may be required to pay an exit fee to Ocwen (which decreases monthly during the initial term). The subservicing fees
payable by New Residential to Ocwen under the Ocwen Subservicing Agreement are expected to be less than the fees that would
have been payable by New Residential under the Original Ocwen Agreements.
As of December 31, 2017, MSRs representing approximately $14.8 billion UPB of underlying loans have been transferred pursuant
to the Ocwen Transaction, and MSRs representing approximately $86.8 billion UPB of underlying loans remain to be transferred
(after paydowns and other factors). Through December 31, 2017, $54.6 million of related lump sum payments have been made or
accrued by New Residential to Ocwen. Upon transfer, any interests already held by New Residential are reclassified (from Excess
MSRs or Servicer Advance Investments) to become part of the basis of the MSR financing receivables held by NRM. As a result
of the length of the initial term of the related subservicing agreement between NRM and Ocwen, although the MSRs were legally
sold, solely for accounting purposes New Residential determined that substantially all of the risks and rewards inherent in owning
the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP. Therefore,
rather than recording an investment in MSRs, New Residential has recorded an investment in mortgage servicing rights financing
receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential has elected
to measure the investment at fair value, with changes in fair value flowing through Change in fair value of investments in mortgage
servicing rights financing receivables in the Consolidated Statements of Income.
On August 28, 2017, New Residential Sales Corp. (together with any other future licensed real estate brokerage subsidiary of New
Residential, “NRZ Brokerage”), a licensed real estate brokerage subsidiary of New Residential, entered into a Cooperative
Brokerage Agreement (the “Altisource Brokerage Agreement”) with REALHome Services and Solutions, Inc. and REALHome
Services and Solutions - CT, Inc. (collectively, “RHSS”), two licensed real estate brokerage subsidiaries of Altisource Portfolio
Solutions S.A. (together with its subsidiaries, “Altisource”). Under the Altisource Brokerage Agreement, RHSS will exclusively
provide marketing and listing services for REO properties included in certain MSR portfolios acquired, or to be acquired, by New
Residential, including (i) an approximately $110 billion UPB (as of June 30, 2017) non-agency MSR portfolio that New Residential
agreed to acquire from certain subsidiaries of Ocwen in July 2017 and certain other Ocwen-owned portfolios if New Residential
were to acquire these portfolios from Ocwen in the future (collectively, the “Ocwen Portfolio”), and (ii) an approximately $6
billion UPB (as of June 30, 2017) non-agency MSR portfolio that New Residential agreed to acquire from certain subsidiaries of
PHH in December 2016 (the “PHH Portfolio” and, together with the Ocwen Portfolio, the “Covered Portfolios”). Pursuant to the
Altisource Brokerage Agreement, RHSS will begin to receive REO referrals from NRZ Brokerage as the Covered Portfolios are
transferred to one or more subsidiaries of New Residential, subject to PHH’s approval of Altisource as a vendor in the case of the
PHH Portfolio. NRZ Brokerage will receive a referral commission for each REO property sold by RHSS on behalf of New
Residential for which RHSS receives a commission under the Altisource Brokerage Agreement. The Altisource Brokerage
Agreement, which extends through August 2025, establishes a direct relationship between the brokerages, irrespective of New
Residential’s subservicer.
On August 28, 2017, RHSS and Altisource also entered into a letter agreement with New Residential (the “Altisource Letter
Agreement”), which provides for New Residential to directly appoint RHSS (or another real estate brokerage subsidiary designated
by Altisource) to perform the real estate brokerage services with respect to REO properties in the Covered Portfolios, subject to
certain specified exceptions, in the event that NRZ Brokerage does not refer the business to RHSS and in which case the designated
Altisource brokerage subsidiary would retain the seller’s brokerage commission.
154
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Concurrently with the Altisource Brokerage Agreement and the Altisource Letter Agreement, Altisource executed a letter of intent
with New Residential to enter into a services agreement (as amended, the “Altisource Services LOI”). Under the anticipated
services agreement, to the extent allowable by law and other applicable contractual requirements, Altisource would provide certain
fee-based services with respect to the Ocwen Portfolio, also through August 31, 2025. Pursuant to the Altisource Services LOI,
the parties have agreed to negotiate in good faith toward the execution of a services agreement through and until February 28,
2018, such date to be automatically extended to March 31, 2018 if the parties are still negotiating in good faith at such time (such
period, including as extended, the “Standstill Period”). Except for certain specified commitments, including those described above,
all of the terms of the Altisource Services LOI are non-binding. There can be no assurance that the parties will reach an agreement
with respect to the terms of a services agreement or that a services agreement will be entered into on a timely basis or at all.
RHSS has the right to terminate the Altisource Brokerage Agreement and the Altisource Letter Agreement upon ninety (90) days’
notice (which period may be shortened by New Residential) if a services agreement is not signed between Altisource and New
Residential during the Standstill Period. The Altisource Brokerage Agreement may otherwise only be terminated upon the
occurrence of certain specified events. The Altisource Brokerage Agreement also includes standard vendor oversight and audit
rights and reporting requirements. New Residential has agreed that, during such notice period and/or the Standstill Period, it will
not replace or reduce the role of Altisource as a service provider with respect to transferred MSRs in the Ocwen Portfolio.
Interest income from investments in mortgage servicing rights financing receivables was comprised of the following:
Servicing fee revenue
Ancillary and other fees
Less: subservicing expense
Interest income, investments in mortgage servicing rights financing receivables
Year Ended
December 31, 2017
$
$
94,945
17,313
(33,686)
78,572
Change in fair value of investments in mortgage servicing rights financing receivables was comprised of the following:
Amortization of servicing rights
Change in valuation inputs and assumptions
Change in fair value of investments in mortgage servicing rights financing receivables
Year Ended
December 31, 2017
$
$
(43,190)
109,584
66,394
The following table presents activity related to the carrying value of New Residential’s investments in mortgage servicing rights
financing receivables:
Balance as of December 31, 2016
Investments made
Ocwen Transaction
Amortization of servicing rights(A)
Change in valuation inputs and assumptions
Balance as of December 31, 2017
$
$
—
467,884
64,450
(43,190)
109,584
598,728
(A)
Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the
underlying residential mortgage loans.
155
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following is a summary of New Residential’s investments in mortgage servicing rights financing receivables as of December 31,
2017:
Agency
Non-Agency
Total
UPB of
Underlying
Mortgages
Weighted
Average Life
(Years)(A)
Amortized
Cost Basis
Carrying
Value(B)
$ 49,498,415
14,846,478
$ 64,344,893
5.9
5.6
5.8
$
$
428,657
60,487
489,144
$
$
476,206
122,522
598,728
(A)
(B)
Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this
investment.
Carrying Value represents fair value. As of December 31, 2017, a weighted average discount rate of 9.4% was used to
value New Residential’s investments in mortgage servicing rights financing receivables.
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs
and mortgage servicing rights financing receivables:
State Concentration
California
New York
Florida
Texas
New Jersey
Illinois
Massachusetts
Michigan
Pennsylvania
Virginia
Other U.S.
Percentage of Total Outstanding Unpaid
Principal Amount
December 31, 2017 December 31, 2016
19.0%
20.5%
6.3%
6.0%
5.7%
5.2%
4.1%
3.8%
3.5%
3.3%
3.1%
40.0%
100.0%
2.8%
7.3%
6.3%
4.5%
4.1%
4.1%
3.1%
2.9%
2.8%
41.6%
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 MSRs.
In connection with its investments in MSRs and MSR financing receivables, New Residential generally acquires any related
outstanding servicer advances (not included in the purchase prices described above), which it records at fair value within servicer
advances receivable upon acquisition.
In addition to receiving cash flows from the MSRs, NRM as servicer has the obligation to fund future servicer advances on the
underlying pool of mortgages (Note 14). These servicer advances are recorded when advanced and are included in servicer advances
receivable.
See Note 11 regarding the financing of MSRs.
6. SERVICER ADVANCE INVESTMENTS
In December 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the
“Buyer”) consolidated by New Residential, purchased the outstanding servicer advances related to a portfolio of residential
156
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
mortgage loans that is serviced by Nationstar and is a subset of the same portfolio of loans in which New Residential has invested
in a portion of the Excess MSRs (Note 4), including the basic fee component of the related MSRs. In August 2017, New Residential
purchased an additional 27.0% interest in the Buyer from third-party co-investors for an aggregate purchase price of $65.9 million.
A taxable wholly-owned subsidiary of New Residential is the managing member of the Buyer and owned an approximately 72.8%
interest in the Buyer as of December 31, 2017. As of December 31, 2017, noncontrolling third-party co-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, 2017, the third-party co-investors and New Residential had previously funded their commitments, however the
Buyer may recall $309.1 million and $254.8 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 this portfolio of loans 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, 2017 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.
New Residential also acquired a portion of the call rights related to this portfolio of loans.
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, and a portion of the call rights related to a portfolio of residential mortgage
loans which is serviced by SLS. Fortress-managed funds acquired the other 50% of the Excess MSRs. SLS services the loans in
exchange for a servicing fee of 10.75 basis points (“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.
In April 2015, New Residential acquired Servicer Advance Investments and Excess MSRs in connection with the HLSS Acquisition
(Note 1). Ocwen services the underlying loans in exchange for a servicing fee of 12% times the servicing fee collections of the
underlying loans, which as of December 31, 2017 is equal to 6.1 bps times the UPB of the underlying loans, and an incentive fee
which is reduced by LIBOR plus 2.75% per annum of the amount, if any, of servicer advances outstanding in excess of a defined
target. In July 2017, New Residential entered into the Ocwen Transaction as described in Note 5. Subsequent to the Ocwen
Transaction, the Servicer Advance Investments (including the related basic fee portion of the MSR) formerly serviced by Ocwen
become reclassified, as described in Note 5, as the underlying MSRs are transferred to NRM.
In connection with the HLSS Acquisition, New Residential acquired from Ocwen the call rights related to the residential mortgage
loans underlying the Excess MSRs and Servicer Advance Investments acquired from HLSS. New Residential continues to evaluate
the call rights it acquired from Nationstar, SLS and 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 residential mortgage loans on which New Residential can successfully
exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions.
All of New Residential’s Servicer Advance Investments are comprised of outstanding servicer advances, the requirement to purchase
all future servicer advances made with respect to a specified pool of residential mortgage loans, and the basic fee component of
the related MSR. New Residential elected to record its Servicer Advance Investments, 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.
157
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following is a summary of New Residential’s Servicer Advance Investments, including the right to the basic fee component
of the related MSRs:
Amortized
Cost Basis
Carrying
Value(A)
Weighted
Average
Discount
Rate
Weighted
Average
Yield
Weighted
Average Life
(Years)(B)
Change in Fair
Value Recorded
in Other Income
for Year then
Ended
December 31, 2017
Servicer Advance Investments(C)
December 31, 2016
Servicer Advance Investments(C)
$
$
3,924,003
5,687,635
$
$
4,027,379
5,706,593
6.8%
5.6%
7.3%
5.5%
5.1
4.6
$
$
84,418
(7,768)
(A)
(B)
(C)
Carrying value represents the fair value of the Servicer Advance Investments, 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, which had an aggregate face amount of $100.0
million and an aggregate carrying value of $100.1 million as of December 31, 2016.
The following is additional information regarding the Servicer Advance Investments and related financing:
UPB of
Underlying
Residential
Mortgage
Loans
Outstanding
Servicer
Advances
Servicer
Advances to
UPB of
Underlying
Residential
Mortgage
Loans
Face
Amount of
Notes and
Bonds
Payable
Loan-to-Value
(“LTV”)(A)
Cost of Funds(C)
Gross
Net(B)
Gross
Net
December 31, 2017
Servicer Advance Investments(D)
December 31, 2016
Servicer Advance Investments(D)
$ 139,460,371
$
3,581,876
2.6% $
3,461,718
93.2%
92.0%
3.3%
3.0%
$ 186,362,657
$
5,617,759
3.0% $
5,560,412
94.5%
93.4%
3.2%
2.8%
(A)
(B)
(C)
(D)
Based on outstanding servicer advances, excluding purchased but unsettled servicer advances and certain deferred
servicing fees (“DSF”) on which New Residential receives financing. If New Residential were to include these DSF in
the servicer advance balance, gross and net LTV as of December 31, 2017 would be 87.4% and 86.3%, respectively. Also
excludes retained Non-Agency bonds with a current face amount of $80.0 million from the outstanding servicer advance
debt. If New Residential were to sell these bonds, gross and net LTV as of December 31, 2017 would be 95.3% and 94.1%,
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 are included in the Servicer Advance Investments:
December 31,
2017
2016
Principal and interest advances
$
909,133
$
1,489,929
Escrow advances (taxes and insurance advances)
Foreclosure advances
Total
1,636,381
1,036,362
2,613,050
1,514,780
$
3,581,876
$
5,617,759
158
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Interest income recognized by New Residential related to its Servicer Advance Investments was comprised of the following:
Interest income, gross of amounts attributable to servicer compensation
Amounts attributable to base servicer compensation(A)
Amounts attributable to incentive servicer compensation(A)
Interest income from Servicer Advance Investments(A)
Year Ended December 31,
2016
2015
2017
$
$
871,506
(227,585)
(115,565)
528,356
$
$
922,006
(127,631)
(430,025)
364,350
$
$
799,126
(107,929)
(338,881)
352,316
(A)
Total interest income of $528.4 million for the year ended December 31, 2017 includes retrospective adjustments of
$204.1 million, mainly due to changes in cash flow assumptions relating to the HLSS portfolio, including a change in
the cost of subservicing assumption to 13 bps.
New Residential has 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 and bonds payable
All other liabilities
Total liabilities(A)
As of December 31,
2017
2016
$
1,002,102
$
1,731,633
40,929
13,011
1,056,042
789,979
3,308
793,287
$
$
$
37,854
19,799
1,789,286
1,464,851
5,187
1,470,038
$
$
$
(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.
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:
December 31,
2017
262,755
27.2%
71,491
$
$
2016
319,248
54.2%
173,057
$
$
Net Advance Purchaser LLC income
Others’ ownership interest as a percent of total(A)
Others’ interest in net income of consolidated subsidiaries
Year Ended December 31,
2016
2015
2017
$
$
23,604
47.6%
11,227
$
$
72,159
55.6%
40,136
$
$
33,180
55.5%
18,407
(A)
As a result, New Residential owned 52.4%, 44.4% and 44.5% of the Buyer, on average during the years ended December 31,
2017, 2016 and 2015, respectively.
159
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
See Note 11 regarding the financing of Servicer Advance Investments.
7. INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES
“Agency” residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as
Fannie Mae or 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 and other securities were as follows:
Purchases
Face
Purchase Price
Sales
Face
Amortized Cost
Sale Price
Gain (Loss) on Sale
Year Ended December 31, 2017
Year Ended December 31, 2016
(in millions)
(in millions)
Treasury
Agency
Non-Agency
Agency
Non-Agency
$
1,552.0
$
7,135.2
$
7,606.5
$
7,163.3
$
1,545.3
7,367.8
3,053.0
7,467.6
$
690.0
$
7,310.7
$
235.1
$
6,466.1
$
687.2
686.7
(0.5)
7,536.6
7,539.6
3.0
164.3
182.4
18.0
6,749.4
6,740.0
(9.4)
5,431.6
2,746.3
332.5
284.7
266.6
(18.1)
As of December 31, 2017, New Residential had sold and purchased $1.0 billion and $1.1 billion face amount of Agency RMBS
for $1.0 billion and $1.1 billion, respectively, and purchased $45.0 million face amount of Non-Agency RMBS for $41.1 million,
which had not yet been settled. These unsettled sales and purchases were recorded on the balance sheet on trade date as Trades
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 and 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.
The following is a summary of New Residential’s real estate and other 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)
Asset Type
December 31, 2017
Treasury
Agency RMBS(F)(G)
Non-Agency RMBS(H) (I)
$
862,000
$
858,028
$
— $
(5,294)
$
852,734
1,203,629
1,247,093
1,176
(4,652)
1,243,617
12,757,357
5,599,644
423,504
(48,359)
5,974,789
Total/Weighted Average
$ 14,822,986
$ 7,704,765
$ 424,680
$ (58,305)
$ 8,071,140
December 31, 2016
Agency RMBS(F)(G)
Non-Agency RMBS(H) (I)
Total/Weighted Average
$
$
1,486,739
$ 1,532,421
$
1,803
$
(3,926)
$ 1,530,298
7,302,218
3,415,906
147,206
(19,552)
3,543,560
8,788,957
$ 4,948,327
$ 149,009
$ (23,478)
$ 5,073,858
3
98
751
852
57
536
593
AAA
AAA
CCC-
B+
AAA
CCC-
BB-
2.21% 2.27%
3.49% 2.83%
2.27% 5.66%
2.44% 4.83%
3.45% 2.94%
1.59% 5.88%
2.16% 4.97%
8.1
7.0
7.7
7.6
9.1
7.9
8.3
N/A
N/A
8.5%
N/A
8.8%
(A)
Fair value, which is equal to carrying value for all securities. See Note 12 regarding the estimation of fair value.
160
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
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 204 bonds with a carrying value of $380.5 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 $186.0 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 fair
value option securities 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 $1.1 billion and $1.3 billion for fixed rate securities and $0.1 billion and $0.2
billion for floating rate securities as of December 31, 2017 and 2016, respectively.
The total outstanding face amount was $1.3 billion (including $0.7 billion of residual and fair value option notional
amount) and $1.2 billion (including $0.8 billion of residual and fair value option notional amount) for fixed rate securities
and $11.5 billion (including $4.5 billion of residual and fair value option notional amount) and $6.1 billion (including
$2.1 billion of residual and fair value option notional amount) for floating rate securities as of December 31, 2017 and
2016, respectively.
Includes other asset backed securities (“ABS”) consisting primarily of (i) interest-only securities and servicing strips (fair
value option securities) which New Residential elected to carry at fair value and record changes to valuation through the
income statement, (ii) bonds backed by servicer advances and (iii) bonds backed by consumer loans.
Outstanding
Face Amount
Amortized
Cost Basis
Gains
Losses
Carrying
Value
Number of
Securities
Rating
Coupon
Yield
Life
(Years)
Principal
Subordination
Gross Unrealized
Weighted Average
Asset Type
December 31, 2017
Consumer loan bonds
$
29,690
$
29,780
$
971
$
(528)
$
30,223
Fair Value Option Securities
Interest-only Securities
4,475,794
205,740
10,407
(9,887)
206,260
Servicing Strips
December 31, 2016
450,974
4,958
1,613
(225)
6,346
Servicer Advance Bonds
$
100,000
$
99,838
$
310
$
— $
100,148
Fair Value Option Securities
Interest-only Securities
2,062,647
113,342
Servicing Strips
456,629
5,613
5,270
311
(6,555)
112,057
(1)
5,923
3
49
20
1
28
11
N/A
N/A
17.17%
AA-
N/A
1.51%
5.33%
0.27% 21.62%
AAA
3.21%
3.10%
AA+
NA
1.85%
5.30%
0.27% 21.74%
1.5
3.2
6.7
0.7
2.9
6.2
N/A
N/A
N/A
N/A
N/A
N/A
Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the year ended December
31, 2017, New Residential recorded OTTI charges of $10.3 million with respect to real estate securities. During the year ended
December 31, 2016, New Residential recorded OTTI of $10.3 million. During the year ended December 31, 2015, New Residential
recorded OTTI of $5.8 million. 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 its 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, 2017.
Securities in an
Unrealized Loss
Position
Less than 12
Months
12 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)
$
4,446,684
$
2,234,124
$
(1,307)
$
2,232,817
$
(44,537)
$ 2,188,280
155
CCC+
2.22%
3.83%
916,578
235,064
(291)
234,773
(13,768)
221,005
$
5,363,262
$
2,469,188
$
(1,598)
$
2,467,590
$
(58,305)
$ 2,409,285
86
241
BBB
2.54%
4.10%
B
2.25%
3.85%
7.6
4.5
7.3
161
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(A)
(B)
This amount represents OTTI recorded on securities that are in an unrealized loss position as of December 31, 2017.
The weighted average rating of securities in an unrealized loss position for less than 12 months excludes the rating of 29
bonds which either have never been rated or for which rating information is no longer provided. The weighted average
rating of securities in an unrealized loss position for 12 or more months excludes the rating of 40 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, 2017
Gross Unrealized Losses
Fair Value
Amortized Cost
Basis After
Impairment
$
— $
—
— $
—
Credit(A)
Non-Credit(B)
—
— $
—
N/A
Securities New Residential intends to sell(C)
Securities New Residential is more likely than not to be
required to sell(D)
Securities New Residential has no intent to sell and is
not more likely than not to be required to sell:
Credit impaired securities
Non-credit impaired securities
516,765
1,892,520
534,878
1,932,712
Total debt securities in an unrealized loss position
$
2,409,285
$
2,467,590
$
(1,598)
—
(1,598) $
(18,113)
(40,192)
(58,305)
(A)
(B)
(C)
(D)
This amount is required to be recorded as OTTI through earnings. In measuring the portion of credit losses, New Residential
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 New
Residential’s expectations of prepayment rates, 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, 2017.
New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes.
While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified,
New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may
differ materially from actual future sales.
162
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following table summarizes the activity related to credit losses on debt securities:
Year Ended December 31,
2017
2016
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in
other comprehensive income
$
15,495
$
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
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in
other comprehensive income
3,903
6,431
—
—
6,239
3,008
7,256
—
—
(2,008)
(1,008)
$
23,821
$
15,495
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,
2017
2016
Outstanding
Face Amount
$
4,882,136
3,005,519
2,555,514
1,337,980
927,647
18,871
Percentage of
Total
Outstanding
Outstanding
Face Amount
Percentage of
Total
Outstanding
38.4% $
2,757,424
23.6%
20.1%
10.5%
7.3%
0.1%
1,635,596
1,426,519
778,372
557,033
47,274
38.3%
22.7%
19.8%
10.8%
7.7%
0.7%
$
12,727,667
100.0% $
7,202,218
100.0%
(A)
(B)
Excludes $29.7 million face amount of bonds backed by consumer loans as of December 31, 2017 and $100.0 million
face amount of bonds backed by servicer advances as of December 31, 2016.
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, 2017, excluding residual and fair value option securities, the face amount of these real estate securities
was $3,148.3 million, with total expected cash flows of $2,699.7 million and a fair value of $1,836.1 million on the dates that New
Residential purchased the respective securities. For those securities acquired during the year ended December 31, 2016, excluding
residual and fair value option securities, the face amount was $2,510.3 million, the total expected cash flows were $2,490.7 million
and the fair value was $1,538.5 million on the dates that New Residential purchased the respective securities.
163
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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 fair value option
securities:
December 31, 2017
December 31, 2016
The following is a summary of the changes in accretable yield for these securities:
Beginning Balance
Additions
Accretion
Reclassifications from (to) non-accretable difference
Disposals
Ending Balance
See Note 11 regarding the financing of real estate securities.
Outstanding
Face Amount
Carrying
Value
$
5,364,847
$
2,951,498
3,493,723
1,871,466
Year Ended December 31,
2017
2016
$
1,200,125
$
316,521
863,681
(215,018)
218,675
(67,197)
2,000,266
$
952,271
(130,745)
63,239
(1,161)
1,200,125
$
164
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
8. INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS
Loans are accounted for based on New Residential’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 (which may include PCD Loans)
• Loans Held-for-Sale
• Real Estate Owned (“REO”)
The following table presents certain information regarding New Residential’s residential mortgage loans outstanding by loan type,
excluding REO:
Outstanding
Face
Amount
Carrying
Value(A)
Loan
Count
Weighted
Average
Yield
Weighted
Average
Life
(Years)(B)
Floating Rate
Loans as a %
of Face
Amount
LTV Ratio(C)
Weighted Avg.
Delinquency(D)
Weighted
Average
FICO(E)
December 31, 2017
Loan Type
Performing Loans(H)
Purchased Credit Deteriorated Loans(I)
249,254
183,540
$
557,381
$
507,615
8,876
2,142
8.0%
7.2%
Total Residential Mortgage Loans, held-for-
investment
Reverse Mortgage Loans(F) (G)
Performing Loans(H) (J)
Non-Performing Loans(I) (J)
691,155
11,018
7.7%
$
$
806,635
16,755
$
$
6,870
48
1,044,116
1,071,371
15,464
846,181
647,293
5,597
Total Residential Mortgage Loans, held-for-sale
$ 1,907,052
$ 1,725,534
21,109
December 31, 2016
Loan Type
Performing Loans(H)
Purchased Credit Deteriorated Loans(I)
Total Residential Mortgage Loans, held-for-
investment
Reverse Mortgage Loans(F) (G)
Performing Loans(H) (J)
Non-Performing Loans(I) (J)
$
$
$
— $
—
—
203,673
190,761
1,183
190,761
1,183
5.5%
$
$
203,673
22,645
179,983
706,302
11,468
175,194
510,003
69
1,957
3,759
5,785
7.2%
4.3%
7.1%
6.5%
Total Residential Mortgage Loans, held-for-sale
$
908,930
$
696,665
7.5%
4.0%
5.6%
4.8%
—%
5.5%
5.5
3.1
4.8
4.5
4.8
4.3
4.6
—
2.7
2.7
4.5
5.9
2.9
3.5
22.1%
14.7%
76.4%
84.2%
8.7%
75.8%
19.8%
78.8%
29.4%
15.9%
10.2%
18.7%
14.0%
—%
8.7%
8.7%
15.4%
22.4%
20.6%
20.8%
141.2%
53.2%
94.4%
72.2%
77.8%
7.0%
63.3%
32.6%
—%
71.5%
—%
94.9%
71.5%
94.9%
135.6%
102.9%
105.0%
105.4%
70.7%
6.4%
75.9%
62.0%
649
597
633
N/A
654
581
622
—
590
590
N/A
625
575
585
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
(I)
(J)
Includes residential mortgage loans with a United States federal income tax basis of $2,414.4 million and $905.7 million
as of December 31, 2017 and 2016, 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 is 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% participation interest that New Residential holds in a portfolio of reverse mortgage loans. Nationstar
holds the other 30% interest and services the loans. The average loan balance outstanding based on total UPB was $0.5
million and $0.5 million at December 31, 2017 and 2016, respectively. Approximately 54.3% and 60.9% of these loans
have reached a termination event at December 31, 2017 and 2016, respectively. As a result of the termination event, each
such loan has matured and the borrower can no longer make draws on these loans.
FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.
Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due.
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, 2017, New Residential has placed
Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (J) below.
Includes $33.7 million and $66.5 million UPB of Ginnie Mae EBO performing and non-performing loans as of
December 31, 2017, respectively, on accrual status as contractual cash flows are guaranteed by the FHA. As of
December 31, 2016, these amounts were $45.2 million and $87.5 million, respectively.
165
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 60 days past due
provide an early warning of borrowers who may be experiencing financial difficulties. 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.
The table below summarizes the geographic distribution of the underlying residential mortgage loans:
State Concentration
New York
New Jersey
Florida
California
Texas
Maryland
Illinois
Massachusetts
Pennsylvania
Washington
Other U.S.
See Note 11 regarding the financing of residential mortgage loans and related assets.
Percentage of Total
Outstanding Unpaid
Principal Amount
December 31,
2017
2016
12.8%
5.2%
8.2%
9.1%
6.6%
2.7%
3.9%
2.7%
3.4%
1.7%
43.7%
100.0%
16.7%
9.6%
11.4%
10.3%
3.9%
4.7%
4.0%
3.5%
2.9%
2.8%
30.2%
100.0%
166
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Call Rights
New Residential has executed calls with respect to the following Non-Agency RMBS trusts and purchased performing and non-
performing residential mortgage loans and REO assets 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).
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)
Date of
Securitization
UPB
Gain
(Loss)
Basis
Loan
UPB
Loan
Price
REO &
Other
Price
18
7
14
14
13
12
11
13
1
2
31
12
—
14
15
20
3
22
21
11
15
10
$
13.7
$
7.4
3.9
61.4
58.0
60.0
6.2
41.7
116.6
49.3
60.9
—
—
9.8
26.4
1.0
28.2
19.9
120.6
19.4
39.5
22.6
9.1
4.5
3.0
48.0
41.0
44.0
1.4
24.2
102.0
43.6
40.1
—
—
6.3
16.9
0.5
17.3
15.7
95.1
13.7
27.1
20.9
$ 369.0
$
388.8
$
216.3
345.4
309.1
167.2
290.6
312.3
289.1
124.4
98.8
882.0
222.4
—
376.9
420.5
534.8
101.7
358.5
583.7
322.5
370.5
298.8
223.1
351.7
315.1
173.3
298.7
319.2
286.8
119.1
96.7
895.5
228.8
—
378.8
424.4
549.8
106.6
360.5
593.2
328.0
372.4
287.9
—
1.5
1.2
3.1
3.1
0.6
1.7
3.7
0.4
7.5
0.4
—
5.9
3.7
0.8
1.9
1.7
5.3
4.9
4.6
4.5
November 2015
March 2016
N/A(C)
May 2016
September 2016
December 2016
N/A(C)
N/A(C)
N/A(C)
April 2017
N/A(C)
June 2017 #1
June 2017 #2
10.1
March 2017
June 2015
$
334.5
$
(2.8)
$
15.0
$
34.5
$
31.7
$
N/A(C)
N/A(C)
N/A(C)
N/A(C)
511.8
261.3
2.4
2.1
22.0
36.6
N/A(C)
N/A(C)
N/A(C)
19.4
29.8
35.8
65.0
85.9
45.6
46.2
17.2
23.4
26.6
61.8
78.2
41.1
21.6
N/A(C)
N/A(C)
N/A(C)
N/A(C)
40.0
45.7
43.2
N/A(C)
N/A(C)
81.9
105.9
N/A(C)
76.1
N/A(C)
68.4
58.4
27.7
—
62.5
47.6
34.9
90.1
25.7
—
55.7
40.5
40.4
1.3
1.5
1.2
2.9
3.4
1.1
2.3
4.4
N/A(C)
N/A(C)
10.8
0.4
—
5.9
3.7
0.8
306.9
308.0
273.6
N/A(C)
N/A(C)
773.8
N/A(C)
668.0
N/A(C)
716.0
497.6
(2.2)
8.1
(5.2)
N/A(C)
N/A(C)
2.1
N/A(C)
10.3
N/A(C)
5.7
10.3
N/A(C)
N/A(C)
N/A(C)
N/A(C)
N/A(C)
N/A(C)
N/A(C)
July 2017
October 2017
N/A(C)
N/A(C)
N/A(C)
339.3
612.5
N/A(C)
N/A(C)
N/A(C)
2.7
—
N/A(C)
N/A(C)
N/A(C)
25.7
92.7
N/A(C)
N/A(C)
N/A(C)
18.3
82.5
N/A(C)
N/A(C)
N/A(C)
18.6
70.7
N/A(C)
N/A(C)
N/A(C)
1.7
5.9
N/A(C)
N/A(C)
N/A(C)
Date of Call (A)
June 2015
September 2015
November 2015
December 2015
March 2016
May 2016
August 2016
November 2016
December 2016
January 2017
February 2017
March 2017
April 2017
April 2017
May 2017
June 2017
June 2017
July 2017
September 2017
October 2017
November 2017
December 2017
(A)
(B)
(C)
Any related securitization may occur on the same or a subsequent date, depending on market conditions and other factors.
Price includes par amount paid for all underlying residential 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. Retained assets are reflected
as of the date of the relevant securitization. The securitization that occurred in November 2015 primarily included loans
from the September 2015 and November 2015 calls, but also included previously acquired loans. The securitization that
occurred in March 2016 primarily included loans from the December 2015 call, but also included previously acquired
loans. The securitization that occurred in May 2016 primarily included loans from the March 2016 and May 2016 calls.
The securitization that occurred in September 2016 primarily included loans from the August 2016 call, but also included
$42.2 million of previously acquired loans. The securitization that occurred in December 2016 primarily included loans
from the November 2016 call, but also included $31.2 million of previously acquired loans. The securitization that occurred
in April 2017 primarily included loans from the March 2017 calls and other acquired loans. The June 2017 #1 securitization
primarily included loans from the April 2017 and May 2017 calls, but also included $31.1 million of previously acquired
loans. The securitization that occurred in October 2017 primarily included loans from the September 2017 call, but also
included loans from a June 2017 call and other previously acquired loans. No loans from the December 2016 call, the
January 2017 calls, the last two June 2017 calls, or any of the calls in the fourth quarter of 2017 had been securitized by
December 31, 2017. In May 2017, certain reperforming residential mortgage loans were financed with a securitization
which was not treated as a sale for accounting purposes (see Variable Interest Entities below and Note 11).
167
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Performing Loans
The following table provides past due information regarding New Residential’s Performing Loans, which is an important
indicator of credit quality and the establishment of the allowance for loan losses:
December 31, 2017
Days Past Due
Current
30-59
60-89
90-119(B)
120+(C)
Delinquency Status(A)
84.2%
6.6%
2.6%
1.5%
5.1%
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 residential mortgage loans held-for-investment were as follows:
Balance at December 31, 2015
Purchases/additional fundings
Proceeds from repayments
Accretion of loan discount (premium) and other amortization(A)
Provision for loan losses
Transfer of loans to other assets(B)
Sales
Transfer of loans to held-for-sale(C)
Balance at December 31, 2016
Purchases/additional fundings
Proceeds from repayments
Accretion of loan discount (premium) and other amortization(A)
Provision for loan losses
Transfer of loans to other assets(B)
Transfer of loans to real estate owned
Balance at December 31, 2017
Reverse
Mortgage
Loans
Performing
Loans
$
19,560
$
19,964
319
(1,352)
2,002
(73)
(4,203)
(1,795)
(14,458)
— $
—
—
—
—
—
—
— $
—
(811)
123
(4)
—
—
(19,272)
—
550,742
(50,562)
8,101
(646)
—
(20)
507,615
$
$
(A)
(B)
(C)
Includes accelerated accretion of discount on loans paid in full and on loans transferred to other assets.
Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make,
a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other
Assets (Note 2).
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has
the intent to hold for the foreseeable future, or until maturity or payoff.
168
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Activities related to the valuation and loss provision on reverse mortgage loans and allowance for loan losses on performing
loans held-for-investment were as follows:
Balance at December 31, 2015
Provision for loan losses(A)
Charge-offs(B)
Sales
Transfer of loans to held-for-sale(C)
Balance at December 31, 2016
Provision for loan losses(A)
Charge-offs(B)
Balance at December 31, 2017
Reverse
Mortgage
Loans
Performing
Loans
$
$
$
$
1,553
73
—
(171)
(1,455)
— $
—
—
— $
119
4
—
—
(123)
—
646
(450)
196
(A)
(B)
(C)
Based on an analysis of collective borrower performance, credit ratings of borrowers, loan-to-value ratios, estimated
value of the underlying collateral, key terms of the loans and historical and anticipated trends in defaults and loss severities
at a pool level.
Loans, other than 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.
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has
the intent to hold for the foreseeable future, or until maturity or payoff.
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, including
consideration of involuntary prepayments.
Activities related to the carrying value of PCD loans held-for-investment were as follows:
Balance at December 31, 2015
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, 2016
Purchases/additional fundings
Sales
Proceeds from repayments
Accretion of loan discount and other amortization
(Allowance) reversal for loan losses(A)
Transfer of loans to real estate owned
Transfer of loans to held-for-sale
Balance at December 31, 2017
169
$
290,654
190,761
—
(8,897)
8,295
(7,583)
(282,469)
190,761
58,884
—
(32,455)
20,217
(1,488)
(29,299)
(23,080)
183,540
$
$
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(A)
An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected.
A reversal results from an increase to expected cash flows that reverses a prior allowance.
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, 2017:
Contractually
Required Payments
Receivable
Cash Flows Expected
to be Collected
Fair Value
As of Acquisition Date
94,951
80,744
58,884
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, 2017
December 31, 2016
The following is a summary of the changes in accretable yield for these loans:
Unpaid Principal
Balance
Carrying Value
$
249,254
$
203,673
183,540
190,761
Balance at December 31, 2015
Additions
Accretion
Reclassifications from non-accretable difference(A)
Disposals(B)
Transfer of loans to held-for-sale(C)
Balance at December 31, 2016
Additions
Accretion
Reclassifications from non-accretable difference(A)
Disposals(B)
Transfer of loans to held-for-sale(C)
Balance at December 31, 2017
$
$
$
71,063
23,688
(8,876)
29,569
(2,680)
(89,076)
23,688
21,860
(20,217)
66,751
(3,451)
—
88,631
(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.
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has
the intent to hold for the foreseeable future, or until maturity or payoff.
170
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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, 2015
Purchases(A)
Transfer of loans from held-for-investment(B)
Sales
Transfer of loans to other assets(C)
Transfer of loans to real estate owned
Proceeds from repayments
Valuation (provision) reversal on loans(D)
Balance at December 31, 2016
Purchases(A)
Transfer of loans from held-for-investment(B)
Sales
Transfer of loans to other assets(C)
Transfer of loans to real estate owned
Proceeds from repayments
Valuation (provision) reversal on loans(D)
Balance at December 31, 2017
$
776,681
1,196,018
316,199
(1,274,707)
(158,807)
(56,001)
(91,339)
(11,379)
696,665
5,135,700
23,080
(3,901,161)
(17,487)
(71,756)
(125,987)
(13,520)
1,725,534
$
$
(A)
(B)
(C)
(D)
Represents loans acquired with the intent to sell.
Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has
the intent to hold for the foreseeable future, or until maturity or payoff.
Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make,
a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other
Assets (Note 2).
Represents the fair value adjustments to loans upon transfer to held-for-sale and provision recorded on certain purchased
held-for-sale loans, including an aggregate of $30.1 million and $30.2 million of provision related to the call transactions
executed during the years ended December 31, 2017 and 2016, respectively.
171
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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, 2015
Purchases
Transfer of loans to real estate owned
Sales
Valuation provision on REO
Balance at December 31, 2016
Purchases
Transfer of loans to real estate owned
Sales
Valuation (provision) reversal on REO
Balance at December 31, 2017
Real Estate
Owned
$
$
50,574
11,283
81,940
(66,880)
(17,326)
59,591
38,127
124,013
(95,456)
2,020
$
128,295
As of December 31, 2017, New Residential had residential mortgage loans that were in the process of foreclosure with an unpaid
principal balance of $429.7 million.
In addition, New Residential has recognized $41.4 million in unpaid 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.
Variable Interest Entities
New Residential formed entities (the “RPL Borrowers”) that issued securitized debt collateralized by reperforming residential
mortgage loans. The RPL Borrowers are VIEs of which subsidiaries of New Residential are the primary beneficiaries, as a result
of controlling the related optional redemption feature and owning certain notes issued by the RPL Borrowers. The following table
presents information on the combined assets and liabilities related to these consolidated VIEs.
Assets
Residential mortgage loans
Other assets
Total assets(A)
Liabilities
Notes and bonds payable(B)
Accounts payable and accrued expenses
Total liabilities(A)
As of
December 31, 2017
$
$
$
$
188,957
—
188,957
184,490
16
184,506
(A)
(B)
The creditors of the RPL Borrowers do not have recourse to the general credit of New Residential, and the assets of the
RPL Borrowers are not directly available to satisfy New Residential’s obligations.
Includes $78.2 million of bonds retained by New Residential issued by these VIEs.
As described in “Call Rights” above, New Residential has issued securitizations which were treated as sales under GAAP. New
Residential has no obligation to repurchase any loans from these securitizations and its exposure to loss is limited to the carrying
amount of its retained interests in the securitization entities. These securitizations are conducted through variable interest entities,
172
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
of which New Residential is not the primary beneficiary. The following table summarizes certain characteristics of the underlying
residential mortgage loans, and related financing, in these securitizations as of December 31, 2017:
Residential mortgage loan UPB
Weighted average delinquency(A)
Net credit losses for the year ended December 31, 2017
Face amount of debt held by third parties(B)
Carrying value of bonds retained by New Residential(C)
Cash flows received by New Residential on these bonds for the year ended December 31, 2017
(A)
(B)
(C)
Represents the percentage of the UPB that is 60+ days delinquent.
Excludes bonds retained by New Residential.
Retained pursuant to required risk retention regulations.
9. INVESTMENTS IN CONSUMER LOANS
Consumer Loan Companies
$
$
$
$
$
5,031,191
2.38%
6,163
5,025,028
467,072
93,698
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. 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 funds managed by Blackstone Tactical Opportunities Advisors L.L.C. acquired 23%. OneMain acted as the managing member
of the Consumer Loan Companies. OneMain is the servicer of the loans and provides all servicing and advancing functions for
the portfolio.
In 2014, the Consumer Loan Companies refinanced the portfolio, resulting in proceeds in excess of the refinanced debt which
were distributed to the respective co-investors. This reduced New Residential’s basis in the consumer loans investment to $0.0
million and resulted in a gain. Subsequent to this refinancing, New Residential discontinued recording its share of the underlying
earnings of the Consumer Loan Companies and instead recorded distributions from the Consumer Loan Companies as Gain on
consumer loans investment.
Prior to March 31, 2016, New Residential accounted for its investment in the Consumer Loan Companies pursuant to the equity
method of accounting because it could exercise significant influence over the Consumer Loan Companies, but the requirements
for consolidation were not met. New Residential’s share of earnings and losses in these equity method investees was included in
“Earnings from investments in consumer loans, equity method investees” on the Consolidated Statements of Income. Equity
method investments were included in “Investments in consumer loans, equity method investees” on the Consolidated Balance
Sheets.
On March 31, 2016, certain of New Residential’s indirect wholly owned subsidiaries (collectively, the “NRZ SpringCastle Buyers”)
entered into a Purchase Agreement (the “SpringCastle Purchase Agreement”) primarily with (i) certain direct or indirect wholly
owned subsidiaries of OneMain (the “SpringCastle Sellers”), (ii) BTO Willow Holdings II, L.P. and Blackstone Family Tactical
Opportunities Investment Partnership - NQ - ESC L.P. (together, the “Blackstone SpringCastle Buyers,” and the Blackstone
SpringCastle Buyers together with the NRZ SpringCastle Buyers, collectively, the “SpringCastle Buyers”). Pursuant to the
SpringCastle Purchase Agreement, the SpringCastle Sellers sold their collective 47% limited liability company interests in the
Consumer Loan Companies to the SpringCastle Buyers for an aggregate purchase price of $111.6 million (the “SpringCastle
Transaction”).
Pursuant to the SpringCastle Purchase Agreement, the NRZ SpringCastle Buyers collectively acquired an additional 23.5% limited
liability company interest in the Consumer Loan Companies (representing 50% of the limited liability company interests being
sold by the SpringCastle Sellers in the SpringCastle Transaction) and the Blackstone SpringCastle Buyers acquired the other 50%
of the limited liability company interests being sold in the SpringCastle Transaction.
173
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Following the SpringCastle Transaction, New Residential, through the NRZ SpringCastle Buyers, owns 53.5% of the limited
liability company interests in the Consumer Loan Companies and the Blackstone SpringCastle Buyers, collectively with their
affiliates, own the remaining 46.5% interests in the Consumer Loan Companies. As a result of the SpringCastle Transaction, New
Residential obtained a controlling financial interest in, and consolidates, the Consumer Loan Companies.
New Residential has consolidated all of the assets and the related liabilities of the Consumer Loan Companies assuming a gross
purchase price of $237.5 million. This gross purchase price is representative of the fair value of 100% of the net assets of the
Consumer Loan Companies, which was used to derive the $111.6 million purchase price for an aggregate 47.0% of the equity
ownership acquired by the SpringCastle Buyers. New Residential previously held a 30% equity method investment in the Consumer
Loan Companies, which had a basis of zero, and a fair value of $71.3 million based on 30% of the gross purchase price of $237.5
million, immediately prior to the SpringCastle Transaction. Therefore, the remeasurement of New Residential’s previously held
equity method investment resulted in a gain of $71.3 million, which was recorded to Gain on Remeasurement of Consumer Loans
Investment.
New Residential has performed an allocation of the purchase price to the Consumer Loan Companies’ assets and liabilities, as set
forth below.
Total Consideration ($ in millions)
Assets
Consumer loans, held-for-investment
Cash and cash equivalents
Restricted cash
Other assets
Total Assets Acquired
Liabilities
Notes and bonds payable
Accrued expenses and other liabilities
Total Liabilities Assumed
Net Assets
$
$
$
$
237.5
1,934.7
0.3
74.6
35.9
2,045.5
1,803.2
4.8
1,808.0
237.5
The acquisition of the Consumer Loan Companies resulted in no goodwill because the total consideration transferred was equal
to the fair value of the net assets acquired.
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, 2016 and 2015 prepared as if the SpringCastle
Transaction had been consummated on January 1, 2015.
Pro Forma
Interest Income
Income Before Income Taxes
Noncontrolling Interests in Income of Consolidated Subsidiaries
Year Ended December 31,
2016
(unaudited)
2015
(unaudited)
$
1,163,648
$
1,030,522
581,925
96,852
466,915
92,413
The 2016 unaudited supplemental pro forma financial information has been adjusted to exclude, and the 2015 unaudited
supplemental pro forma financial information has been adjusted to include, (i) the gain on remeasurement of New Residential’s
Consumer Loans investment of $71.3 million and (ii) approximately $1.5 million of acquisition related costs incurred by New
Residential in 2016. The unaudited supplemental pro forma financial information does not include any other anticipated benefits
174
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
of the SpringCastle Transaction 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 SpringCastle Transaction occurred
on January 1, 2015.
New Residential’s Consolidated Statements of Income include Interest Income and Income Before Income Taxes of the Consumer
Loan Companies for the period from April 1, 2016 through December 31, 2016 of $226.0 million and $82.0 million, respectively.
Other
In 2016, New Residential agreed to purchase newly originated consumer loans from a third party (“Consumer Loan Seller”). In
the aggregate, as of December 31, 2016, New Residential had purchased $177.4 million UPB of loans for an aggregate purchase
price of $176.2 million from Consumer Loan Seller. These loans are not held in the Consumer Loan Companies and have been
designated as performing consumer loans, held-for-investment. In addition, see “Equity Method Investees” below.
Upon acquisition, consumer loans are accounted for based on New Residential’s strategy for the loan, and on whether the loan
was credit impaired at the date of acquisition. New Residential determined that it has the intent and ability to hold the consumer
loans for the foreseeable future and accounts for consumer loans based on the following categories:
• Loans Held-for-Investment:
Performing Loans
PCD Loans
The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:
Unpaid
Principal
Balance
Interest in
Consumer
Loans
Carrying
Value
Weighted
Average
Coupon
Weighted
Average
Expected Life
(Years)(A)
Weighted
Average
Delinquency(B)
December 31, 2017
Consumer Loan Companies
Performing Loans
Purchased Credit Deteriorated Loans(C)
Other - Performing Loans
$
1,005,570
53.5% $
1,052,561
282,540
89,682
53.5%
100.0%
236,449
85,253
Total Consumer Loans, held-for-investment
$
1,377,792
$
1,374,263
December 31, 2016
Consumer Loan Companies
Performing Loans
Purchased Credit Deteriorated Loans(C)
Other - Performing Loans
$
1,275,121
53.5% $
1,321,825
371,261
163,570
53.5%
100.0%
316,532
161,129
Total Consumer Loans, held-for-investment
$
1,809,952
$
1,799,486
18.7%
16.2%
14.1%
17.9%
18.7%
16.6%
14.2%
17.9%
3.7
3.3
1.0
3.5
4.2
3.6
1.5
3.8
6.0%
12.5%
4.5%
7.3%
6.3%
14.0%
0.3%
7.3%
(A)
(B)
(C)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the
primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
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, which are accounted for as PCD loans.
See Note 11 regarding the financing of consumer loans.
175
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Performing Loans
The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment,
which is an important indicator of credit quality and the establishment of the allowance for loan losses:
December 31, 2017
Days Past Due
Current
30-59
60-89
90-119(B)
120+(B) (C)
Delinquency Status(A)
94.0%
2.5%
1.4%
0.8%
1.3%
100.0%
(A)
(B)
(C)
Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency
status.
Includes loans more than 90 days past due and still accruing interest.
Interest is accrued up to the date of charge-off at 180 days past due.
Activities related to the carrying value of performing consumer loans, held-for-investment were as follows:
Performing Loans
Balance at December 31, 2015
SpringCastle Transaction
Purchases
Additional fundings(A)
Proceeds from repayments
Accretion of loan discount and premium amortization, net
Net charge-offs
Allowance for loan losses
Balance at December 31, 2016
Purchases
Additional fundings(A)
Proceeds from repayments
Accretion of loan discount and premium amortization, net
Gross charge-offs
Additions to the allowance for loan losses, net
Balance at December 31, 2017
(A)
Represents draws on consumer loans with revolving privileges.
$
$
$
—
1,539,569
176,107
49,289
(239,236)
7,728
(47,065)
(3,438)
1,482,954
56,321
(329,843)
4,891
(73,842)
(2,667)
1,137,814
176
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Activities related to the allowance for loan losses on performing consumer loans, held-for-investment were as follows:
Balance at March 31, 2016 (date of SpringCastle Transaction)
Provision for loan losses
Net charge-offs(C)
Balance at December 31, 2016
Provision (reversal) for loan losses
Net charge-offs(C)
Balance at December 31, 2017
Collectively
Evaluated(A)
Individually
Impaired(B)
Total
$
$
$
— $
— $
49,506
(47,065)
2,441
65,059
(63,071)
4,429
$
$
997
—
997
679
—
$
1,676
$
—
50,503
(47,065)
3,438
65,738
(63,071)
6,105
(A)
(B)
(C)
Represents smaller-balance homogeneous loans that are not individually considered impaired and are evaluated based
on an analysis of collective borrower performance, key terms of the loans and historical and anticipated trends in defaults
and loss severities, and consideration of the unamortized acquisition discount.
Represents consumer loan modifications considered to be troubled debt restructurings (“TDRs”) as they provide
concessions to borrowers, primarily in the form of interest rate reductions, who are experiencing financial difficulty. As
of December 31, 2017, there are $10.9 million in UPB and $9.4 million in carrying value of consumer loans classified
as TDRs.
Consumer loans, other than PCD loans, are charged off when available information confirms that loans are uncollectible,
which is generally when they become 180 days past due. Charge-offs are presented net of $10.8 million and $8.1 million
in recoveries of previously charged-off UPB in 2017 and 2016, respectively.
Purchased Credit Deteriorated Loans
A portion of the consumer loans are considered PCD loans. Activities related to the carrying value of PCD consumer loans, held-
for-investment were as follows:
Balance at December 31, 2015
SpringCastle Transaction
Allowance for Loan Losses(A)
Proceeds from repayments
Accretion of loan discount and other amortization
Balance at December 31, 2016
(Allowance) reversal for loan losses(A)
Proceeds from repayments
Accretion of loan discount and other amortization
Balance at December 31, 2017
$
$
$
—
395,129
(3,013)
(112,222)
36,638
316,532
3,013
(123,932)
40,836
236,449
(A)
An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected.
A reversal results from an increase to expected cash flows that reverses a prior allowance.
The following is the unpaid principal balance and carrying value for consumer 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, 2017
December 31, 2016
Unpaid Principal
Balance
Carrying Value
$
282,540
$
371,261
236,449
316,532
177
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following is a summary of the changes in accretable yield for these loans:
Balance at December 31, 2015
SpringCastle Transaction
Accretion
Reclassifications from (to) non-accretable difference(A)
Balance at December 31, 2016
Accretion
Reclassifications from (to) non-accretable difference(A)
Balance at December 31, 2017
$
$
$
—
176,387
(36,638)
28,179
167,928
(40,836)
5,199
132,291
(A)
Represents a probable and significant increase (decrease) in cash flows previously expected to be uncollectible.
Noncontrolling Interests
Others’ interests in the equity of the Consumer Loan Companies is computed as follows:
Total Consumer Loan Companies equity
Others’ ownership interest
Others’ interests in equity of consolidated subsidiary
Others’ interests in the Consumer Loan Companies’ net income (loss) is computed as follows:
Net Consumer Loan Companies income (loss)
Others’ ownership interest as a percent of total
Others’ interest in net income (loss) of consolidated subsidiaries
Variable Interest Entities
December 31,
2017
74,071
46.5%
34,466
$
$
2016
75,311
46.5%
35,020
Year Ended December 31,
2017
98,692
46.5%
45,892
$
$
2016
81,992
46.5%
38,127
$
$
$
$
The Consumer Loan Companies consolidate certain entities that issued securitized debt collateralized by the consumer loans (the
“Consumer Loan SPVs”). The Consumer Loan SPVs are VIEs of which the Consumer Loan Companies are the primary
beneficiaries. The following table presents information on the combined assets and liabilities related to these consolidated VIEs.
Assets
Consumer loans, held-for-investment
Restricted cash
Accrued interest receivable
Total assets(A)
Liabilities
Notes and bonds payable(B)
Accounts payable and accrued expenses
Total liabilities(A)
178
As of December 31,
2016
2017
$
1,289,010
$
1,638,357
11,563
19,360
1,319,933
1,284,436
4,007
1,288,443
$
$
$
13,393
24,528
1,676,278
1,648,488
951
1,649,439
$
$
$
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(A)
(B)
The creditors of the Consumer Loan SPVs do not have recourse to the general credit of New Residential, and the assets
of the Consumer Loan SPVs are not directly available to satisfy New Residential’s obligations.
Includes $121.0 million face amount of bonds retained by New Residential issued by these VIEs.
Equity Method Investees
In February 2017, New Residential completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC
(“LoanCo”), to purchase up to $5.0 billion worth of newly originated consumer loans from Consumer Loan Seller over a two year
term. New Residential, along with three co-investors, each acquired 25% membership interests in LoanCo. New Residential
accounts for its investment in LoanCo pursuant to the equity method of accounting because it can exercise significant influence
over LoanCo but the requirements for consolidation are not met. New Residential’s investment in LoanCo is recorded as Investment
in Consumer Loans, Equity Method Investees. LoanCo has elected to account for its investments in consumer loans at fair value.
New Residential has elected to record LoanCo’s activity on a one month lag.
In addition, New Residential and the LoanCo co-investors agreed to purchase warrants to purchase up to 177.7 million shares of
Series F convertible preferred stock in the Consumer Loan Seller’s parent company (“ParentCo”), which were valued at
approximately $75.0 million in the aggregate as of February 2017, through a newly formed entity, PF WarrantCo Holdings, LP
(“WarrantCo”). New Residential acquired a 23.57% interest in WarrantCo, the remaining interest being acquired by three co-
investors. WarrantCo has agreed to purchase a pro rata portion of the warrants each time LoanCo closes on a portion of its consumer
loan purchase agreement from Consumer Loan Seller. The holder of the warrants has the option to purchase an equivalent number
of shares of Series F convertible preferred stock in ParentCo at a price of $0.01 per share. WarrantCo is vested in the warrants to
purchase an aggregate of 70.1 million Series F convertible preferred stock in ParentCo as of November 30, 2017. The Series F
convertible preferred stock holders have the right to convert such preferred stock to common stock at any time, are entitled to the
number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be
converted, and will have liquidation rights in the event of liquidation. New Residential accounts for its investment in WarrantCo
pursuant to the equity method of accounting because it can exercise significant influence over WarrantCo but the requirements for
consolidation are not met. New Residential’s investment in WarrantCo is recorded as Investment in Consumer Loans, Equity
Method Investees. WarrantCo has elected to account for its investments in warrants at fair value. New Residential has elected to
record WarrantCo’s activity on a one month lag.
The following tables summarize the investment in LoanCo and WarrantCo held by New Residential:
Consumer loans, at fair value
Warrants, at fair value
Other assets
Warehouse financing
Other liabilities
Equity
Undistributed retained earnings
New Residential’s investment
New Residential’s ownership
December 31, 2017(A)
178,422
$
80,746
46,342
(117,944)
(13,059)
174,507
—
42,473
24.3%
$
$
$
179
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Interest income
Interest expense
Change in fair value of consumer loans and warrants
Gain on sale of consumer loans(B)
Other expenses
Net income
New Residential’s equity in net income
New Residential’s ownership
Year Ended
December 31, 2017(A)
35,912
$
(8,144)
56,324
$
$
26,400
(4,623)
105,869
25,617
24.2%
(A)
(B)
Data as of, and for the periods ended, November 30, 2017, as a result of the one month reporting lag.
During the year ended December 31, 2017, LoanCo sold, through securitizations which were treated as sales for accounting
purposes, $1.7 billion in UPB of consumer loans. LoanCo retained $178.4 million of residual interests in the securitizations
and distributed them to the LoanCo co-investors, including New Residential.
The following is a summary of LoanCo’s consumer loan investments:
Unpaid
Principal
Balance
Interest in
Consumer
Loans
Carrying
Value
Weighted
Average
Coupon
Weighted
Average
Expected Life
(Years)(A)
December 31, 2017(C)
$
178,422
25.0% $
178,422
15.1%
1.4
Weighted
Average
Delinquency(B)
0.4%
(A)
(B)
(C)
Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the
primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.
Data as of November 30, 2017 as a result of the one month reporting lag.
New Residential’s investment in LoanCo and WarrantCo changed as follows:
Balance at December 31, 2016
Contributions to equity method investees
Distributions of earnings from equity method investees
Distributions of capital from equity method investees
Earnings from investments in consumer loans, equity method investees
Balance at December 31, 2017
10. DERIVATIVES
$
$
—
470,344
(6,240)
(438,309)
25,617
51,412
As of December 31, 2017, New Residential’s derivative instruments included economic hedges that were not designated as hedges
for accounting purposes. 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, as well as 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, 2017, New Residential held to-be-announced forward contract positions (“TBAs”) of $3.1 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, 2017, New
180
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Residential separately held TBAs of $1.0 billion 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. 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.
New Residential’s derivatives are recorded at fair value on the Consolidated Balance Sheets as follows:
Derivative assets
Interest Rate Caps
TBAs
Derivative liabilities
Interest Rate Swaps(A)
TBAs
Balance Sheet Location
Other assets
Other assets
Accrued expenses and other liabilities
Accrued expenses and other liabilities
December 31,
2017
2016
$
$
$
$
2,423
—
2,423
$
$
— $
697
697
$
4,251
2,511
6,762
3,021
—
3,021
(A)
Net of related variation margin accounts. As of December 31, 2017, no variation margin accounts existed.
The following table summarizes notional amounts related to derivatives:
TBAs, short position(A)
TBAs, long position(A)
Interest Rate Caps(B)
Interest Rate Swaps(C)
December 31,
2017
2016
$
3,101,100
$
3,465,500
1,014,000
772,500
—
2,125,552
1,185,000
3,640,000
(A)
(B)
(C)
Represents the notional amount of Agency RMBS, classified as derivatives.
As of December 31, 2017, caps LIBOR at 0.50% for $425.0 million of notional, at 2.00% for $185.0 million of notional,
at 4.00% for $12.5 million of notional, and at 4.00% for $150.0 million of notional. The weighted average maturity of
the interest rate caps as of December 31, 2017 was 11 months.
Receive LIBOR and pay a fixed rate. The weighted average maturity of the interest rate swaps as of December 31, 2016
was 22 months and the weighted average fixed pay rate was 1.35%. There were no interest rate swaps outstanding at
December 31, 2017.
181
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following table summarizes all income (losses) recorded in relation to derivatives:
Other income (loss), net(A)
TBAs
Interest Rate Caps
Interest Rate Swaps
Gain (loss) on settlement of investments, net
TBAs
Interest Rate Caps
Interest Rate Swaps
Total income (losses)
(A)
Represents unrealized gains (losses).
11. DEBT OBLIGATIONS
Year Ended December 31,
2016
2015
2017
$
$
$
(1,793) $
323
(720)
(2,190)
(44,224) $
(1,911)
6,921
(39,214)
(41,404) $
(414) $
688
5,500
5,774
(17,927) $
(4,754)
(4,810)
(27,491)
(21,717) $
(2,058)
(1,749)
269
(3,538)
(27,142)
(1,180)
(18,660)
(46,982)
(50,520)
The following table presents certain information regarding New Residential’s debt obligations:
December 31, 2017
Collateral
Outstanding
Face
Amount
Carrying
Value(A)
Final
Stated
Maturity(B)
Weighted
Average
Funding
Cost
Weighted
Average
Life
(Years)
Outstanding
Face
Amortized
Cost Basis
Carrying
Value
December
31, 2016
Weighted
Average
Life
(Years)
Carrying
Value(A)
$
1,974,164
$
1,974,164
Jan-18
1.37%
0.1
$
1,951,238
$ 2,014,038
$ 1,997,348
3.7
$
1,764,760
Debt Obligations/Collateral
Repurchase Agreements(C)
Agency RMBS(D)
Non-Agency RMBS(E)
4,720,290
4,720,290
Residential Mortgage Loans(F)
1,850,515
1,849,004
Real Estate Owned(G) (H)
118,778
118,681
Total Repurchase Agreements
8,663,747
8,662,139
Notes and Bonds Payable
Excess MSRs(I)
MSRs(J)
484,199
483,978
1,158,085
1,157,179
Servicer Advances(K)
4,066,567
4,060,156
Residential Mortgage Loans(L)
137,196
137,196
Jan-18 to
Mar-18
Feb-18 to
Dec-19
Feb-18 to
Dec-19
Jun-19 to
Jul-22
Feb-18 to
Dec-22
Mar-18 to
Dec-21
Oct-18 to
Apr-20
Dec-21 to
Mar-24
Consumer Loans(M)
Receivable from government
agency(L)
1,248,050
1,242,756
3,126
3,126
Oct-18
Total Notes and Bonds Payable
7,097,223
7,084,391
Total/Weighted Average
$
15,760,970
$
15,746,530
2.90%
3.73%
3.70%
2.74%
5.31%
5.44%
3.26%
3.61%
3.36%
3.90%
3.78%
3.21%
0.1
0.9
0.8
0.3
2.8
2.2
2.0
2.3
3.1
0.8
2.3
1.2
11,899,935
5,467,187
5,839,524
2,364,874
2,165,584
2,135,698
7.7
4.3
N/A
N/A
142,404
N/A
264,504,619
1,107,042
1,328,008
221,952,565
1,904,987
2,211,710
4,255,047
4,596,042
4,699,418
229,522
179,812
179,812
1,377,625
1,380,202
1,374,097
6.1
6.2
4.5
8.0
3.5
N/A
N/A
2,782
N/A
2,654,242
686,412
85,217
5,190,631
729,145
—
5,549,872
8,271
1,700,211
3,106
7,990,605
$ 13,181,236
(A)
(B)
(C)
(D)
Net of deferred financing costs.
All debt obligations with a stated maturity through February 13, 2018 were refinanced, extended or repaid.
These repurchase agreements had approximately $16.9 million of associated accrued interest payable as of December 31,
2017.
All of the Agency RMBS repurchase agreements have a fixed rate. Collateral amounts include approximately $1.0 billion
of related trade and other receivables and $0.9 billion of treasury securities.
182
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(E)
(F)
(G)
(H)
(I)
(J)
(K)
(L)
(M)
All of the Non-Agency RMBS repurchase agreements have LIBOR-based floating interest rates. This includes repurchase
agreements of $160.2 million on retained servicer advance and consumer loan 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 has made or intends to make a claim on the FHA guarantee.
Includes $204.2 million of corporate loans which bear interest equal to the sum of (i) a floating rate index equal to one-
month LIBOR and (ii) a margin of 3.75%, and includes $280.0 million of corporate loans which bear interest equal to
the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 3.75%. The outstanding face amount
of the collateral represents the UPB of the residential mortgage loans underlying the interests in MSRs that secure these
notes.
Includes: $290.0 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month
LIBOR and (ii) a margin of 4.25%, $232.9 million of MSR notes which bear interest equal to the sum of (i) a floating
rate index equal to one-month LIBOR and (ii) a margin of 3.75%, $74.0 million of MSR notes which bear interest equal
to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 3.50%; $487.2 million of MSR
notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of
4.00%; and $74.0 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-
month LIBOR and (ii) a margin of 3.13%. The outstanding face amount of the collateral represents the UPB of the
residential mortgage loans underlying the MSRs and mortgage servicing rights financing receivables that secure these
notes.
$3.5 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 equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from 1.5%
to 2.4%. Collateral includes Servicer Advance Investments, as well as servicer advances receivable related to the mortgage
servicing rights and mortgage servicing rights financing receivables owned by NRM.
Represents: (i) a $10.3 million note payable to Nationstar that bears interest equal to one-month LIBOR plus 2.88% and
(ii) $130.0 million of asset-backed notes held by third parties which bear interest equal to 3.60%.
Includes the SpringCastle debt, which is comprised of the following classes of asset-backed notes held by third parties:
$927.0 million UPB of Class A notes with a coupon of 3.05% and a stated maturity date in November 2023; $210.8
million UPB of Class B notes with a coupon of 4.10% and a stated maturity date in March 2024; $18.3 million UPB of
Class C-1 notes with a coupon of 5.63% and a stated maturity date in March 2024; $18.3 million UPB of Class C-2 notes
with a coupon of 5.63% and a stated maturity date in March 2024. Also includes a $73.6 million face amount note
collateralized by newly originated consumer loans which bears interest equal to 4.00%.
As of December 31, 2017, 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).
General
Certain of the debt obligations included above are obligations of New Residential’s consolidated subsidiaries, which own the
related collateral. In some cases, such collateral is not available to other creditors of New Residential.
New Residential has margin exposure on $8.7 billion of repurchase agreements as of December 31, 2017. 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.
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
183
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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.
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.
Consumer Loans
In October 2016, the Consumer Loan Companies (Note 9) refinanced their outstanding asset-backed notes with a new asset-backed
securitization. The issuance consisted of $1.7 billion face amount of asset-backed notes comprised of six classes with maturity
dates in November 2023 and March 2024, of which approximately $157.6 million face amount was retained by the Consumer
Loan Companies and subsequently distributed to their members including New Residential. New Residential’s $79.9 million
portion of these bonds is not treated as outstanding debt in consolidation. In connection with the refinancing, the Consumer Loan
Companies recorded approximately $4.7 million of loss on extinguishment of debt related to an unamortized discount.
184
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Activities related to the carrying value of New Residential’s debt obligations were as follows:
Balance at December 31, 2015
$
182,978
$
— $ 7,047,061
$ 3,017,157
$ 1,004,980
$
40,446
$ 11,292,622
Excess
MSRs
MSRs
Servicer
Advances(A)
Real Estate
Securities
Residential
Mortgage
Loans and
REO
Consumer
Loans
Total
Repurchase Agreements:
Borrowings
Repayments
Capitalized deferred financing costs, net of
amortization
Notes and Bonds Payable:
Acquired borrowings, net of discount
Borrowings
Repayments
—
—
—
—
1,141,996
(592,175)
Discount on borrowings, net of amortization
1,420
Capitalized deferred financing costs, net of
amortization
(5,074)
—
—
—
—
—
—
—
—
— 30,441,880
552,459
21,458
31,015,797
— (29,040,035)
(764,113)
(61,904)
(29,866,052)
—
—
6,857,006
(8,354,692)
—
497
—
—
—
—
—
—
(2,169)
—
(2,169)
—
—
1,803,192
1,789,706
1,803,192
9,788,708
(8,151)
(1,888,714)
(10,843,732)
—
—
(3,374)
(1,954)
(599)
(5,176)
Balance at December 31, 2016
$
729,145
$
— $ 5,549,872
$ 4,419,002
$
783,006
$ 1,700,211
$ 13,181,236
Repurchase Agreements:
Borrowings
Repayments
Capitalized deferred financing costs, net of
amortization
Notes and Bonds Payable:
—
—
—
—
—
—
—
Borrowings
Repayments
1,400,354
1,172,058
5,344,985
(1,650,409)
(13,973)
(6,838,862)
Discount on borrowings, net of amortization
—
—
(147)
Capitalized deferred financing costs, net of
amortization
4,888
(906)
4,308
— 55,233,007
2,529,556
—
57,762,563
— (52,957,555)
(1,334,952)
— (54,292,507)
—
—
—
—
—
1,449
140,323
—
—
1,449
8,057,720
(11,375)
(456,904)
(8,971,523)
—
—
(700)
149
(847)
8,439
Balance at December 31, 2017
$
483,978
$ 1,157,179
$ 4,060,156
$ 6,694,454
$ 2,108,007
$ 1,242,756
$ 15,746,530
(A)
New Residential net settles daily borrowings and repayments of the Notes and Bonds Payable on its servicer advances.
Maturities
New Residential’s debt obligations as of December 31, 2017 had contractual maturities as follows:
Year
2018
2019
2020
2021
2022
2023 and thereafter
Nonrecourse
1,160,873
$
1,391,994
506,269
1,211,100
74,000
1,174,408
5,518,644
$
Recourse
9,020,147
530,794
—
—
691,385
—
10,242,326
$
$
$
$
Total
10,181,020
1,922,788
506,269
1,211,100
765,385
1,174,408
15,760,970
185
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Borrowing Capacity
The following table represents New Residential’s borrowing capacity as of December 31, 2017:
Debt Obligations/ Collateral
Repurchase Agreements
Borrowing
Capacity
Balance
Outstanding
Available
Financing
Residential mortgage loans and REO
$
2,735,000
$
1,969,293
$
765,707
Notes and Bonds Payable
Excess MSRs
MSRs
Servicer advances(A)
Consumer loans
750,000
775,000
1,910,120
150,000
6,320,120
$
280,000
670,898
1,585,069
73,646
4,578,906
$
470,000
104,102
325,051
76,354
1,741,214
$
(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 0.02% fee on the unused borrowing capacity. Excludes borrowing capacity and outstanding debt
for retained Non-Agency bonds collateralized by servicer advances with a current face amount of $93.5 million.
Certain of the debt obligations are subject to customary loan covenants and event of default provisions, including event of default
provisions triggered by certain specified declines in New Residential’s equity or a failure to maintain a specified tangible net worth,
liquidity, or indebtedness to tangible net worth ratio. New Residential was in compliance with all of its debt covenants as of
December 31, 2017.
12. FAIR VALUE MEASUREMENT
U.S. GAAP requires the categorization of fair value measurement 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 rates, 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 fair value measurements. The classifications are based on the lowest level of input
that is significant to the fair value measurement.
186
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The carrying values and fair values of New Residential’s 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, 2017 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)
$
217,121,299
$
1,173,713
$
— $
— $
1,173,713
$
1,173,713
Excess mortgage servicing rights, equity method
investees, at fair value(A)
Mortgage servicing rights, at fair value(A)
Mortgage servicing rights financing receivables, at
fair value(A)
Servicer advance investments, at fair value
Real estate and other securities, available-for-sale
Residential mortgage loans, held-for-investment
Residential mortgage loans, held-for-sale
Consumer loans, held-for-investment
Derivative assets
Cash and cash equivalents
Restricted cash
Other assets
Liabilities:
Repurchase agreements
Notes and bonds payable
Derivative liabilities
50,501,054
171,765
172,454,150
1,735,504
64,344,893
3,581,876
14,822,986
806,635
1,907,052
1,377,792
772,500
295,798
150,252
1,788,354
598,728
4,027,379
8,071,140
691,155
1,725,534
1,374,263
2,423
295,798
150,252
28,802
—
—
—
—
—
—
—
—
—
295,798
150,252
19,259
—
—
—
—
2,096,351
—
—
—
2,423
—
—
—
171,765
171,765
1,735,504
1,735,504
598,728
4,027,379
5,974,789
694,692
1,794,210
1,379,746
—
—
—
9,543
598,728
4,027,379
8,071,140
694,692
1,794,210
1,379,746
2,423
295,798
150,252
28,802
$ 20,046,456
$ 465,309
$
2,098,774
$ 17,560,069
$ 20,124,152
$
8,663,747
$
8,662,139
$
— $
8,663,747
$
— $
8,663,747
7,097,223
4,115,100
7,084,391
697
—
—
—
697
7,109,803
7,109,803
—
697
$ 15,747,227
$
— $
8,664,444
$
7,109,803
$ 15,774,247
(A)
The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs,
MSR financing receivables, and Excess MSRs. New Residential does not receive an excess mortgage servicing amount
on non-performing loans in Agency portfolios.
187
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The carrying values and fair values of New Residential’s 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, 2016 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)
$ 277,975,997
$ 1,399,455
$
— $
— $ 1,399,455
$ 1,399,455
Excess mortgage servicing rights, equity method
investees, at fair value(A)
Mortgage servicing rights, at fair value(A)
60,677,300
79,935,302
194,788
659,483
Servicer advance investments, at fair value
5,617,759
5,706,593
Real estate securities, available-for-sale
8,788,957
5,073,858
Residential mortgage loans, held-for-investment
Residential mortgage loans, held-for-sale
203,673
908,930
190,761
696,665
Consumer loans, held-for-investment
1,809,952
1,799,486
6,776,052
290,602
163,095
888,412
6,762
290,602
163,095
4,856
—
—
—
—
—
—
—
—
290,602
163,095
—
—
—
—
194,788
659,483
194,788
659,483
5,706,593
5,706,593
1,530,298
3,543,560
5,073,858
—
—
—
6,762
—
—
—
190,343
717,985
190,343
717,985
1,819,106
1,819,106
—
—
—
4,856
6,762
290,602
163,095
4,856
$ 16,186,404
$ 453,697
$ 1,537,060
$ 14,236,169
$ 16,226,926
$
5,193,686
$ 5,190,631
$
— $ 5,193,686
$
— $ 5,193,686
8,015,097
7,990,605
3,640,000
3,021
—
—
—
7,993,326
7,993,326
3,021
—
3,021
$ 13,184,257
$
— $ 5,196,707
$ 7,993,326
$ 13,190,033
Derivative assets
Cash and cash equivalents
Restricted cash
Other assets
Liabilities
Repurchase agreements
Notes and bonds payable
Derivative liabilities
(A)
The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs
and Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in
Agency portfolios.
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 assets or liabilities, 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 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.
188
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
New Residential’s assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:
Level 3
Excess MSRs(A)
Agency
Non-
Agency
Excess
MSRs in
Equity
Method
Investees(A)(B)
Mortgage
Servicing Rights
Financing
Receivables(A)
Servicer
Advance
Investments
Non-
Agency
RMBS
MSRs(A)
Total
$
437,201
$ 1,144,316
$
217,221
$
— $
— $ 7,426,794
$ 1,584,283
$ 10,809,815
—
—
124
—
(88,050)
(239,782)
(38,959)
$
381,757
$ 1,017,698
$
194,788
$
659,483
$
— $ 5,706,593
$ 3,543,560
$ 11,503,879
Interest income
35,526
114,615
Balance at December 31, 2015
Transfers(C)
Transfers from Level 3
Transfers to Level 3
Gains (losses) included in net income
Included in other-than-temporary impairment 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 servicing revenue, net(E)
Included in change in fair value of servicer
advance investments
Included in gain (loss) on settlement of
investments, net
Included in other income (loss), net(D)
Gains (losses) included in other comprehensive
income(F)
Purchases, sales, repayments and transfers
Purchases
Proceeds from sales
Proceeds from repayments
Balance at December 31, 2016
Transfers(C)
Transfers from Level 3
Transfers to Level 3
Gains (losses) included in net income
Included in other-than-temporary impairment 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 servicing revenue, net(E)
Included in change in fair value of investments in
mortgage servicing rights financing
receivables(D)
Included in change in fair value of servicer
advance investments
Included in gain (loss) on settlement of
investments, net
Included in other income (loss), net(D)
Gains (losses) included in other comprehensive
income(F)
Interest income
Purchases, sales and repayments
Purchases
Proceeds from sales
Proceeds from repayments
Ocwen Transaction (Note 5)
—
—
—
—
—
—
(5,372)
(1,925)
—
—
—
—
2,452
—
—
—
—
—
350
—
—
—
—
—
—
—
(3,037)
7,359
—
—
—
—
—
—
—
—
—
—
2,150
2,227
—
74,702
—
—
28,351
—
(13,505)
(71,080)
—
—
—
—
—
16,526
—
—
—
—
—
—
—
—
—
—
—
—
12,617
—
—
—
—
—
—
—
—
—
—
—
—
—
—
88,325
—
—
—
—
—
571,158
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(7,768)
—
—
—
364,350
—
—
—
—
(10,264)
(10,264)
—
—
—
—
(18,117)
(4,875)
124,669
209,706
(7,297)
16,526
88,325
(7,768)
(18,117)
(2,073)
124,669
724,197
15,266,816
2,746,409
18,584,507
—
(261,192)
(261,192)
— (17,343,599)
(827,059)
(18,537,449)
—
—
—
—
—
(67,672)
—
—
—
—
—
—
—
—
—
—
—
—
66,394
—
—
—
—
—
—
—
—
—
—
—
—
84,418
9,327
—
—
528,356
—
—
—
—
(10,334)
(10,334)
—
—
—
—
—
18,050
2,883
244,608
333,297
4,322
12,617
(67,672)
66,394
84,418
27,377
7,260
244,608
964,706
1,143,693
467,884
12,168,519
3,052,965
16,833,061
—
—
—
—
—
(182,325)
(195,830)
— (13,988,614)
(1,027,915)
(15,304,176)
64,450
(481,220)
—
(488,752)
(180,927)
(71,982)
(35,640)
—
Balance at December 31, 2017
$
324,636
$
849,077
$
171,765
$
1,735,504
$
598,728
$ 4,027,379
$ 5,974,789
$ 13,681,878
(A)
(B)
Includes the recapture agreement for each respective pool, as applicable.
Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New
Residential has a 50% interest.
189
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
(C)
(D)
(E)
(F)
Transfers are assumed to occur at the beginning of the respective period.
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.
The components of Servicing revenue, net are disclosed in Note 5.
These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of
Comprehensive Income.
Investments in Excess MSRs, Excess MSRs Equity Method Investees, MSRs and MSR Financing Receivables Valuation
Fair value estimates of New Residential’s investments in MSRs and 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 mortgage servicing amount or excess mortgage servicing amount of the underlying
residential mortgage loans, as applicable, 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 addition, for investments in MSRs significant inputs
included the market-level estimated cost of servicing.
In order to evaluate the reasonableness of its fair value determinations, New Residential engages an independent valuation firm
to separately measure the fair value of its investments in MSRs and 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. New Residential
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 investments in MSRs and Excess MSRs, New Residential considered the likelihood of one of its servicers
being removed as the servicer, which likelihood is considered to be remote.
Significant increases (decreases) in the discount rates, prepayment or delinquency rates, or costs of servicing, in isolation would
result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recapture rates or
mortgage servicing amount or excess mortgage servicing amount, as applicable, 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 rate.
190
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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:
December 31, 2017
Significant Inputs(A)
Prepayment
Rate(B)
Delinquency(C)
Recapture Rate(D)
Mortgage Servicing
Amount
or Excess Mortgage
Servicing Amount
(bps)(E)
Collateral
Weighted Average
Maturity Years(F)
Excess MSRs Directly Held (Note 4)
Agency
Original Pools
Recaptured Pools
Recapture Agreement
Non-Agency(G)
Nationstar and SLS Serviced:
Original Pools
Recaptured Pools
Recapture Agreement
Ocwen Serviced Pools
Total/Weighted Average--Excess MSRs Directly Held
Excess MSRs Held through Equity Method Investees
(Note 4)
Agency
Original Pools
Recaptured Pools
Recapture Agreement
Total/Weighted Average--Excess MSRs Held through
Investees
Total/Weighted Average--Excess MSRs All Pools
MSRs
Agency
Mortgage Servicing Rights(H)
Mortgage Servicing Rights Financing Receivables(H)
Non-Agency
Mortgage Servicing Rights Financing Receivables(H)
9.7%
7.1%
7.1%
8.8%
12.2%
6.9%
6.9%
8.8%
9.4%
9.2%
11.3%
7.3%
7.3%
9.3%
9.2%
10.5%
10.3%
3.0%
4.4%
4.3%
3.5%
N/A
N/A
N/A
N/A
N/A
3.5%
5.0%
4.7%
4.7%
4.8%
3.8%
0.9%
0.9%
31.6%
23.1%
26.2%
29.1%
15.4%
19.8%
19.7%
—%
4.0%
10.9%
34.8%
24.3%
24.2%
29.5%
14.9%
25.4%
14.8%
10.0%
10.9%
—%
21
22
21
21
15
22
20
14
15
16
19
23
23
21
17
27
27
34
23
24
—
23
24
24
—
26
26
25
22
24
—
23
25
21
20
22
191
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
December 31, 2016
Significant Inputs(A)
Prepayment
Rate(B)
Delinquency(C)
Recapture Rate(D)
Mortgage Servicing
Amount
or Excess Mortgage
Servicing Amount
(bps)(E)
Collateral
Weighted Average
Maturity Years(F)
Excess MSRs Directly Held (Note 4)
Agency
Original Pools
Recaptured Pools
Recapture Agreement
Non-Agency(G)
Nationstar and SLS Serviced:
Original Pools
Recaptured Pools
Recapture Agreement
Ocwen Serviced Pools
Total/Weighted Average--Excess MSRs Directly Held
Excess MSRs Held through Equity Method Investees
(Note 4)
Agency
Original Pools
Recaptured Pools
Recapture Agreement
Total/Weighted Average--Excess MSRs Held through
Investees
Total/Weighted Average--Excess MSRs All Pools
MSRs
Agency
Mortgage Servicing Rights(H)
10.1%
7.4%
7.4%
9.3%
11.8%
7.9%
7.5%
8.8%
9.4%
9.4%
11.8%
7.3%
7.3%
9.8%
9.5%
3.2%
4.3%
5.0%
3.6%
N/A
N/A
N/A
N/A
N/A
3.6%
5.2%
4.5%
5.0%
5.0%
3.9%
32.6%
23.0%
20.0%
29.5%
10.7%
20.0%
20.0%
—%
2.7%
10.0%
35.0%
24.7%
20.0%
29.8%
14.2%
12.4%
2.8%
27.5%
21
21
22
21
14
21
20
14
14
16
19
23
23
21
17
26
24
25
—
24
24
24
—
26
26
26
23
25
—
24
26
23
(A)
(B)
(C)
(D)
(E)
(F)
(G)
(H)
Weighted by fair value of the portfolio.
Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
Projected percentage of residential mortgage loans in the pool for which the borrower will miss its mortgage payments.
Percentage of voluntarily prepaid loans that are expected to be refinanced by the related servicer or subservicer, as
applicable.
Weighted average total mortgage servicing amount, in excess of the basic fee as applicable, measured in bps. A weighted
average cost of subservicing of $7.23 per loan per month was used to value the agency MSRs, including MSR Financing
Receivables. A weighted average cost of subservicing of $12.45 per loan per month was used to value the non-agency
MSRs, including MSR Financing Receivables.
Weighted average maturity of the underlying residential mortgage loans in the pool.
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.
For certain pools, recapture rate represents the expected recapture rate with the successor subservicer appointed by NRM.
As of December 31, 2017 and 2016, weighted average discount rates of 8.9% and 9.8%, respectively, were used to value New
Residential’s investments in Excess MSRs (directly and through equity method investees). As of December 31, 2017 and 2016,
weighted average discount rates of 9.1% and 12.0% were used to value New Residential’s investments in MSRs, respectively. As
192
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
of December 31, 2017, a weighted average discount rate of 9.4% was used to value New Residential’s investments in MSR financing
receivables.
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. New Residential uses assumptions that generate
its best estimate of future cash flows for each investment in MSRs and Excess MSRs.
When valuing investments in MSRs and Excess MSRs, New Residential uses the following criteria to determine the significant
inputs:
•
Prepayment Rate: Prepayment rate 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”). New Residential considers historical prepayment experience associated with the
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 New Residential’s servicers and subservicers, and delinquency experience over the past year. New
Residential 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 New Residential’s servicers
and subservicers on similar residential mortgage loan pools. Generally, New Residential looks to three to six months’ worth
of actual recapture rates, which it believes provides a reasonable sample for projecting future recapture rates while taking
into account current market conditions. Recapture rate projections are in the form 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 or subservicer. The recapture vector takes into account the nature and timeline of the relationship
between the borrowers in the pool and the servicer or subservicer, the customer retention programs offered by the servicer
or subservicer and the historical recapture rates.
• Mortgage Servicing Amount or Excess Mortgage Servicing Amount: For existing mortgage pools, mortgage servicing
amount and excess mortgage servicing amount projections are based on the actual total mortgage servicing amount, in
excess of a base fee as applicable. For loans expected to be refinanced by the related servicer or subservicer and subject to
a recapture agreement, New Residential considers the mortgage servicing amount or excess mortgage servicing amount on
loans recently originated by the related servicer over the past three months and other general market considerations. New
Residential believes this time period provides a reasonable sample for projecting future mortgage servicing amounts and
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.
• Cost of subservicing: The costs of subservicing used by New Residential are based on available market data for various
loan types.
New Residential uses different prepayment and delinquency assumptions in valuing the MSRs and Excess MSRs relating to the
original loan pools, the recapture agreements and the MSRs and Excess MSRs relating to recaptured loans. The prepayment rate
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 investments in MSRs and Excess MSRs and recapture agreements are based on historical recapture experience
and market pricing.
193
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Servicer Advance Investments Valuation
New Residential 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. New Residential’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
rates 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 Advance Investments.
In order to evaluate the reasonableness of its fair value determinations, New Residential engages an independent valuation firm
to separately measure the fair value of its Servicer Advance Investments. The independent valuation firm determines an estimated
fair value range based on its own models and issues a “fairness opinion” with this range. New Residential 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 Advance Investments, New Residential considered the likelihood of the related servicer being removed as
the servicer, which likelihood is considered to be remote.
Significant increases (decreases) in the advance balance-to-UPB ratio, prepayment rate, 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.
The following table summarizes certain information regarding the inputs used in valuing the Servicer Advance Investments,
including the basic fee component of the related MSRs:
Significant Inputs
Weighted Average
Outstanding
Servicer Advances
to UPB of Underlying
Residential Mortgage
Loans
Prepayment
Rate(A)
Delinquency
Mortgage
Servicing
Amount(B)
Discount
Rate
Collateral
Weighted
Average
Maturity
(Years)(C)
December 31, 2017
December 31, 2016
1.7%
2.1%
10.0%
9.8%
13.8%
14.9%
18.2 bps
8.3 bps
6.8%
5.6%
25.6
24.8
(A)
(B)
(C)
Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.
Mortgage servicing amount is net of 12.5 bps and 22.4 bps which represent the amounts New Residential paid its servicers
as a monthly servicing fee as of December 31, 2017 and 2016, respectively.
Weighted average maturity of the underlying residential mortgage loans in the pool.
The valuation of the Servicer Advance Investments 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 Advance Investments 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 rate, 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 Servicer Advance Investment, including the basic fee component of the related MSR.
194
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
When valuing Servicer Advance Investments, 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 Rate: Prepayment rate 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. New Residential 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. New Residential 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. New
Residential projects the weighted average mortgage servicing amount based on its projections for prepayment rates.
• LIBOR: The performance-based incentive fees on both Ocwen-serviced and Nationstar-serviced Servicer Advance
Investments 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.
Real Estate and Other Securities Valuation
New Residential’s securities valuation methodology and results are further detailed as follows:
Outstanding
Face
Amount
Amortized
Cost Basis
Multiple
Quotes(A)
Single
Quote(B)
Total
Level
Fair Value
$ 1,203,629
$ 1,247,093
$ 1,243,617
$
— $ 1,243,617
862,000
12,757,357
858,028
5,599,644
852,734
5,963,577
$ 14,822,986
$ 7,704,765
$ 8,059,928
$ 1,486,739
$ 1,532,421
$ 1,530,298
7,302,218
3,415,906
3,028,094
$ 8,788,957
$ 4,948,327
$ 4,558,392
—
11,212
852,734
5,974,789
11,212
$ 8,071,140
— $ 1,530,298
515,466
3,543,560
515,466
$ 5,073,858
$
$
$
2
2
3
2
3
Asset Type
December 31, 2017
Agency RMBS
Treasury
Non-Agency RMBS(C)
Total
December 31, 2016
Agency RMBS
Non-Agency RMBS(C)
Total
(A)
New Residential 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. New Residential evaluates
quotes received and determines one as being most representative of fair value, and does 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. New Residential 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 has not adjusted any of the quotes received in the periods presented.
195
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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.
The third-party pricing services and brokers engaged by New Residential (collectively, “valuation providers”) use either
the income approach or the market approach, or a combination of the two, in arriving at their estimated valuations of
RMBS. Valuation providers using the market approach generally look at prices and other relevant information generated
by market transactions involving identical or comparable assets. Valuation providers using the income approach create
pricing models that generally incorporate such assumptions as discount rates, expected prepayment rates, expected default
rates and expected loss severities. New Residential has reviewed the methodologies utilized by its valuation providers
and has found them to be consistent with GAAP requirements. In addition to obtaining multiple quotations, when available,
and reviewing the valuation methodologies of its valuation providers, New Residential creates its own internal pricing
models for Level 3 securities and uses the outputs of these models as part of its process of evaluating the fair value
estimates it receives from its valuation providers. These models incorporate the same types of assumptions as the models
used by the valuation providers, but the assumptions are developed independently. These assumptions are regularly refined
and updated at least quarterly by New Residential, and reviewed by its valuation group, which is separate from its
investment acquisition and management group, to reflect market developments and actual performance.
For 82.5% of New Residential’s Non-Agency RMBS, the ranges of assumptions used by New Residential’s valuation
providers are summarized in the table below. The assumptions used by New Residential’s valuation providers with respect
to the remainder of New Residential’s Non-Agency RMBS were not readily available.
Non-Agency RMBS
$
4,928,338
Fair Value
Discount Rate
Prepayment
Rate(a)
2.38% to 32.75% 0.25% to 22.40% 0.10% to 9.00%
CDR(b)
Loss Severity(c)
5.0% to 100%
(a)
(b)
(c)
Represents the annualized rate of the prepayments as a percentage of the total principal balance of the pool.
Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal
balance of the pool.
Represents 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 balance.
(B)
(C)
New Residential was unable to obtain quotations from more than one source on these securities. For approximately $10.5
million in 2017 and $509.6 million in 2016, 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 rates 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 rate.
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, 2017 and 2016, assets measured at fair value on a nonrecurring basis were $803.2 million and $449.9 million,
respectively. The $803.2 million of assets at December 31, 2017 include approximately $725.3 million of residential mortgage
loans held-for-sale and $77.9 million of REO. The $449.9 million of assets at December 31, 2016 include approximately $406.3
196
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
million of residential mortgage loans held-for-sale and $43.6 million of REO. The fair value of New Residential’s residential
mortgage loans, held-for-sale is estimated based on a discounted cash flow model analysis using internal pricing models and is
categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these residential
mortgage loans:
Fair Value and
Carrying Value
Discount
Rate
Weighted
Average Life
(Years)(A)
Prepayment
Rate
CDR(B)
Loss
Severity(C)
December 31, 2017
Performing Loans
Non-Performing Loans
Total/Weighted Average
December 31, 2016
Performing Loans
Non-Performing Loans
Total/Weighted Average
$
$
$
$
721,121
4,203
725,324
151,436
254,848
406,284
3.8%
7.5%
3.8%
3.8%
5.6%
4.9%
4.8
3.8
4.8
6.0
3.0
4.1
11.5%
3.0%
11.5%
11.7%
2.8%
6.1%
1.1%
3.0%
1.2%
N/A
36.9%
30.0%
36.9%
24.4%
30.0%
27.9%
(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.
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 generally range from 10% to 25%, depending on the information available to the broker.
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, 2017 was an increase in net valuation allowance of approximately $13.7 million,
consisting of an approximately $15.7 million increase for residential mortgage loans, offset by a reversal of prior valuation allowance
of $2.0 million for REO.
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, 2016 was an increase in the net valuation allowance of approximately $28.7 million
consisting of $11.4 million and $17.3 million increases for loans held-for-sale and REO, respectively.
197
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Loans for Which Fair Value is Only Disclosed
The fair value of New Residential’s loans is estimated based on a discounted cash flow model analysis using internal pricing
models and is categorized within Level 3 of the fair value hierarchy.
The following table summarizes the inputs used in valuing certain loans:
Carrying
Value
Fair Value
Discount
Rate
Weighted
Average Life
(Years)(A)
Prepayment
Rate
CDR(B)
Loss
Severity(C)
December 31, 2017
Reverse Mortgage Loans(D)
Performing Loans
Non-Performing Loans
Total/Weighted Average
$
6,870
$
8,964
857,865
826,630
866,020
888,594
$ 1,691,365
$
1,763,578
7.0%
6.6%
5.9%
6.3%
Consumer Loans
$ 1,374,263
$
1,379,746
9.4%
December 31, 2016
Reverse Mortgage Loans(D)
Performing Loans
Non-Performing Loans
Total/Weighted Average
$
11,468
$
12,952
23,758
445,916
24,420
464,674
$
481,142
$
502,046
7.0%
7.4%
7.6%
7.6%
Consumer Loans
$ 1,799,486
$
1,819,106
9.3%
4.5
5.3
4.0
4.7
3.5
4.5
5.6
2.7
2.9
3.8
N/A
7.5%
2.8%
N/A
2.3%
3.0%
9.6%
42.8%
32.6%
37.7%
22.7%
6.2%
92.7%
N/A
6.2%
2.0%
N/A
2.1%
N/A
9.5%
50.3%
30.0%
30.5%
15.4%
5.7%
87.6%
(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% participation interest New Residential holds in the portfolio of reverse
mortgage loans.
Derivative Valuation
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 and bonds 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 and bonds payable have an estimated fair value equal to their carrying
value due to their short duration and generally floating interest rates. Longer-term notes and bonds payable are valued based on
internal models utilizing both observable and unobservable inputs.
198
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
13. EQUITY AND EARNINGS PER SHARE
Equity and Dividends
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.
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. To compensate 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. To compensate 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.
In August 2016, New Residential issued 20.0 million shares of its common stock in a public offering at a price to the public of
$14.20 per share for net proceeds of approximately $278.8 million. To compensate 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 2.0
million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $2.3
million as of the grant date. The assumptions used in valuing the options were: a 1.45% risk-free rate, a 11.80% dividend yield,
27.57% volatility and a 10-year term.
In February 2017, New Residential issued 56.5 million shares of its common stock in a public offering at a price to the public of
$15.00 per share for net proceeds of approximately $834.5 million. One of New Residential’s executive officers participated in
this offering and purchased 18,600 shares at the public offering price. To compensate 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
5.7 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $8.1
million as of the grant date. The assumptions used in valuing the options were: a 2.38% risk-free rate, a 10.82% dividend yield,
28.64% volatility and a 10-year term.
In July 2015, a former employee of the Manager exercised 37,500 options with a weighted average exercise price of $7.19 and
received 20,227 shares of common stock of New Residential. In August 2016, employees of the Manager exercised an aggregate
of 1,100,497 options with a weighted average exercise price of $10.59 per share and received 280,111 shares of common stock of
New Residential.
199
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Common dividends have been declared as follows:
Declaration Date
March 16, 2015
May 14, 2015
September 18, 2015
December 10, 2015
March 22, 2016
June 27, 2016
September 23, 2016
December 16, 2016
January 26, 2017
June 21, 2017
September 22, 2017
December 18, 2017
Per Share
Quarterly
Dividend
Total Amounts
Distributed
(millions)
0.38
0.45
0.46
0.46
0.46
0.46
0.46
0.46
0.48
0.50
0.50
0.50
53.7
89.5
106.0
106.0
106.0
106.0
115.4
115.4
147.5
153.7
153.7
153.7
Payment Date
April 2015
July 2015
October 2015
January 2016
April 2016
July 2016
October 2016
January 2017
April 2017
July 2017
October 2017
January 2018
Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals
at December 31, 2017.
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 5,654,578, 2,000,000,
8,543,539 and 1,437,500 were made on January 1, 2018, 2017, 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 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.
Upon joining the board, non-employee directors were, in accordance with the Plan, granted options relating to an aggregate of
6,000 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
Issued to the Manager and subsequently transferred to certain of the Manager’s employees
Issued to the independent directors
Total
200
December 31,
2017
2016
16,387,480
11,204,242
2,108,708
6,000
18,502,188
1,986,368
6,000
13,196,610
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
The following table summarizes New Residential’s outstanding options as of December 31, 2017. The last sales price on the New
York Stock Exchange for New Residential’s common stock in the year ended December 31, 2017 was $17.88 per share.
Recipient
Directors
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Manager(C)
Outstanding
Date of
Grant/
Exercise(A)
Various
2012
2013
2014
2015
2016
2017
Number of
Unexercised
Options
6,000
25,000
835,571
1,437,500
8,543,539
2,000,000
5,654,578
18,502,188
Options
Exercisable
as of
December 31,
2017
Weighted
Average
Exercise
Price(B)
Intrinsic Value of
Exercisable
Options as of
December 31, 2017
(millions)
$
6,000
25,000
835,571
1,437,500
8,543,539
1,066,667
1,884,859
13,799,136
$
13.99
7.19
11.48
12.20
15.46
14.20
15.00
—
0.3
5.3
8.2
20.7
3.9
5.4
(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 to
Manager
2015
2016
Total
Range of Exercise
Prices
$15.25 to $15.88
$14.20
Total Unexercised
Inception to Date
1,708,708
400,000
2,108,708
The following table summarizes activity in New Residential’s outstanding options:
December 31, 2015 outstanding options
Options granted
Options exercised(A)
Options expired unexercised
December 31, 2016 outstanding options
Options granted
Options exercised(A)
Options expired unexercised
December 31, 2017 outstanding options
Amount
12,380,107
2,002,000
$
(1,100,497) $
(85,000)
13,196,610
5,654,578
$
— $
Weighted
Average
Exercise Price
14.20
10.59
15.00
—
(349,000)
18,502,188 See table above
(A)
The 1.1 million options that were exercised in 2016 had an intrinsic value of approximately $4.0 million at the date of
exercise.
Income and Earnings Per Share
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
201
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
ended December 31, 2017, 2016 and 2015, based on the treasury stock method, New Residential had 2,143,323, 364,107 and
2,167,796 dilutive common stock equivalents, respectively.
Noncontrolling Interests
Noncontrolling interests is comprised of the interests held by third parties in consolidated entities that hold New Residential’s
Servicer Advance Investments (Note 6) and Consumer Loans (Note 9), as well as HLSS (Note 1) 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.
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 (the “Exchange Act”) 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 Exchange Act in an amount to be proven at trial and
reasonable costs, expenses, and fees. On February 11, 2015, defendants filed motions to dismiss the Securities Action in its entirety.
On June 6, 2016, all allegations except those regarding certain related party transactions were dismissed.
On June 15, 2017, the court entered an order preliminarily approving a settlement of the Securities Action for $6.0 million, certifying
a settlement class, approving the form and content of notice of the settlement to class members, and setting a hearing to determine
whether the settlement should receive final approval. Following a hearing on November 17, 2017, the court entered an order and
judgment finally approving the settlement and dismissing all claims with prejudice. Insurance proceeds covered $5.0 million of
the $6.0 million settlement.
202
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 Note 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 became 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 its experience, New Residential expects the risk of material loss to be remote.
Capital Commitments — As of December 31, 2017, New Residential had outstanding capital commitments related to investments
in the following investment types (also refer to Note 5 for MSR investment commitments and to Note 18 for additional capital
commitments entered into subsequent to December 31, 2017, if any):
MSRs and servicer advances — New Residential and, in some cases, third-party co-investors agreed to purchase future servicer
advances related to certain Non-Agency mortgage loans. In addition, New Residential’s subsidiary, NRM, is generally obligated
to fund future servicer advances related to the loans it is obligated to service. 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 Notes 5 and 6 for information on New
Residential’s investments in MSRs and Servicer Advance Investments, respectively.
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.
Consumer Loans — The Consumer Loan Companies have invested in loans with an aggregate of $152.0 million of unfunded and
available revolving credit privileges as of December 31, 2017. However, under the terms of these loans, requests for draws may
be denied and unfunded availability may be terminated at New Residential’s discretion.
Environmental Costs — As a residential real estate owner, through its REO, New Residential is subject to potential environmental
costs. At December 31, 2017, 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 Drive Shack under applicable U.S. federal
income tax rules, and if Drive Shack failed to qualify as a REIT for a taxable year ending on or before December 31, 2014, New
Residential could be prohibited from electing to be a REIT. Accordingly, in the separation and distribution agreement executed in
connection with New Residential’s spin-off from Drive Shack, Drive Shack (i) represented that it had 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 Drive Shack’s income and assets, the composition of its stockholders, and its
203
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
operation as a REIT; and (iii) covenanted to use its reasonable best efforts to maintain its REIT status for each of Drive Shack’s
taxable years ending on or before December 31, 2014 (unless Drive Shack 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 Drive Shack’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 12 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.
If the Management Agreement is terminated, the Manager may require New Residential to purchase from the Manager the right
of the Manager to receive the Incentive Compensation. In exchange therefor, New Residential would be obligated to pay the
Manager a cash purchase price equal to the amount of the Incentive Compensation that would be paid to the Manager if all of New
Residential’s assets were sold for cash at their then current fair market value (taking into account, among other things, expected
future performance of the underlying investments). 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.
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 Drive Shack on the date of
the spin-off, plus total net proceeds from stock offerings, plus certain capital contributions to subsidiaries, less capital distributions
and repurchases of common stock.
In addition, 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 Drive Shack 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 Drive Shack’s prior performance.
In addition to the management fee and incentive compensation, New Residential is responsible for reimbursing the Manager for
certain expenses paid by the Manager on behalf of New Residential.
204
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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,
2017
2016
$
$
4,734
$
81,373
2,854
88,961
$
3,689
42,197
1,462
47,348
Year Ended December 31,
2016
2015
2017
$
$
55,634
$
41,610
$
81,373
500
42,197
500
33,475
16,017
500
137,507
$
84,307
$
49,992
(A)
Included in General and Administrative Expenses in the Consolidated Statements of Income.
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, 8, 11 and 14 for a discussion of transactions with Nationstar. As of December 31, 2017, 66.1%, 41.2% and 35.0%
of the UPB of the loans underlying New Residential’s investments in Excess MSRs, MSRs and Servicer Advance Investments,
respectively, was serviced, subserviced or master serviced by Nationstar. As of December 31, 2017, a total face amount of $3.3
billion of New Residential’s Non-Agency RMBS portfolio and approximately $106.6 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 $19.0 billion as of December 31, 2017. 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 residential mortgage loans falls below a pre-determined threshold, it can effectively purchase the underlying
residential mortgage loans at par, plus unreimbursed servicer advances, and repay all of the outstanding securitization financing
at par, in exchange for a fee of 0.75% of UPB paid to Nationstar at the time of exercise. In connection with New Residential’s
exercise of certain of these call rights, and certain other call rights acquired by New Residential, 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 2017, 2016 and 2015, New Residential accrued for
MSR Fund Payments in an aggregate amount of approximately $0.3 million, $0.5 million and $4.4 million, respectively, and has
also caused an aggregate of $1.4 million and $0.1 million of securities to be transferred to such funds in 2017 and 2016, respectively.
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 residential mortgage loans on which New Residential
can successfully exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions. As of
December 31, 2017, $787.5 million UPB of New Residential’s residential mortgage loans and $20.5 million of New Residential’s
REO were being serviced or master serviced by Nationstar. Additionally, in the ordinary course of business, New Residential
engages Nationstar to administer the termination of securitization trusts that it collapses pursuant to its call rights. 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 4 regarding co-investments with Fortress-managed funds.
205
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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 (loss) on settlement of
investments, net
Reclassification of net realized (gain)
loss on securities into earnings
Other-than-temporary
impairment on securities
Total reclassifications
Year Ended December 31,
2016
2015
2017
$
$
(20,642) $
27,460
$
(13,096)
10,334
(10,308) $
10,264
37,724
$
5,788
(7,308)
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,
2016
2015
2017
$
(1,250) $
360
(890)
3,813
$
252
4,065
148,997
19,521
168,518
33,999
847
34,846
$
167,628
$
38,911
$
(2,737)
(1,631)
(4,368)
(2,778)
(3,855)
(6,633)
(11,001)
New Residential intends to qualify as a REIT for each of its tax years through December 31, 2017. 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
distributed 100% of its 2013 through 2017 REIT taxable income by the prescribed dates.
New Residential operates various securitization vehicles and has made certain investments, particularly its investments in MSRs
(Note 5), Servicer Advance Investments (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.
The increase in the provision for income taxes for the year ended December 31, 2017 is primarily due to the use of deferred tax
assets and an increase in net income attributable to New Residential’s TRSs.
The increase in the provision for income taxes for the year ended December 31, 2016 is primarily due to an increase in net income
attributable to New Residential’s TRSs.
206
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
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
Change in valuation allowance
Change in federal tax rate
Other
Total provision
2017
35.00 %
(21.72)%
1.76 %
0.85 %
(0.92)%
(0.17)%
14.80 %
December 31,
2016
35.00 %
(28.22)%
0.18 %
0.67 %
— %
(0.48)%
7.15 %
2015
35.00 %
(36.51)%
(1.16)%
0.01 %
— %
(1.59)%
(4.25)%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liability are presented
below:
Deferred tax assets:
Servicer advances basis difference(A)
Net operating losses and tax credit carryforwards(B)
Interest accruals not currently deductible for tax purposes
Basis differences for REO and other assets
Other
Total deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Basis difference for partnership investments
Interest accruals not currently includible in income for tax purposes
Unrealized mark to market
Total deferred tax (liability)
Net deferred tax assets (liability)
December 31,
2017
2016
$
— $
113,354
20,682
2,628
8,034
2,279
33,623
(12,404)
21,219
$
44,289
16,543
—
5,684
179,870
(10,054)
169,816
(3,873)
(6,979)
(29,585)
(40,437) $
—
—
(18,532)
(18,532)
(19,218) $
151,284
$
$
$
(A)
(B)
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 related to the difference
in the book basis and tax basis of New Residential’s Servicer Advance Investments and is included as part of the deferred
tax asset as of December 31, 2016.
As of December 31, 2017, New Residential’s TRSs had approximately $131.3 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 December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. The TCJA includes a number of significant
changes to existing U.S. corporate income tax laws, most notably a reduction of the U.S. corporate income tax rate from 35 percent
to 21 percent, effective January 1, 2018. New Residential measures deferred tax assets and liabilities using enacted tax rates that
207
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
will apply in the years in which the temporary differences are expected to be recovered or paid. Accordingly, New Residential’s
deferred tax assets and liabilities were remeasured to reflect the reduction in the U.S. corporate income tax rate, resulting in a
$10.1 million decrease in income tax expense for the year ended December 31, 2017 and a corresponding decrease of the same
amount in our deferred tax liabilities as of December 31, 2017. New Residential is still analyzing certain aspects of the TCJA and
refining its calculations, which could potentially affect the measurement of these balances or give rise to new deferred tax amounts.
In assessing the realizability of deferred tax assets, New Residential 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. During the year ended December 31,
2017, New Residential recorded a partial valuation allowance related to certain net operating losses and loan loss reserves related
to one of New Residential’s TRSs as New Residential does not believe that it is more likely than not that these deferred tax assets
will be realized.
The following table summarizes the change in the deferred tax asset valuation allowance:
Valuation allowance at December 31, 2015
Increase related to net operating losses and loan loss reserves
Other increase (decrease)
Valuation allowance at December 31, 2016
Increase related to net operating losses and loan loss reserves
Decrease related to changes in tax rates
Other increase (decrease)
Valuation allowance at December 31, 2017
$
$
9,409
1,303
(658)
10,054
4,720
(3,845)
1,475
12,404
New Residential and its TRSs file income tax returns with the U.S. federal government and various state and local jurisdictions.
Generally, New Residential is no longer subject to tax examinations by tax authorities for tax years ended prior to December 31,
2014. 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. As of December 31, 2017, New Residential has no material
uncertainties to be recognized. 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.
Common stock distributions were taxable as follows:
Year
2017(A)
2016(B)
2015
Dividends
per Share
Ordinary
Income
$
1.94
1.38
1.75
66.64%
96.13%
92.92%
Long-term
Capital
Gain
Return
of
Capital
7.83%
3.87%
7.08%
25.53%
—%
—%
(A)
(B)
The entire $0.50 per share dividend declared in December 2017 and paid in January 2018 is treated as received by
stockholders in 2018.
The entire $0.46 per share dividend declared in December 2016 and paid in January 2017 is treated as received by
stockholders in 2017.
18. SUBSEQUENT EVENTS
These financial statements include a discussion of material events that have occurred subsequent to December 31, 2017 (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.
208
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
Corporate Activities
On December 18, 2017, New Residential’s board of directors declared a fourth quarter 2017 dividend of $0.50 per common share
or $153.7 million, which was paid on January 30, 2018 to stockholders of record as of December 29, 2017.
In January 2018, New Residential issued 28.8 million shares of its common stock in a public offering at a price to the public of
$17.10 per share for net proceeds of approximately $482.4 million. To compensate 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 2.9
million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $3.8
million as of the grant date. The assumptions used in valuing the options were: a 2.58% risk-free rate, a 9.86% dividend yield,
23.16% volatility and a 10-year term.
New Ocwen Agreements
During July 2017, New Residential and Ocwen entered into the Ocwen Transaction (Note 5). While New Residential continues
the process of obtaining the third party consents necessary to transfer the related MSRs to New Residential’s subsidiary, NRM,
Ocwen and New Residential have entered into new agreements, which will accelerate the implementation of certain parts of the
Ocwen Transaction in order to achieve its intent sooner. These new agreements are described in further detail below.
On January 18, 2018, New Residential entered into a new agreement regarding the rights to MSRs (the “New Ocwen RMSR
Agreement”) including a servicing addendum thereto (the “Ocwen Servicing Addendum”), Amendment No. 1 to Transfer
Agreement (the “New Ocwen Transfer Agreement”) and a Brokerage Services Agreement (the “Ocwen Brokerage Services
Agreement” and, collectively, the “New Ocwen Agreements”) with Ocwen. The New Ocwen Agreements modify and supplement
the arrangements among the parties set forth in the Original Ocwen Agreements, the Ocwen Master Agreement, the Ocwen Transfer
Agreement, and the Ocwen Subservicing Agreement (together with the Original Ocwen Agreements, the Ocwen Master Agreement,
and the Ocwen Transfer Agreement, the “Existing Ocwen Agreements”).
Under the Existing Ocwen Agreements, Ocwen sold and transferred to New Residential certain “Rights to MSRs” and other assets
related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion as of the opening
balances on January 1, 2018 (the “Existing Ocwen Subject MSRs”).
Pursuant to the New Ocwen Agreements, Ocwen will continue to service the mortgage loans related to the Existing Ocwen Subject
MSRs until the necessary third party consents are obtained in order to transfer the Existing Ocwen Subject MSRs in accordance
with the New Ocwen Agreements.
The New Ocwen RMSR Agreement provides, among other things:
•
the Existing Ocwen Subject MSRs will remain in the parties’ ownership structure under the Existing Ocwen Agreements
while they continue to seek third party consents to transfer Ocwen’s remaining rights to the Existing Ocwen Subject MSRs
to New Residential or any permitted assignee of New Residential;
• Ocwen will continue to service the related mortgage loans pursuant to the terms of the Ocwen Servicing Addendum until
the transfer of the Existing Ocwen Subject MSRs;
• a subsidiary of New Residential will make a lump-sum “Fee Restructuring Payment” of $279.6 million to Ocwen on the date
of the New Ocwen RMSR Agreement with respect to such Existing Ocwen Subject MSRs, subject to certain adjustments
within five business days;
• under the arrangements contemplated by the New Ocwen RMSR Agreement, Ocwen will receive substantially identical
compensation for servicing the related mortgage loans underlying the Existing Ocwen Subject MSRs that it would receive
if the Existing Ocwen Subject MSRs had been transferred to NRM as named servicer and Ocwen subserviced such mortgage
loans for NRM as named servicer;
•
in the event that the required third party consents are not obtained with respect to any Existing Ocwen Subject MSRs by
certain dates specified in the New Ocwen RMSR Agreement, in accordance with the process set forth in the New Ocwen
RMSR Agreement, the Rights to MSRs (as defined in the Existing Ocwen Agreements) related to such Existing Ocwen
Subject MSRs could either: (i) remain subject to the New Ocwen RMSR Agreement at the option of New Residential, (ii)
209
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
if New Residential does not opt for the New Ocwen RMSR Agreement to remain in place with respect to certain Existing
Ocwen Subject MSRs, Ocwen may acquire such Existing Ocwen Subject MSRs at a price determined in accordance with
the terms of the New Ocwen RMSR Agreement, or (iii) if Ocwen does not acquire such Existing Ocwen Subject MSRs, be
sold to a third party in accordance with the terms of the New Ocwen RMSR Agreement, as determined pursuant to the terms
of the New Ocwen RMSR Agreement; and
• New Residential agrees to waive any rights New Residential may have had under the Existing Ocwen Agreements to replace
Ocwen as named servicer with respect to the Existing Ocwen Subject MSRs based on Ocwen’s residential servicer rating
agency related downgrades.
Pursuant to the Ocwen Servicing Addendum, Ocwen will service the mortgage loans related to the Existing Ocwen Subject MSRs.
In consideration of servicing such mortgage loans, Ocwen will receive a servicing fee based on the unpaid principal balance as of
the first of each month as set forth in the Ocwen Servicing Addendum. The initial term of the Ocwen Servicing Addendum is for
the five years following July 23, 2017. At any time during the initial term, New Residential may terminate the Ocwen Servicing
Addendum for convenience, subject to Ocwen’s right to receive a termination fee calculated in accordance with the Ocwen Servicing
Addendum and specified notice. Following the initial term, (i) New Residential may extend the term of the Ocwen Servicing
Addendum for additional three-month periods by delivering written notice to Ocwen of its desire to extend such contract thirty
days prior to the end of such three-month period and (ii) the Ocwen Servicing Addendum may be terminated by Ocwen on an
annual basis. In addition, New Residential and Ocwen will have the right to terminate the Ocwen Servicing Addendum for cause
if certain conditions specified in the Ocwen Servicing Addendum occur. If the Ocwen Servicing Addendum is terminated or not
renewed in accordance with these provisions, New Residential will have the right to direct the transfer of servicing to a third party,
subject to Ocwen’s option to purchase the Existing Ocwen Subject MSRs and related assets in certain cases. To the extent that
servicing of the loans cannot be transferred in accordance with these provisions, the Ocwen Servicing Addendum will remain in
place with respect to the servicing of any remaining loans.
Pursuant to the Ocwen Brokerage Services Agreement, Ocwen will engage NRZ Brokerage to perform brokerage and marketing
services for all REO properties serviced by Ocwen pursuant to the Subject Servicing Agreements as defined in the New Ocwen
RMSR Agreement. Such REO properties are subject to the Altisource Brokerage Agreement and Altisource Letter Agreement.
Shellpoint
On November 29, 2017, NRM Acquisition LLC (the “Shellpoint Purchaser”), a Delaware limited liability company and a wholly
owned subsidiary of New Residential, entered into a Securities Purchase Agreement (the “Shellpoint SPA”) with Shellpoint Partners
LLC, a Delaware limited liability company (“Shellpoint”), the sellers party thereto and Shellpoint Services LLC, a Delaware
limited liability company, as the representative of the sellers. The Shellpoint SPA provides that, upon the terms and subject to the
conditions set forth therein, the Shellpoint Purchaser will purchase all of the outstanding equity interests of Shellpoint (the
“Shellpoint Acquisition”) for a purchase price (currently expected to be approximately $150.0 million, in addition to the
approximately $81.0 million for the Shellpoint MSR Purchase discussed below) to be determined at the closing of the Shellpoint
Acquisition (the “Shellpoint Closing”) based on the tangible book value of Shellpoint, subject to certain customary closing and
post-closing adjustments. As additional consideration for the Shellpoint Acquisition, the Shellpoint Purchaser will make up to
three cash earnout payments, which will be calculated following each of the first three anniversaries of the Shellpoint Closing as
a percentage of the amount by which the pre-tax income of certain of Shellpoint’s businesses exceeds certain specified thresholds,
up to an aggregate maximum amount of $60.0 million (the “Shellpoint Earnout Payments”), and allocated approximately 92% to
the sellers and approximately 8% to a long-term employee incentive plan of Shellpoint. In connection with the Shellpoint
Acquisition, the New Residential also entered into a guaranty in favor of the sellers in respect of all of the Shellpoint Purchaser’s
payment obligations under the Shellpoint SPA. In connection with the Shellpoint SPA, NRM also entered into certain other
agreements, including a Shellpoint MSR Purchase Agreement and a Shellpoint Subservicing Agreement (each described below).
Shellpoint is a vertically integrated mortgage platform with operations across mortgage origination and servicing, and is an approved
Fannie Mae and Freddie Mac seller and servicer and a Ginnie Mae issuer.
The Shellpoint SPA contains certain customary representations and warranties made by each party, which are qualified by the
confidential disclosures provided to the Shellpoint Purchaser in connection with the Shellpoint SPA. The Shellpoint Purchaser and
Shellpoint have agreed to various customary covenants, including, among others, covenants regarding the conduct of Shellpoint’s
business prior to the Shellpoint Closing and covenants requiring the Shellpoint Purchaser and Shellpoint to use commercially
reasonable efforts to obtain certain third-party and governmental consents, approvals or other authorizations required in connection
210
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
with the Shellpoint Acquisition. The Shellpoint SPA also contains certain indemnification provisions. A portion of the closing
purchase price will be held back by the Shellpoint Purchaser, which holdback amount, together with a right of offset against the
Shellpoint Earnout Payments, will be available to the Shellpoint Purchaser to satisfy certain indemnification claims.
Each party’s obligation to consummate the Shellpoint Acquisition is subject to certain closing conditions, including among others,
(i) the accuracy of the other party’s representations and warranties (subject to certain qualifications); (ii) the other party’s compliance
with its covenants contained in the Shellpoint SPA (subject to certain qualifications); (iii) the applicable waiting periods under the
HSR Act shall have expired or been terminated; (iv) no judgment, decree or judicial order shall have been entered or might be
entered which would materially and adversely affect the consummation of the Shellpoint Acquisition; and (v) certain conditions
relating to litigation and regulatory matters. In addition, the obligations of the Shellpoint Purchaser to consummate the Shellpoint
Acquisition are subject to (i) the absence of any Material Adverse Effect (as defined in the Shellpoint SPA); (ii) the receipt of
certain approvals from governmental entities, government-sponsored entities and other third parties; and (iii) the consummation
of the transactions contemplated by the Shellpoint MSR Purchase Agreement.
The Shellpoint SPA may be terminated by either party under certain circumstances, including, among others: (i) if the Shellpoint
Closing has not occurred on or before October 31, 2018 (unless extended under certain circumstances by the Shellpoint Purchaser);
(ii) if a court or other governmental entity has issued a final and non-appealable order prohibiting the Shellpoint Closing; (iii) upon
a material uncured breach by the other party that would result in a failure of the conditions to the Shellpoint Closing to be satisfied;
or (iv) certain circumstances relating to litigation and regulatory matters.
On November 29, 2017, concurrently with the Shellpoint Purchaser’s entry into the Shellpoint SPA, NRM entered into (i) a Bulk
Agreement for the Purchase and Sale of Mortgage Servicing Rights (the “Shellpoint MSR Purchase Agreement”) with New Penn
Financial LLC (“New Penn”), a Delaware limited liability company and a wholly owned subsidiary of Shellpoint, pursuant to
which NRM has agreed to purchase from New Penn the mortgage servicing rights relating to a portfolio of Fannie Mae and Freddie
Mac mortgage loans having an aggregate UPB of approximately $7.8 billion for a purchase price of approximately $81.0 million
(the “Shellpoint MSR Purchase”), which closed on January 16, 2018, and (ii) a Subservicing Agreement (the “Shellpoint
Subservicing Agreement”) with New Penn, pursuant to which New Penn has agreed to subservice Fannie Mae and Freddie Mac
mortgage loans for which NRM has acquired the right to service such loans. Each party’s obligation to consummate the Shellpoint
MSR Purchase is subject to certain customary closing conditions, including among others, the applicable waiting periods under
the HSR Act shall have expired or been terminated and the receipt of certain approvals from government-sponsored entities, and
the consummation of the Shellpoint Acquisition is not a condition to the closing of the Shellpoint MSR Purchase. Under the
Shellpoint Subservicing Agreement, New Penn is entitled to certain monthly and other servicing compensation, and both NRM
and New Penn may terminate the Shellpoint Subservicing Agreement, subject to certain specified terms, notice periods and other
requirements.
211
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(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.
2017
Interest income
Interest expense
Net interest income
Impairment
March 31
June 30
September 30
December 31
Quarter Ended
Year Ended
December 31
$
292,538
$
471,952
$
397,722
$
357,467
$
1,519,679
98,229
194,309
115,157
356,795
125,278
272,444
122,201
235,266
460,865
1,058,814
Other-than-temporary impairment (OTTI) on
securities
Valuation and loss provision (reversal) on
loans and real estate owned
Net interest income after impairment
Servicing revenue, net
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
Dividends Declared per Share of Common
Stock
$
$
$
$
$
$
2,112
5,115
1,509
1,598
10,334
17,910
20,022
174,287
40,602
(3,694)
68,441
142,754
5,596
137,158
15,780
121,378
0.42
0.42
$
$
$
$
$
20,771
25,886
330,909
170,851
57,847
139,360
420,247
82,844
337,403
15,671
321,732
1.05
1.04
$
$
$
$
$
26,700
28,209
244,235
58,014
87,145
117,060
272,334
32,613
239,721
13,600
226,121
0.74
0.73
$
$
$
$
$
10,377
11,975
223,291
154,882
66,488
97,716
346,945
46,575
300,370
12,068
288,302
0.94
0.93
$
$
$
$
$
75,758
86,092
972,722
424,349
207,786
422,577
1,182,280
167,628
1,014,652
57,119
957,533
3.17
3.15
286,600,324
307,344,874
307,361,309
307,361,309
302,238,065
288,241,188
309,392,512
309,207,345
310,388,102
304,381,388
0.48
$
0.50
$
0.50
$
0.50
$
1.98
212
NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017, 2016 and 2015
(dollars in tables in thousands, except share data)
2016
Quarter Ended
March 31
June 30
September 30
December 31(B)
Year Ended
December 31
Interest income
Interest expense
Net interest income
Impairment
$
190,036
$
277,477
$
282,388
$
326,834
$
1,076,735
81,228
108,808
100,685
176,792
96,488
185,900
95,023
231,811
373,424
703,311
Other-than-temporary impairment (OTTI) on
securities
Valuation and loss provision (reversal) on
loans and real estate owned
Net interest income after impairment
Servicing revenue, net
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
$
$
$
$
$
3,254
6,745
9,999
98,809
—
31,922
25,016
105,715
(10,223)
115,938
4,202
111,736
0.48
0.48
$
$
$
$
$
2,819
1,765
2,426
10,264
16,825
19,644
157,148
—
(19,723)
36,280
101,145
7,518
93,627
24,975
68,652
0.30
0.30
$
$
$
$
$
18,275
20,040
165,860
—
26,701
40,575
151,986
20,900
131,086
32,178
98,908
0.41
0.41
$
$
$
$
$
35,871
38,297
193,514
118,169
23,437
72,339
262,781
20,716
242,065
16,908
225,157
0.90
0.90
$
$
$
$
$
77,716
87,980
615,331
118,169
62,337
174,210
621,627
38,911
582,716
78,263
504,453
2.12
2.12
230,471,202
230,478,390
240,601,691
250,773,117
238,122,665
230,538,712
230,839,753
241,099,381
251,299,730
238,486,772
Dividends Declared per Share of Common Stock $
0.46
$
0.46
$
0.46
$
0.46
$
1.84
(A)
(B)
Earnings from investments in equity method investees is included in other income.
New Residential completed significant transactions in the fourth quarter of 2016, as described in Notes 5, 8 and 9, as well
as certain financings included in Note 11.
213
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 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 GAAP 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, 2017. 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, 2017, 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.
Item 9B. Other Information.
None.
214
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item 10 is incorporated by reference to our definitive proxy statement for the 2018 annual meeting
of stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after the fiscal year ended December 31,
2017 (our “Definitive Proxy Statement”) under the headings “Proposal No. 1 Election of Directors,” “Executive Officers” and
“Security Ownership of Management and Certain Beneficial Owners-Section 16(a) of Beneficial Ownership Reporting
Compliance.”
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference to our Definitive Proxy Statement under the headings
“Executive and Manager Compensation” and “Compensation Committee Report.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 is incorporated by reference to our Definitive Proxy Statement under the heading “Security
Ownership of Management and Certain Beneficial Owners.”
See also “Nonqualified Stock Option and Incentive Award Plan” in Part II, Item 5, “Market for Registrant’s Common Equity,
Related Stockholder Matters, and Issuer Purchases of Equity Securities.”
Item 13. Certain Relationships and Related Transactions, Director Independence.
The information required by this Item 13 is incorporated by reference to our Definitive Proxy Statement under the headings
“Proposal No. 1 Election of Directors” and “Certain Relationships and Related Transactions.”
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated by reference to our Definitive Proxy Statement under the heading “Proposal
No. 2 Approval of Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm.”
215
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
Exhibit Description
2.1† Separation and Distribution Agreement, dated as of April 26, 2013, by and between New Residential Investment
Corp. and Newcastle Investment Corp. (incorporated by reference to Exhibit 2.1 to Amendment No. 6 of New
Residential Investment Corp.’s Registration Statement on Form 10, filed April 29, 2013)
2.2† Purchase Agreement, dated as of March 5, 2013, by and among the Sellers listed therein, HSBC Finance Corporation
and SpringCastle Acquisition LLC (incorporated by reference to Exhibit 99.1 to Drive Shack Inc.’s Current Report
on Form 8-K, filed March 11, 2013)
2.3† Master Servicing Rights Purchase Agreement, dated as of December 17, 2013, by and between Nationstar Mortgage
LLC and Advance Purchaser LLC (incorporated by reference to Exhibit 2.1 to New Residential Investment Corp.’s
Current Report on Form 8-K, filed December 23, 2013)
2.4† Sale Supplement (Shuttle 1), dated as of December 17, 2013, by and between Nationstar Mortgage LLC and Advance
Purchaser LLC (incorporated by reference to Exhibit 2.2 to New Residential Investment Corp.’s Current Report on
Form 8-K, filed December 23, 2013)
2.5† Sale Supplement (Shuttle 2), dated as of December 17, 2013, by and between Nationstar Mortgage LLC and Advance
Purchaser LLC (incorporated by reference to Exhibit 2.3 to New Residential Investment Corp.’s Current Report on
Form 8-K, filed December 23, 2013)
2.6† Sale Supplement (First Tennessee), dated as of December 17, 2013, by and between Nationstar Mortgage LLC and
Advance Purchaser LLC (incorporated by reference to Exhibit 2.4 to New Residential Investment Corp.’s Current
Report on Form 8-K, filed December 23, 2013)
2.7† Purchase Agreement, dated as of March 31, 2016, by and among SpringCastle Holdings, LLC, Springleaf Acquisition
Corporation, Springleaf Finance, Inc., NRZ Consumer LLC, NRZ SC America LLC, NRZ SC Credit Limited, NRZ
SC Finance I LLC, NRZ SC Finance II LLC, NRZ SC Finance III LLC, NRZ SC Finance IV LLC, NRZ SC Finance
V LLC, BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership - NQ
- ESC L.P., and solely with respect to Section 11(a) and Section 11(g), NRZ SC America Trust 2015-1, NRZ SC
Credit Trust 2015-1, NRZ SC Finance Trust 2015-1, and BTO Willow Holdings, L.P. (incorporated by reference to
Exhibit 2.10 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 2016, filed on May 4, 2016)
2.8† Securities Purchase Agreement, dated as of November 29, 2017, by and between NRM Acquisition LLC and
Shellpoint Partners LLC
3.1 Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated by reference
to Exhibit 3.1 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 Exhibit 3.2 to
New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)
3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation of New Residential Investment
Corp. (incorporated by reference to Exhibit 3.1 to New Residential Investment Corp.’s Current Report on Form 8-
K, filed October 17, 2014)
4.1 Amended and Restated Indenture, dated as of August 17, 2017, by and among NRZ Advance Receivables Trust
2015-ONI, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New
Residential Mortgage LLC and Credit Suisse AG, New York Branch (incorporated by reference to Exhibit 4.1 to
New Residential Investment Corp.’s Current Report on Form 8-K, filed August 22, 2017)
4.2 Omnibus Amendment to Term Note Indenture Supplements, dated as of August 17, 2017, by and among NRZ
Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC,
HLSS Holdings, LLC, New Residential Mortgage LLC, Credit Suisse AG, New York Branch and New Residential
Investment Corp. (incorporated by reference to Exhibit 4.2 to New Residential Investment Corp.’s Current Report
on Form 8-K, filed August 22, 2017)
216
4.3 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 Exhibit 4.19 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2015)
4.4 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 Exhibit 4.20 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2015)
4.5 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 Exhibit 4.21 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 2015)
4.6 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. (incorporated by reference to Exhibit 4.22 to
New Residential Investment Corp.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015)
4.7 Amendment No. 2, dated as of March 22, 2016, 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. (incorporated by reference to Exhibit 4.1 to New Residential
Investment Corp.’s Current Report on Form 8-K, filed March 24, 2016)
4.8 Amendment No. 3, dated as of May 9, 2016, 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. (incorporated by reference to Exhibit 4.1 to New Residential
Investment Corp.’s Current Report on Form 8-K, filed May 13, 2016)
4.9 Amendment No. 4, dated as of May 27, 2016, 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. (incorporated by reference to Exhibit 4.1 to New Residential
Investment Corp.’s Current Report on Form 8-K, filed June 3, 2016)
4.10 Amendment No. 5, dated as of December 15, 2016, 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. (incorporated by reference to Exhibit 4.3 to New Residential
Investment Corp.’s Current Report on Form 8-K, filed December 16, 2016)
4.11 Amendment No. 6, dated as of August 17, 2017, to Series 2015-VF1 Indenture Supplement, dated as of August 28,
2015, to the Amended and Restated Indenture, dated as of August 21, 2017, by and among NRZ Advance Receivables
Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC,
New Residential Mortgage LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp.
(incorporated by reference to Exhibit 4.3 to New Residential Investment Corp.’s Current Report on Form 8-K, filed
August 22, 2017)
4.12 Amendment No. 7, dated as of November 15, 2017, to Series 2015-VF1 Indenture Supplement, dated as of August
28, 2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company,
HLSS Holdings, LLC, Credit Suisse AG, New York Branch, Ocwen Loan Servicing, LLC, New Residential Mortgage
LLC, and New Residential Investment Corp and consented to by Credit Suisse and Credit Suisse International
(incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K filed
November 17, 2017)
4.13 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. (incorporated by reference to Exhibit 4.23 to New Residential Investment Corp.’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2015)
217
4.14 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. (incorporated by reference to Exhibit 4.24 to New Residential Investment Corp.’s Annual Report on Form 10-
K for the fiscal year ended December 31, 2015)
4.15 Series 2016-T1 Indenture Supplement, dated as of June 30, 2016, 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 Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed
July 7, 2016)
4.16 Series 2016-T2 Indenture Supplement, dated as of October 25, 2016, 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 Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed
October 31, 2016)
4.17 Series 2016-T3 Indenture Supplement, dated as of October 25, 2016, 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 Exhibit 4.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed
October 31, 2016)
4.18 Series 2016-T4 Indenture Supplement, dated as of December 15, 2016, 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 Exhibit
4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 16, 2016)
4.19 Series 2016-T5 Indenture Supplement, dated as of December 15, 2016, 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 Exhibit
4.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 16, 2016)
4.20 Series 2017-T1 Indenture Supplement, dated as of February 7, 2017, 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 Exhibit 4.1 to
New Residential Investment Corp.’s Current Report on Form 8-K filed February 8, 2017)
10.1 Third Amended and Restated Management and Advisory Agreement, dated as of May 7, 2015, by and between New
Residential Investment Corp. and FIG LLC (incorporated by reference to Exhibit 10.4 to New Residential Investment
Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015)
10.2 Form of Indemnification Agreement by and between New Residential Investment Corp. and its directors and officers
(incorporated by reference to Exhibit 10.2 to Amendment No. 3 to New Residential Investment Corp.’s Registration
Statement on Form 10, filed March 27, 2013)
10.3 New Residential Investment Corp. Nonqualified Stock Option and Incentive Award Plan, adopted as of April 29,
2013 (incorporated by reference to Exhibit 10.1 to New Residential Investment Corp.’s Current Report on Form 8-
K, filed May 3, 2013)
10.4 Amended and Restated New Residential Investment Corp. Nonqualified Stock Option and Incentive Plan, adopted
as of November 4, 2014 (incorporated by reference to Exhibit 10.6 to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2014)
10.5 Investment Guidelines (incorporated by reference to Exhibit 10.4 to Amendment No. 4 to New Residential Investment
Corp.’s Registration Statement on Form 10, filed April 9, 2013)
10.6 Excess Servicing Spread Sale and Assignment Agreement, dated as of December 8, 2011, by and between Nationstar
Mortgage LLC and NIC MSR I LLC (incorporated by reference to Exhibit 10.5 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2011)
10.7 Excess Spread Refinanced Loan Replacement Agreement, dated as of December 8, 2011, by and between Nationstar
Mortgage LLC and NIC MSR I LLC (incorporated by reference to Exhibit 10.6 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2011)
10.8 Future Spread Agreement for FHLMC Mortgage Loans, dated as of May 13, 2012, by and between Nationstar
Mortgage LLC and NIC MSR IV LLC (incorporated by reference to Exhibit 10.4 to Drive Shack Inc.’s Current
Report on Form 8-K, filed May 15, 2012)
218
10.9 Future Spread Agreement for FNMA Mortgage Loans, dated as of May 13, 2012, by and between Nationstar Mortgage
LLC and NIC MSR V LLC (incorporated by reference to Exhibit 10.2 to Drive Shack Inc.’s Current Report on Form
8-K, filed May 15, 2012)
10.10 Future Spread Agreement for Non-Agency Mortgage Loans, dated as of May 13, 2012, by and between Nationstar
Mortgage LLC and NIC MSR VI LLC (incorporated by reference to Exhibit 10.6 to Drive Shack Inc.’s Current
Report on Form 8-K, filed May 15, 2012)
10.11 Future Spread Agreement for GNMA Mortgage Loans, dated as of May 13, 2012, by and between Nationstar Mortgage
LLC and NIC MSR VII, LLC (incorporated by reference to Exhibit 10.8 to Drive Shack Inc.’s Current Report on
Form 8-K, filed May 15, 2012)
10.12 Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of May 31, 2012,
by and between Nationstar Mortgage LLC and NIC MSR III LLC (incorporated by reference to Exhibit 10.1 to
Drive Shack Inc.’s Current Report on Form 8-K, filed June 6, 2012)
10.13 Future Spread Agreement for FHLMC Mortgage Loans, dated as of May 31, 2012, by and between Nationstar
Mortgage LLC and NIC MSR III LLC (incorporated by reference to Exhibit 10.2 to Drive Shack Inc.’s Current
Report on Form 8-K, filed June 6, 2012)
10.14 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated
as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to
Exhibit 10.1 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)
10.15 Amended and Restated Future Spread Agreement for FNMA Mortgage Loans, dated as of June 7, 2012, by and
between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.2 to Drive Shack
Inc.’s Current Report on Form 8-K, filed June 7, 2012)
10.16 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated
as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to
Exhibit 10.3 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)
10.17 Amended and Restated Future Spread Agreement for FHLMC Mortgage Loans, dated as of June 7, 2012, by and
between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.4 to Drive Shack
Inc.’s Current Report on Form 8-K, filed June 7, 2012)
10.18 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans,
dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference
to Exhibit 10.5 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)
10.19 Amended and Restated Future Spread Agreement for Non-Agency Mortgage Loans, dated as of June 7, 2012, by
and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.6 to Drive
Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)
10.20 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated
as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR V LLC (incorporated by reference to
Exhibit 10.1 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)
10.21 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated
as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR IV LLC (incorporated by reference
to Exhibit 10.2 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)
10.22 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans,
dated as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR VI LLC (incorporated by
reference to Exhibit 10.3 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)
10.23 Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated
as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR VII LLC (incorporated by reference
to Exhibit 10.4 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)
10.24 Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of December 31,
2012, by and between Nationstar Mortgage LLC and MSR VIII LLC (incorporated by reference to Exhibit 10.35 to
Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)
10.25 Future Spread Agreement for GNMA Mortgage Loans, dated as of December 31, 2012, by and between Nationstar
Mortgage LLC and MSR VIII LLC (incorporated by reference to Exhibit 10.36 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012)
10.26 Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of January 6, 2013,
by and between Nationstar Mortgage LLC and MSR IX LLC (incorporated by reference to Exhibit 10.37 to Drive
Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)
219
10.27 Future Spread Agreement for FHLMC Mortgage Loans, dated as of January 6, 2013, by and between Nationstar
Mortgage LLC and MSR IX LLC (incorporated by reference to Exhibit 10.38 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012)
10.28 Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of January 6, 2013,
by and between Nationstar Mortgage LLC and MSR X LLC (incorporated by reference to Exhibit 10.39 to Drive
Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)
10.29 Future Spread Agreement for FNMA Mortgage Loans, dated as of January 6, 2013, by and between Nationstar
Mortgage LLC and MSR X LLC (incorporated by reference to Exhibit 10.40 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012)
10.30 Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of January 6, 2013,
by and between Nationstar Mortgage LLC and MSR XI LLC (incorporated by reference to Exhibit 10.41 to Drive
Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)
10.31 Future Spread Agreement for GNMA Mortgage Loans, dated as of January 6, 2013, by and between Nationstar
Mortgage LLC and MSR XI LLC (incorporated by reference to Exhibit 10.42 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012)
10.32 Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of January 6,
2013, by and between Nationstar Mortgage LLC and MSR XII LLC (incorporated by reference to Exhibit 10.43 to
Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)
10.33 Future Spread Agreement for Non-Agency Mortgage Loans, dated as of January 6, 2013, by and between Nationstar
Mortgage LLC and MSR XII LLC (incorporated by reference to Exhibit 10.44 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012)
10.34 Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of January 6,
2013, by and between Nationstar Mortgage LLC and MSR XIII LLC (incorporated by reference to Exhibit 10.45
to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)
10.35 Future Spread Agreement for Non-Agency Mortgage Loans, dated as of January 6, 2013, by and between Nationstar
Mortgage LLC and MSR XIII LLC (incorporated by reference to Exhibit 10.46 to Drive Shack Inc.’s Annual Report
on Form 10-K for the fiscal year ended December 31, 2012)
10.36
Interim Servicing Agreement, dated as of April 1, 2013, by and 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 Exhibit 10.35
to Amendment No. 4 to New Residential Investment Corp.’s Registration Statement on Form 10, filed April 9, 2013)
10.37 Second Amended and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC, dated as
of March 31, 2016 (incorporated by reference to Exhibit 10.37 to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 2016)
10.38 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 Exhibit 2.4 to New Residential Investment Corp.’s Current
Report on Form 8-K, filed April 10, 2015)
10.39 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 Exhibit 10.47
to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September
30, 2015)
10.40 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 Exhibit 10.48 to New
Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)
10.41# Master Agreement, dated as July 23, 2017, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS
MSR - EBO Acquisition LLC and New Residential Mortgage LLC (incorporated by reference to Exhibit 10.41 to
New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2017)
10.42 Amendment No. 1 to Master Agreement, dated as of October 12, 2017, by and among Ocwen Loan Servicing, LLC,
HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC and New Residential Mortgage LLC (incorporated by
reference to Exhibit 10.42 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2017)
220
10.43# Transfer Agreement, dated as of July 23, 2017, by and among Ocwen Loan Servicing, LLC, New Residential Mortgage
LLC, Ocwen Financial Corporation and New Residential Investment Corp. (incorporated by reference to Exhibit
10.43 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2017)
10.44# Subservicing Agreement, dated as of July 23, 2017, by and between New Residential Mortgage LLC and Ocwen
Loan Servicing, LLC (incorporated by reference to Exhibit 10.44 to New Residential Investment Corp.’s Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2017)
10.45# Cooperative Brokerage Agreement, dated as of August 28, 2017, by and among REALHome Services and Solutions,
Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp. (incorporated by reference to
Exhibit 10.45 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2017)
10.46# First Amendment to Cooperative Brokerage Agreement, dated as of November 16, 2017, by and among REALHome
Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp.
10.47# Second Amendment to Cooperative Brokerage Agreement, dated as of January 18, 2018, by and among REALHome
Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp.
10.48# Letter Agreement, dated as of August 28, 2017, by and among New Residential Investment Corp., New Residential
Mortgage LLC, REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and
Altisource Solutions S.a.r.l. (incorporated by reference to Exhibit 10.46 to New Residential Investment Corp.’s
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)
12.1 Ratio of Earnings to Fixed Charges
21.1 List of Subsidiaries of New Residential Investment Corp.
23.1 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
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
101.CA
L
101.LA
B
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
†
#
Schedules and exhibits may have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
Portions of this exhibit have been omitted pursuant to a request for confidential treatment.
The following second 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 Second Amended 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:
•
•
•
Second Amended and Restated Limited Liability Company Agreement of SpringCastle America, LLC, dated as of
March 31, 2016.
Second Amended and Restated Limited Liability Company Agreement of SpringCastle Credit, LLC, dated as of
March 31, 2016.
Second Amended and Restated Limited Liability Company Agreement of SpringCastle Finance, LLC, dated as of
March 31, 2016.
221
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
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.
Item 16. Form 10-K Summary.
None.
222
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:
SIGNATURES
NEW RESIDENTIAL INVESTMENT CORP.
By:
/s/ Michael Nierenberg
Michael Nierenberg
Chairman of the Board
February 14, 2018
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/ Nicola Santoro, Jr.
By:
Nicola Santoro, Jr.
Chief Financial Officer and Treasurer
(Principal Financial Officer)
February 14, 2018
/s/ Jonathan R. Brown
By:
Jonathan R. Brown
Chief Accounting Officer
(Principal Accounting Officer)
February 14, 2018
/s/ Michael Nierenberg
By:
Michael Nierenberg
Chairman of the Board, Chief Executive Officer and President
(Principal Executive Officer)
February 14, 2018
/s/ Kevin J. Finnerty
By:
Kevin J. Finnerty
Director
February 14, 2018
/s/ Douglas L. Jacobs
By:
Douglas L. Jacobs
Director
February 14, 2018
/s/ Robert J. McGinnis
By:
Robert J. McGinnis
Director
February 14, 2018
/s/ David Saltzman
By:
David Saltzman
Director
February 14, 2018
/s/ Andrew Sloves
By:
Andrew Sloves
Director
February 14, 2018
/s/ Alan L. Tyson
By:
Alan L. Tyson
Director
February 14, 2018
223
CORPORATE INFORMATION
BOARD OF DIRECTORS
ROBERT J. McGINNIS
Independent Director (1,2,3)
DAVID SALTZMAN
Independent Director (2)
ANDREW SLOVES
Independent Director (1,2,3)
ALAN L. TYSON
Independent Director (1,2,3)
MICHAEL NIERENBERG
Chairman of the Board
KEVIN J. FINNERTY
Independent Director (1,2,3)
DOUGLAS L. JACOBS
Independent Director (1,3)
(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
CORPORATE HEADQUARTERS
New Residential Investment Corp.
1345 Avenue of the Americas, 45th Floor
New York, NY 10105
www.newresi.com
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP
Five Times Square
New York, NY 10036-6530
SHAREHOLDER INFORMATION
SHAREHOLDER SERVICES, TRANSFER
AGENT AND REGISTRAR
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
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
STOCK EXCHANGE LISTING
New Residential Investment Corp.
is listed on the New York Stock Exchange
(NYSE:NRZ)
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 the Company’s ability to have in-house servicing, asset origination and recapture abilities upon closing the Shellpoint acquisition, the ability of Shellpoint
to be a leading third party servicer that could provide added servicing capacity and diversify our servicing relationships, that there will likely be a rise in interest
rates in the foreseeable future, that our MSR portfolio should continue to perform well, that advance balances will continue to decline over time, that our future
SpringCastle returns and cash flow will continue to be strong, and whether we will be able to generate stable earnings and grow book value for our shareholders.
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 “Cautionary Statement Regarding Forward-Looking Statements,” “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 state-
ments 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