INVESTMENTS IN SERVICER ADVANCES

On December 17, 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) consolidated by New Residential, agreed to purchase $3.2 billion of outstanding servicer advances on a portfolio of loans, which is a subset of the same portfolio of loans in which New Residential invests in a portion of the Excess MSR (Notes 4 and 5), including the basic fee component of the related MSRs. During the year ended December 31, 2014, the Buyer also agreed to purchase outstanding servicer advances on an additional portfolio of loans. As of December 31, 2014, New Residential and third-party co-investors had settled $3.0 billion of servicer advances, net of recoveries, financed with $2.8 billion of notes payables outstanding (Note 11). A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer and owned an approximately 44.5% interest in the Buyer as of December 31, 2014. As of December 31, 2014, noncontrolling third-party investors, owning the remaining interest in the Buyer have funded capital commitments to the Buyer of $389.6 million and New Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of December 31, 2014, the third-party co-investors and New Residential have previously funded their commitments, however the Buyer may recall $200.0 million and $160.5 million of capital distributed to the third-party co-investors and New Residential, respectively. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer that holds its investment in servicer advances.

The Buyer has purchased servicer advances from Nationstar, is required to purchase all future servicer advances made with respect to these pools from Nationstar, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Nationstar in consideration of Nationstar’s servicing activities. The compensation paid to Nationstar as of December 31, 2014 was approximately 9.2% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs, all of the servicer advances and related basic fee portion of the MSR (the “Advance Fee”), and a portion of the call rights related to an underlying pool of residential mortgage loans with a UPB of approximately $3.0 billion which is serviced by Specialized Loan Servicing LLC (“SLS”). Fortress-managed funds acquired the other 50% of the Excess MSRs. The aggregate purchase price was approximately $229.7 million. The par amount of the total advance commitments for the SLS transaction are $219.2 million (with related financing of $195.5 million). As of December 31, 2014, the closed portion of the purchase of $93.8 million included $8.4 million for 50% of the Excess MSRs, $83.8 million for servicer advances and Advance Fee (of which $74.3 million was financed as of December 31, 2014), and $1.6 million to fund a portion of the call rights on 57 of the 99 underlying securitization trusts. The remaining portion of the purchase price of $135.9 million included servicer advances and Advance Fee unfunded commitments of approximately $133.8 million that were funded in January 2015 (with approximately $121.2 million of related financing) and $2.1 million to fund the remaining portion of the call rights on 57 of the 99 underlying securitization trusts. SLS will continue to service the loans in exchange for a servicing fee of 10.75 bps and an incentive fee (the “Incentive Fee”) which is based on the ratio of the outstanding servicer advances to the UPB of the underlying loans.

New Residential elected to record its investments in servicer advances, including the right to the basic fee component of the related MSRs, at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of market factors.

The following is a summary of the investments in servicer advances, including the right to the basic fee component of the related MSRs, made by New Residential:



	Amortized Cost Basis		Carrying Value^(A)		Weighted Average Discount Rate		Weighted Average Life (Years)^(B)	Change in Fair Value Recorded in Other Income for Year then Ended
December 31, 2014
Servicer advances	$	3,186,622	$	3,270,839	5.4	%	4.0	$	84,217
December 31, 2013
Servicer advances	$	2,665,551	$	2,665,551	5.6	%	2.7	$	—


(A)	Carrying value represents the fair value of the investments in servicer advances, including the basic fee component of the related MSRs.


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

The following is additional information regarding the servicer advances and related financing:



									Loan-to-Value				Cost of Funds^(B)
	UPB of Underlying Residential Mortgage Loans		Outstanding Servicer Advances		Servicer Advances to UPB of Underlying Residential Mortgage Loans		Carrying Value of Notes Payable		Gross		Net^(A)		Gross		Net
December 31, 2014
Servicer advances^(C)	$	96,547,773	$	3,102,492	3.2	%	$	2,890,230	91.4	%	90.4	%	3.0	%	2.3	%
December 31, 2013
Servicer advances^(C)	$	43,444,216	$	2,661,130	6.1	%	$	2,390,778	89.8	%	88.6	%	4.0	%	2.3	%


(A)	Ratio of face amount of borrowings to par amount of servicer advance collateral, net of an interest reserve maintained by the Buyer.


(B)	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.


(C)	The following types of advances comprise the investments in servicer advances:



	December 31, 2014		December 31, 2013
Principal and interest advances	$	729,713	$	1,516,715
Escrow advances (taxes and insurance advances)	1,600,713		934,525
Foreclosure advances	772,066		209,890
Total	$	3,102,492	$	2,661,130

Interest income recognized by New Residential related to its investments in servicer advances was comprised of the following:



	Year Ended December 31,
	2014			2013
Interest income, gross of amounts attributable to servicer compensation	$	290,309		$	6,708
Amounts attributable to base servicer compensation	(26,092		)	(2,287		)
Amounts attributable to incentive servicer compensation	(74,011		)	—
Interest income from investments in servicer advances	$	190,206		$	4,421

Others' interests in the equity of the Buyer is computed as follows:



	December 31, 2014			December 31, 2013
Total Advance Purchaser LLC equity	$	457,545		$	362,807
Others' ownership interest	55.5		%	68.1		%
Others' interest in equity of consolidated subsidiary	$	253,836		$	247,225

Others' interests in the Buyer's net income is computed as follows:



	Year Ended December 31,
	2014			2013
Net Advance Purchaser LLC income (loss)	$	159,374		$	(517	)
Others' ownership interest as a percent of total^(A)	56.0		%	63.1		%
Others' interest in net income (loss) of consolidated subsidiaries	$	89,222		$	(326	)


(A)	As a result, New Residential owned 44.0% and 36.9% of the Buyer, on average during the years ended December 31, 2014 and 2013, respectively.

See Note 11 regarding the financing of servicer advances.