INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

9 Months Ended

12 Months Ended

Sep. 30, 2013

Dec. 31, 2012

Investments In Excess Mortgage Servicing Rights At Fair Value

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

3. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $43.7 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans (“Pool 1”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $42.3 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans, comprised of approximately 25% conforming loans in Fannie Mae (“Pool 3”) and Freddie Mac (“Pool 4”) GSE pools as well as approximately 75% non-conforming loans in private label securitizations (“Pool 5”). Nationstar had co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and is the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. In September 2013, New Residential invested an additional $26.6 million to acquire an additional 15% interest in the Excess MSRs related to Pool 5 from Nationstar. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 11. On May 20, 2013, New Residential entered into an excess spread agreement with Nationstar to purchase a two-thirds interest in the Excess MSRs on a portion of the loans in the pool which are eligible to be refinanced by a specific third party for a period of time for $2.4 million, with Nationstar retaining the remaining one-third interest in the Excess MSRs and all servicing rights. After this period expires, Nationstar will have the ability to refinance all of the loans in the pool. See Note 6 for information on our other agreements with Nationstar with respect to Pool 11.

Pool 12. On September 23, 2013, New Residential invested approximately $17.4 million to acquire a 40% interest in the Excess MSRs on a portfolio of residential mortgage loans (“Pool 12”), comprised of loans in private label securitizations. Fortress-managed funds also acquired a 40% interest in the Excess MSRs and the remaining 20% interest in the Excess MSRs is owned by Nationstar. Nationstar performs all servicing and advancing functions, and it retains the ancillary income, servicing obligations and liabilities associated with this portfolio as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs are shared on a pro rata basis by New Residential, the Fortress-managed funds and Nationstar, subject to certain limitations.

As described above, New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments to date. Under the Recapture Agreements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio.

New Residential elected to record its investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.

The following is a summary of New Residential’s direct investments in Excess MSRs:

	September 30, 2013														Nine Months Ended September 30, 2013
	Unpaid Principal Balance (“UPB”) of Underlying Mortgages		Interest in Excess MSR			Amortized     Cost Basis (A)		Carrying Value (B)		Weighted Average Yield			Weighted Average Life (Years) (C)		Changes in Fair Value Recorded in Other Income (D)
MSR Pool 1	$	7,171,426		65.0	%	$	27,255	$	37,907		12.5	%		4.9	$	4,914
MSR Pool 1—Recapture Agreement		—		65.0	%		2,230		4,629		12.5	%		11.3		1,893
MSR Pool 2		8,217,751		65.0	%		30,806		35,592		12.5	%		5.2		3,742
MSR Pool 2—Recapture Agreement		—		65.0	%		1,934		5,882		12.5	%		12.3		3,767
MSR Pool 3		8,066,890		65.0	%		25,250		34,063		12.5	%		4.8		5,958
MSR Pool 3—Recapture Agreement		—		65.0	%		3,608		5,231		12.5	%		11.6		1,699
MSR Pool 4		5,222,892		65.0	%		10,032		13,743		12.5	%		5.2		2,693
MSR Pool 4—Recapture Agreement		—		65.0	%		2,509		3,446		12.5	%		11.6		951
MSR Pool 5		38,315,786		80.0	%		121,544		142,387		12.7	%		5.4		18,864
MSR Pool 5—Recapture Agreement		—		80.0	%		9,277		4,779		12.7	%		12.5		(656	)
MSR Pool 11—Recapture Agreement		—		66.7	%		2,391		2,391		12.5	%		10.2		—
MSR Pool 12		5,321,060		40.0	%		16,963		17,032		16.4	%		4.6		69
MSR Pool 12—Recapture Agreement		—		40.0	%		479		486		16.4	%		13.6		5
	$	72,315,805				$	254,278	$	307,568		12.9	%		5.8	$	43,899

(A) 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.

(B) Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.

(C) Weighted Average Life represents the weighted average expected timing of the receipt of expected cash flows for this investment.

(D) The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs at September 30, 2013:

State Concentration	Percentage of Total Outstanding
California		30.3	%
Florida		10.1	%
New York		4.7	%
Texas		4.2	%
Washington		4.1	%
Arizona		3.7	%
Maryland		3.6	%
Colorado		3.3	%
New Jersey		3.3	%
Virginia		3.1	%
Other U.S.		29.6	%
		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 Excess MSRs.

4. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AT FAIR VALUE

Pool 1. On December 13, 2011, Newcastle announced the completion of the first co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights acquired by Nationstar. New Residential invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of government-sponsored enterprise (“GSE”) residential mortgage loans with an outstanding principal balance of approximately $9.9 billion (“Pool 1”). Nationstar has co-invested on a pari-passu basis with New Residential in 35% of the Excess MSRs and will be the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, the servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

Pool 2. On June 5, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Bank of America. New Residential invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $10.4 billion (“Pool 2”), comprised of loans in GSE pools. Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and will be the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations. As of December 31, 2012, New Residential has a remaining purchase price payable of less than $0.1 million which is to be funded in 2013 pursuant to the payment terms of the agreement.

Pools 3, 4 and 5. On June 29, 2012, Newcastle announced the completion of a co-investment between New Residential and Nationstar in Excess MSRs related to mortgage servicing rights Nationstar acquired from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. New Residential invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $63.7 billion, comprised of approximately 75% non-conforming loans in private label securitizations and approximately 25% conforming loans in GSE pools. The portfolio is comprised of three pools: two GSE loan pools with outstanding principal balances of approximately $9.8 billion (“Pool 3”) and $6.3 billion (“Pool 4”), respectively, and a pool of non-conforming loans in private label securitizations with an outstanding principal balance of approximately $47.6 billion (“Pool 5”). Nationstar has co-invested on a pari passu basis with New Residential in 35% of the Excess MSRs and will be the servicer of the loans, performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared on a pro rata basis by New Residential and Nationstar, subject to certain limitations.

The following is a summary of New Residential’s Excess MSRs at December 31, 2012 and 2011:

	December 31, 2011											Period From Dec 8, 2011 (Commencement of Operations) Through Dec 31, 2011
Description	Unpaid Principal Balance		Amortized Cost Basis(A)		Carrying Value(B)		Wtd. Avg. Yield			Wtd. Avg. Maturity (Years)(C)		Changes in Fair Value Recorded in Income(D)
Pool 1	$	9,705,512	$	37,469	$	37,637		20.0	%		4.5	$	168
Pool 1-Recapture Agreement		—		6,135		6,334		20.0	%		10.3		199
	$	9,705,512	$	43,604	$	43,971		20.0	%		6.0	$	367

Description	December 31, 2012											Year Ended December 31, 2012
	Unpaid Principal Balance		Amortized Cost Basis(A)		Carrying Value(B)		Wtd. Avg. Yield			Wtd. Avg. Maturity (Years)(C)		Changes in Fair Value Recorded in Income(D)
Pool 1	$	8,403,211	$	30,237	$	35,974		18.0	%		4.8	$	5,569
Pool 1-Recapture Agreement		—		4,430		4,936		18.0	%		10.8		307
Pool 2		9,397,120		32,890		33,935		17.3	%		5.0		1,045
Pool 2-Recapture Agreement		—		5,206		5,387		17.3	%		11.8		181
Pool 3		9,069,726		27,618		30,474		17.6	%		4.7		2,856
Pool 3-Recapture Agreement		—		5,036		4,960		17.6	%		11.3		(76	)
Pool 4		5,788,133		11,130		12,149		17.9	%		4.6		1,019
Pool 4-Recapture Agreement		—		2,902		2,887		17.9	%		11.1		(15	)
Pool 5		43,902,561		107,704		109,682		17.5	%		4.8		1,978
Pool 5-Recapture Agreement		—		8,493		4,652		17.5	%		11.7		(3,841	)
	$	76,560,751	$	235,646	$	245,036		17.6	%		5.4	$	9,023

(A) 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.

(B) Carrying Value represents the fair value of the pools or Recapture Agreements, as applicable.

(C) Weighted Average Maturity represents the weighted average expected timing of the receipt of expected cash flows for this investment.

(D) The portion of the change in fair value of the Recapture Agreements relating to loans recaptured to date is reflected in the respective pool.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSRs at December 31, 2012 and 2011:

Percentage of Total Outstanding Unpaid Principal Amount(A)
December 31, 2012				December 31, 2011
State Concentration	Percentage			State Concentration	Percentage
California		32.0	%	California		19.4	%
Florida		10.1	%	Florida		11.1	%
Washington		4.3	%	Texas		6.7	%
New York		4.3	%	Arizona		4.8	%
Arizona		3.9	%	Virginia		3.5	%
Texas		3.6	%	Washington		3.2	%
Colorado		3.5	%	New Jersey		3.1	%
Maryland		3.4	%	Maryland		3.1	%
New Jersey		3.1	%	Illinois		3.0	%
Virginia		3.0	%	Nevada		2.7	%
Other U.S.		28.8	%	Other U.S.		39.4	%
		100.0	%			100.0	%

(A) Based on the information provided by the loan servicer as of the most recent remittance for the respective dates.

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 the mortgage payment and therefore could have a meaningful, negative impact on the Excess MSRs.