INVESTMENTS IN REAL ESTATE SECURITIES

During the year ended December 31, 2014, New Residential acquired $3.2 billion face amount of Non-Agency RMBS for approximately $1.5 billion and $1.3 billion face amount of Agency RMBS for approximately $1.4 billion. The $1.3 billion in Agency RMBS includes $0.3 billion of floating rate securities and $1.0 billion of fixed rate specified pools comprised of new production mortgages that are expected to carry less prepayment risk and warrant a premium relative to TBA pools. New Residential sold Non-Agency RMBS with a face amount of approximately $2.0 billion and an amortized cost basis of approximately $1.2 billion for approximately $1.3 billion, recording a gain on sale of approximately $60.6 million. Furthermore, New Residential sold Agency RMBS with a face amount of $746.9 million and an amortized cost basis of approximately $791.7 million for approximately $796.4 million, recording a gain on sale of approximately $4.7 million.

During 2013, New Residential acquired $1.3 billion face amount of Non-Agency RMBS for approximately $835.6 million and $608.9 million face amount of Agency ARM RMBS for approximately $645.5 million. In addition, Newcastle contributed $1.0 billion face amount of Agency ARM RMBS to New Residential during 2013, prior to the spin-off (Note 13). New Residential sold $729.7 million face amount of Non-Agency RMBS for approximately $521.9 million and recorded a gain of $52.7 million.

During the third quarter of 2013, Nationstar exercised their call rights related to four Non-Agency RMBS trusts, in which Nationstar was the master servicer. New Residential owned $2.6 million face amount of Non-Agency RMBS issued by these trusts. New Residential received par on these securities, which had an amortized cost basis of $2.1 million prior to the repayment, and recorded interest income of $0.6 million related to these securities in the third quarter of 2013.

On March 6, 2014, Merrill Lynch, Pierce, Fenner & Smith Incorporated and New Residential entered into an agreement pursuant to which New Residential agreed to purchase approximately $625 million face amount of Non-Agency residential mortgage securities for approximately $553 million. The purchased securities were issued by the American General Mortgage Loan Trust 2009-1 and represent 75% of the mezzanine and subordinate tranches (the "2009-1 Retained Certificates") of a securitization sponsored by Third Street Funding LLC, an affiliate of Springleaf. The securitization, including the 2009-1 Retained Certificates, is collateralized by residential mortgage loans with a face amount of approximately $0.9 billion. On May 30, 2014, New Residential sold the 2009-1 Retained Certificates for approximately $598.5 million and recorded a gain of approximately $39.7 million. At the time of sale, the 2009-1 Retained Certificates had an amortized cost basis of approximately $558.8 million. The purchase and sale of the 2009-1 Retained Certificates is included in the purchases and sales described above.

On May 27, 2014, New Residential exercised its call rights related to sixteen Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans contained in such trusts prior to their termination. New Residential owned $17.4 million face amount of securities issued by these trusts and received par on these securities, which had an amortized cost basis of $12.0 million prior to the repayment. See Note 8 for further details on this transaction.

On August 25, 2014, New Residential exercised its call rights related to nineteen Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans contained in such trusts prior to their termination. New Residential owned $15.4 million face amount of securities issued by these trusts and received par on these securities, which had an amortized cost basis of $13.1 million prior to the repayment. See Note 8 for further details on this transaction.

In December 2014, New Residential purchased $186.7 million face amount of Non-Agency RMBS for approximately $114.3 million. The investment was financed with an $84.6 million repurchase agreement with the same counterparty from which it purchased the securities. This purchase was accounted for as a linked transaction (Note 10).

On December 26, 2014, New Residential exercised its call rights related to twenty-five Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans contained in such trusts prior to their termination. New Residential owned $27.9 million face amount of securities issued by these trusts and received par on these securities, which had an amortized cost basis of $24.0 million prior to the repayment. See Note 8 for further details on this transaction.

The following is a summary of New Residential’s real estate securities as of December 31, 2014 and December 31, 2013, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.



					Gross Unrealized								Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value^(A)		Number of Securities	Rating^(B)	Coupon		Yield		Life (Years)^(C)	Principal Subordination^(D)
December 31, 2014
Agency RMBS^(E)(F)	$	1,646,361	$	1,724,329	$	18,572	$	(2,738	)	$	1,740,163	104	AAA	3.22	%	2.22	%	5.0	N/A
Non-Agency RMBS^(G)	1,896,150		710,515		15,327		(2,842		)	723,000		142	CCC	1.98	%	3.37	%	6.4	17.3	%
Total/Weighted Average	$	3,542,511	$	2,434,844	$	33,899	$	(5,580	)	$	2,463,163	246	A	2.86	%	2.83	%	5.7
December 31, 2013
Agency RMBS^(E)(F)	$	1,314,130	$	1,403,215	$	3,434	$	(3,885	)	$	1,402,764	114	AAA	3.18	%	1.33	%	4.1	N/A
Non-Agency RMBS^(G)	872,866		566,760		7,618		(3,953		)	570,425		100	CCC-	0.94	%	4.68	%	8.0	7.4	%
Total/Weighted Average	$	2,186,996	$	1,969,975	$	11,052	$	(7,838	)	$	1,973,189	214	BBB+	2.28	%	2.66	%	5.7


(A)	Fair value, which is equal to carrying value for all securities. See Note 12 regarding the estimation of fair value.

(B)

Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. This excludes the ratings of the collateral underlying five bonds for which New Residential was unable to obtain rating information. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date and may not be current.


(C)	The weighted average life is based on the timing of expected principal reduction on the assets.


(D)	Percentage of the outstanding face amount of securities that is subordinate to New Residential’s investments.


(E)	Includes securities issued or guaranteed by U.S. Government agencies such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”).


(F)	The total outstanding face amount was $1.0 billion and $0.0 billion for fixed rate securities and $0.6 billion and $1.3 billion for floating rate securities as of December 31, 2014 and 2013, respectively.

(G)

The total outstanding face amount was $1.0 billion (including $959.1 million of interest-only notional amount) and $6.6 million for fixed rate securities and $882.4 million (including $130.6 million of residual and interest-only notional amount) and $866.2 million (including $42.9 million of residual and interest-only notional amount) for floating rate securities as of December 31, 2014 and 2013, respectively.

Unrealized losses that are considered other than temporary are recognized currently in earnings. During the year ended December 31, 2014, New Residential recorded other-than-temporary impairment charges (“OTTI”) of $1.4 million with respect to real estate securities. During the year ended December 31, 2013, New Residential recorded OTTI of $5.0 million, of which $3.8 million was recorded with respect to real estate securities included in the spin-off on May 15, 2013. Based on Newcastle management’s analysis of these securities, Newcastle determined it did not have the intent to hold the securities past May 15, 2013. New Residential has also recorded OTTI of $1.0 million with respect to real estate securities sold in January 2014 that were in an unrealized loss position as of December 31, 2013 since New Residential determined that it did not have the intent to hold the securities, as well as $0.3 million with respect to expected credit loss related to real estate securities in an unrealized loss position as of December 31, 2013, based on management’s analysis of expected cash flows of these securities. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.

The following table summarizes New Residential’s securities in an unrealized loss position as of December 31, 2014.



			Amortized Cost Basis													Weighted Average
Securities in an Unrealized Loss Position	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)
Less than Twelve Months	$	1,223,482	$	372,024	$	(448	)	$	371,576	$	(3,889	)	$	367,687	71	BBB	2.49	%	2.54	%	5.4
Twelve or More Months	135,012		145,401		—			145,401		(1,691		)	143,710		17	AAA	2.88	%	1.69	%	4.5
Total/Weighted Average	$	1,358,494	$	517,425	$	(448	)	$	516,977	$	(5,580	)	$	511,397	88	A-	2.53	%	2.45	%	5.3


(A)	This amount represents other-than-temporary impairment recorded on securities that are in an unrealized loss position as of December 31, 2014.


(B)	The weighted average rating of securities in an unrealized loss position for less than twelve months excludes the rating of five bonds for which New Residential was unable to obtain rating information.

New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:



	December 31, 2014
					Unrealized Losses
	Fair Value		Amortized Cost Basis After Impairment		Credit^(A)			Non-Credit^(B)
Securities New Residential intends to sell^(C)	$	—	$	—	$	—		$	—
Securities New Residential is more likely than not to be required to sell^(D)	—		—		—			N/A
Securities New Residential has no intent to sell and is not more likely than not to be required to sell:
Credit impaired securities	106,892		107,712		(448		)	(820		)
Non credit impaired securities	404,505		409,265		—			(4,760		)
Total debt securities in an unrealized loss position	$	511,397	$	516,977	$	(448	)	$	(5,580	)

(A)

This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion of credit losses, New Residential’s management estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include management’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.


(B)	This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income.


(C)	A portion of securities New Residential intends to sell have a fair value equal to their amortized cost basis after impairment, and, therefore do not have unrealized losses reflected in other comprehensive income as of December 31, 2014.

(D)

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.

The following table summarizes the activity related to credit losses on debt securities:



	Year Ended December 31,
	2014			2013
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	2,071		$	—
Increases to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income	568			—
Additions for credit losses on securities for which an OTTI was not previously recognized	823			4,993
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	(401		)	(2,878		)
Reduction for securities sold during the period	(1,934		)	(44		)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	1,127		$	2,071

The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:



	December 31, 2014				December 31, 2013
Geographic Location	Outstanding Face Amount		Percentage of Total Outstanding		Outstanding Face Amount		Percentage of Total Outstanding
Western U.S.	$	779,930	41.1	%	$	317,111	36.3	%
Southeastern U.S.	409,755		21.6	%	198,298		22.7	%
Northeastern U.S.	344,716		18.2	%	164,481		18.9	%
Midwestern U.S.	190,480		10.0	%	98,682		11.3	%
Southwestern U.S.	170,829		9.0	%	51,425		5.9	%
Other^(A)	440		0.1	%	42,869		4.9	%
	$	1,896,150	100.0	%	$	872,866	100.0	%


(A)	Represents collateral for which New Residential was unable to obtain geographic information.

New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the year ended December 31, 2014, the face amount of these real estate securities was $754.6 million, with total expected cash flows of $734.9 million and a fair value of $552.1 million on the dates that New Residential purchased the respective securities. For those securities acquired during the year ended December 31, 2013, the face amount was $1.1 billion, the total expected cash flows were $0.9 billion and the fair value was $0.7 billion on the dates that New Residential purchased the respective securities.

The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:



	Outstanding Face Amount		Carrying Value
December 31, 2014	$	536,342	$	414,298
December 31, 2013	$	729,895	$	483,680

The following is a summary of the changes in accretable yield for these securities:



	Year Ended December 31,
	2014			2013
Beginning Balance	$	143,067		$	90,077
Additions	189,252			155,854
Accretion	(14,035		)	(19,939		)
Reclassifications from non-accretable difference	20,385			40,785
Disposals	(156,998		)	(123,710		)
Ending Balance	$	181,671		$	143,067

See Note 11 regarding the financing of real estate securities.