INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

3 Months Ended

Mar. 31, 2015

Transfers and Servicing [Abstract]

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

The following table presents activity related to the carrying value of New Residential’s investments in Excess MSRs:

	Servicer
	Nationstar			SLS(A)			Total
Balance as of December 31, 2014	$	409,076		$	8,657		$	417,733
Transfers from indirect ownership	98,258			—			98,258
Purchases	26,479			—			26,479
Interest income	14,856			181			15,037
Other income	730			—			730
Proceeds from repayments	(29,544		)	(270		)	(29,814		)
Change in fair value	(1,472		)	(289		)	(1,761		)
Balance as of March 31, 2015	$	518,383		$	8,279		$	526,662

(A)    Specialized Loan Servicing LLC (“SLS”). See Note 6 for a description of the SLS Transaction.

Nationstar or SLS, as applicable, as servicer, performs all servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

On January 16, 2015, New Residential invested approximately $23.8 million to acquire a 33.3% interest in the Excess MSR on a portfolio of Freddie Mac residential mortgage loans with an aggregate UPB of $8.4 billion. Fortress-managed funds and Nationstar each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in each of the portfolios. Under the terms of the 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.

New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments through March 31, 2015, including those Excess MSR investments made through investments in joint ventures (Note 5). Under such 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. These Recapture Agreements do not apply to New Residential’s investments in servicer advances (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:

	March 31, 2015										December 31, 2014
	Unpaid Principal Balance (“UPB”) of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years(A)	Amortized Cost Basis(B)		Carrying Value(C)		Carrying Value(C)
			New Residential	Fortress-managed funds	Nationstar
Agency
Original and Recaptured Pools	$	54,829,877	32.5%-66.7%	0.0%-33.3%	33.3%-35%	5.9	$	161,109	$	209,114	$	188,733
Recapture Agreements	—		32.5%-66.7%	0.0%-33.3%	33.3%-35%	12.9	9,927		29,865		28,786
	54,829,877					6.3	171,036		238,979		217,519
Non-Agency(D)
Original and Recaptured Pools	$	108,742,559	33.3%-80.0%	0.0%-50.0%	0.0%-33.3%	4.9	$	231,228	$	270,365	$	189,812
Recapture Agreements	—		33.3%-80.0%	0.0%-50.0%	0.0%-33.3%	11.8	16,638		17,318		10,402
	108,742,559					5.4	247,866		287,683		200,214
Total	$	163,572,436				5.8	$	418,902	$	526,662	$	417,733

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

(B) 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.

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

(D) Excess MSR investments in which New Residential also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2015 (Note 6).

Changes in fair value recorded in other income are comprised of the following:

	Three Months Ended March 31,
	2015			2014
Original and Recaptured Pools	$	(1,976	)	$	7,088
Recapture Agreements	215			(486		)
	$	(1,761	)	$	6,602

In the first quarter of 2015, a weighted average discount rate of 9.6% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the direct investments in Excess MSRs:

	Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration	March 31, 2015		December 31, 2014
California	33.0	%	31.5	%
Florida	9.3	%	7.7	%
New York	4.9	%	4.3	%
Maryland	3.8	%	4.0	%
Texas	3.6	%	4.2	%
New Jersey	3.5	%	3.2	%
Virginia	3.2	%	3.3	%
Illinois	3.2	%	3.2	%
Washington	3.2	%	3.6	%
Arizona	2.7	%	3.2	%
Other U.S.	29.6	%	31.8	%
	100.0	%	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.