INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS

Certain of New Residential's investments in residential mortgage loans were acquired through the exercise of call rights:

•

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 with a UPB of approximately $282.2 million at a price of approximately $289.4 million, contained in such trusts prior to their termination. New Residential securitized approximately $233.8 million in UPB of performing loans, which was recorded as a sale for accounting purposes, and recognized a gain on settlement of investments of approximately $3.5 million. New Residential retained performing and non-performing loans with a UPB of approximately $48.4 million at a price of $40.1 million. Additionally, New Residential acquired $1.3 million of real estate owned.

•

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 with a UPB of approximately $530.1 million at a price of approximately $536.3 million, contained in such trusts prior to their termination. Additionally, New Residential acquired $3.0 million of real estate owned. New Residential identified approximately $463.0 million UPB in performing loans for future securitization and classified as Held-for-Sale. On October 3, 2014, New Residential securitized these loans Held-for-Sale, which was recorded as a sale for accounting purposes, recognized a gain on settlement of investments of approximately $7.0 million, and paid approximately $25.8 million to acquire interest-only notes representing a beneficial interest in the securitization.

•

On, December 26, 2014, New Residential exercised its call rights related to twenty-five Non-Agency RMBS trusts and purchased performing and non-performing loans with a UPB of approximately $597.1 million at a price of approximately $623.7 million, contained in such trusts prior to their termination. New Residential securitized approximately $516.1 million in UPB of performing loans, which was recorded as a sale for accounting purposes, recognized a gain on settlement of investments of approximately $0.7 million, and paid approximately $28.9 million to acquire interest only notes representing a beneficial interest in the securitization. New Residential retained performing and non-performing loans with a UPB of approximately $81.0 million at a price of $71.7 million. Additionally, New Residential acquired $4.3 million of real estate owned.

Certain of New Residential's investments in residential mortgage loans have historically been accounted for as linked transactions (see "—Linked Transactions"). New Residential sold the majority of this investment in October 2014.

Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. New Residential accounts for loans based on the following categories:


•	Reverse Mortgage Loans


•	Performing Loans


•	Purchased Credit Impaired (“PCI”) Loans


•	Loans Held-for-Sale ("HFS")


•	Real Estate Owned ("REO")


•	Linked Transactions (treated as derivatives, Note 10)

The following table presents certain information regarding New Residential's residential mortgage loans outstanding by loan type, excluding REO and linked transactions at December 31, 2014 and December 31, 2013, respectively.



December 31, 2014	Outstanding Face Amount		Carrying Value^(A)		Loan Count	Weighted Average Yield		Weighted Average Life (Years)^(B)	Floating Rate Loans as a % of Face Amount		Loan to Value Ratio ("LTV")^(C)		Weighted Avg. Delinquency^(D)		Weighted Average FICO^(E)
Loan Type
Reverse Mortgage Loans^(F)(G)	$	45,182	$	24,965	198	10.2	%	3.9	21.4	%	108.2	%	82.6	%	N/A
Performing Loans^(H)	24,399		22,873		731	7.9	%	5.9	17.4	%	72.0	%	—	%	628
Total Residential Mortgage Loans, held-for- investment	$	69,581	$	47,838	929	9.4	%	4.6	20.0	%	95.5	%	53.6	%	628

Performing Loans, held-for-sale^(H)	$	403,992	$	388,485	5,809	5.6	%	7.2	23.0	%	85.0	%	5.0	%	626
Purchased Credit Impaired ("PCI") Loans, held-for-sale^(I)	960,224		737,954		5,025	5.9	%	2.6	3.7	%	104.0	%	90.0	%	571
Total Residential Mortgage Loans, held-for- sale	$	1,364,216	$	1,126,439	10,834	5.8	%	4.0	9.4	%	98.4	%	64.8	%	587

December 31, 2013
Loan Type
Reverse Mortgage Loans^(F)	$	57,552	$	33,539	328	10.3	%	3.7	22.0	%	101.4	%	84.6	%	N/A
	$	57,552	$	33,539	328	10.3	%	3.7	22.0	%	101.4	%	84.6	%	N/A


(A)	Includes residential mortgage loans with a United States federal income tax basis of $1,159.1 million and $33.9 million as of December 31, 2014 and 2013, respectively.


(B)	The weighted average life is based on the expected timing of the receipt of cash flows.


(C)	LTV refers to the ratio comparing the loan’s unpaid principal balance to the value of the collateral property.


(D)	Represents the percentage of the total principal balance that are 60+ days delinquent, $2.3 million of which are on non-accrual status as of December 31, 2014.


(E)	The weighted average FICO score is based on the weighted average of information updated and provided by the loan servicer on a monthly basis.

(F)

Represents a 70% interest New Residential holds in reverse mortgage loans. The average loan balance outstanding based on total UPB is $0.3 million and $0.2 million at December 31, 2014 and December 31, 2013, respectively, and 77% and 82% of these loans outstanding at each respective date have reached a termination event. As a result, the borrower can no longer make draws on these loans. Each loan matures upon the occurrence of a termination event.


(G)	FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan.


(H)	Includes loans that are current or less than 30 days past due at acquisition where New Residential expects to collect all contractually required principal and interest payments. Presented net of unamortized discounts and premiums of $15.2 million.


(I)	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.

New Residential generally considers the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as its credit quality indicators. Delinquency status is a primary credit quality indicator as loans that are more than 30 days past due provide an early warning of borrowers who may be experiencing financial difficulties. For residential mortgage loans, the current LTV ratio is an indicator of the potential loss severity in the event of default. Finally, the geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific events will affect credit quality.

The table below summarizes the geographic distribution of the underlying residential mortgage loans as of December 31, 2014 and December 31, 2013, respectively:



Percentage of Total Outstanding Unpaid Principal Amount
State Concentration	December 31, 2014		December 31, 2013
California	15.0	%	5.7	%
New York	12.2	%	22.0	%
New Jersey	7.0	%	6.9	%
Florida	6.3	%	21.2	%
Illinois	4.4	%	7.7	%
Texas	4.1	%	2.8	%
Pennsylvania	3.9	%	0.9	%
Georgia	3.6	%	—	%
Maryland	3.4	%	2.8	%
Ohio	3.1	%	1.1	%
Other U.S.	37.0	%	28.9	%
	100.0	%	100.0	%

See Note 11 regarding the financing of residential mortgage loans.

Reverse Mortgage Loans

On February 27, 2013, New Residential, through a subsidiary, entered into an agreement to co-invest in reverse mortgage loans with a UPB of approximately $83.1 million as of December 31, 2012. New Residential invested approximately $35.1 million to acquire a 70% interest in the reverse mortgage loans. Nationstar has co-invested on a pari passu basis with New Residential in 30% of the reverse mortgage loans and is the servicer of the loans performing all servicing and advancing functions and retaining the ancillary income, servicing obligations and liabilities as the servicer.

Performing Loans

The following table provides past due information for New Residential's Performing Loans, which is an important indicator of credit quality and the establishment of the allowance for loan losses:



December 31, 2014
Days Past Due	Delinquency Status^(A)
Current	79.1	%
30-59	15.9	%
60-89	2.1	%
90-119^(B)	1.1	%
120+^(C)	1.8	%
	100.0	%


(A)	Represents the percentage of the total principal balance that corresponds to loans that are in each delinquency status.


(B)	Includes loans 90-119 days past due and still accruing because they are generally placed on nonaccrual status at 120 days or more past due.


(C)	Represents nonaccrual loans.

Activities related to the carrying value of reverse mortgage loans and performing loans held-for-investment were as follows:



	Year Ended December 31, 2014
	Reverse Mortgage Loans			Performing Loans
Balance at December 31, 2012	$	—		$	—
Purchases/additional fundings	35,138			—
Proceeds from repayments	(3,788		)	—
Accretion of loan discount and other amortization	2,650			—
Allowance for loan losses	(461		)	—
Balance at December 31, 2013	33,539			—
Purchases/additional fundings	—			134,818
Proceeds from repayments	(2,810		)	(10,381		)
Accretion of loan discount and other amortization	6,501			2,994
Allowance for loan losses	(1,111		)	(651		)
Transfer of loans to other assets	(10,261		)	—
Transfer of loans to real estate owned	(947		)	—
Transfer of loans to held-for-sale	—			(103,907		)
Reversal of valuation provision on loans transferred to other assets	54			—
Balance at December 31, 2014	$	24,965		$	22,873

Activities related to the valuation provision on reverse mortgage loans and allowance for loan losses on performing loans were as follows:



	Reverse Mortgage Loans			Performing Loans
Balance at December 31, 2012	$	—		$	—
Allowance for loan losses^(A)	461			—
Charge-offs^(B)	—			—
Reversal of valuation provision on loans transferred to other assets	—			—
Balance at December 31, 2013	461			—
Allowance for loan losses^(A)	1,111			1,811
Charge-offs^(B)(C)	—			(364		)
Reversal of valuation provision on loans transferred to other assets	(54		)	—
Balance at December 31, 2014	$	1,518		$	1,447


(A)	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.


(B)	Loans, other than PCI 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.


(C)	Represents a charge-off upon transfer to held-for-sale.

Purchased Credit Impaired Loans

New Residential determined at acquisition that the PCI loans acquired would be aggregated into pools based on common risk characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio) and aggregated a total of ten pools. Loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows.

Activities related to the carrying value of PCI loans held-for-investment were as follows:



	Purchase Credit Impaired Loans
Balance at December 31, 2013	$	—
Purchases/additional fundings	749,739
Sales	—
Proceeds from repayments	(20,431		)
Accretion of loan discount and other amortization	30,361
Transfer of loans to real estate owned	(21,842		)
Transfer of loans to held-for-sale	(737,827		)
Balance at December 31, 2014	$	—

The following is the contractually required payments receivable, cash flows expected to be collected, and fair value at acquisition date for loans acquired during the year ended December 31, 2014:



	Contractually Required Payments Receivable		Cash Flows Expected to be Collected		Fair Value
As of Acquisition Date	$	1,846,100	$	956,970	$	749,739

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:



	Unpaid Principal Balance		Carrying Value
December 31, 2014	$	960,224	$	737,954
December 31, 2013	$	—	$	—

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



	Year Ended December 31, 2014
Balance at December 31, 2013	$	—
Additions	207,231
Accretion	(30,361		)
Reclassifications from non-accretable difference^(A)	6,836
Disposals^(B)	(8,324		)
Transfer to held-for-sale^(C)	(175,382		)
Balance at December 31, 2014	$	—


(A)	Represents a probable and significant increase in cash flows previously expected to be uncollectible.


(B)	Includes sales of loans or foreclosures, which result in removal of the loan from the PCI loan pool at its carrying amount.


(C)	Recognition of the accretable yield ceases upon transfer of the PCI loan pools to held-for-sale.

Loans Held-for-Sale

Activities related to the carrying value of loans held-for-sale were as follows:



Balance at December 31, 2013	$	—
Purchases^(A)	1,577,933
Securitizations	(1,289,687		)
Transfers of loans from linked transactions^(B)	4,595
Transfers of loans from held-for-investment^(C)	841,734
Proceeds from repayments	(2,413		)
Valuation provision on loans^(D)	(5,723		)
Balance at December 31, 2014	$	1,126,439


(A)	Represents loans acquired with the intent to sell.


(B)	Represents loans previously financed with the selling counterparty and accounted for as linked transactions that New Residential decided to sell.


(C)	Represents loans not acquired with the intent to sell that New Residential decided to sell.


(D)	Represents the fair value adjustments to loans upon transfer to held-for-sale and provision recorded on certain purchased held-for-sale loans.

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.

During the year ended December 31, 2014, New Residential received properties in satisfaction of non-performing residential mortgage loans included in the PCI loan portfolio. In addition, New Residential acquired properties through its purchases of residential mortgage loan portfolios. As a result, New Residential has recognized REO assets totaling approximately $30.6 million (net of a $2.4 million valuation allowance) during the year ended December 31, 2014. As of December 31, 2014, New Residential had PCI residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $536.6 million. In addition, see below regarding REO acquired through linked transactions.

Linked Transactions

In the first quarter of 2014, New Residential invested in portfolios of non-performing loans and financed the transactions with the same counterparties from which it purchased them. New Residential accounts for the contemporaneous purchase of the investments and the associated financings as linked transactions. Accordingly, New Residential recorded a non-hedge derivative instrument on a net basis, with changes in market value recorded as Other Income in the Consolidated Statements of Income. For further information on the transactions, see below and Note 10.

On January 15, 2014, New Residential purchased a portfolio of non-performing residential mortgage loans with a UPB of approximately $65.6 million at a price of approximately $33.7 million. To finance this purchase, on January 15, 2014, New Residential entered into a $25.3 million repurchase agreement with Credit Suisse ("CS"). This purchase was accounted for as a linked transaction (Note 10).

On March 28, 2014, New Residential purchased a portfolio of non-performing mortgage loans with a UPB of approximately $7.0 million at a price of approximately $3.8 million. The investment was financed with a $2.5 million master repurchase agreement with The Royal Bank of Scotland ("RBS"). This acquisition is accounted for as a linked transaction (Note 10).

On October 28, 2014, New Residential sold substantially all of its non-performing mortgage loans accounted for as linked transactions for approximately $86.2 million, recording a gain on sale of approximately $5.6 million, and paid off $62.5 million of related financing under repurchase agreements. At the time of sale, the non-performing mortgage loans had an outstanding unpaid principal balance of $138.5 million.

During the year ended December 31, 2014, New Residential received properties in satisfaction of non-performing residential mortgage loans included in the portfolios acquired from CS and RBS accounted for as linked transactions. As a result, New Residential has recognized REO assets totaling approximately $29.3 million, as of December 31, 2014. As of December 31, 2014 and December 31, 2013, New Residential had residential mortgage loans accounted for as linked transactions that were in the process of foreclosure with an unpaid principal balance of $2.1 million and $0.0 million, respectively.

See Notes 2 and 18 regarding new accounting guidance for these transactions applicable in 2015.