FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying values and fair values of New Residential’s financial assets recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of March 31, 2015 were as follows:



					Fair Value
	Principal Balance or Notional Amount		Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Investments in:
Excess mortgage servicing rights, at fair value^(A)	$	163,572,436	$	526,662	$	—	$	—	$	526,662	$	526,662
Excess mortgage servicing rights, equity method investees, at fair value^(A)	84,000,746		225,111		—		—		225,111		225,111
Servicer advances	3,068,306		3,245,457		—		—		3,245,457		3,245,457
Real estate securities, available-for-sale	3,396,295		2,324,915		—		1,664,996		659,919		2,324,915
Residential mortgage loans, held-for- investment	65,854		44,967		—		—		45,900		45,900
Residential mortgage loans, held-for- sale	569,329		500,174		—		—		506,986		506,986
Non-hedge derivatives	210,000		71		—		71		—		71
Cash and cash equivalents	459,334		459,334		459,334		—		—		459,334
Restricted cash	28,325		28,325		28,325		—		—		28,325
			$	7,355,016	$	487,659	$	1,665,067	$	5,210,035	$	7,362,761
Liabilities:
Repurchase agreements	$	2,339,389	$	2,339,389	$	—	$	1,928,891	$	410,498	$	2,339,389
Notes payable	2,999,418		2,999,418		—		—		2,999,418		2,999,418
Derivative liabilities	2,087,000		21,127		—		21,127		—		21,127
			$	5,359,934	$	—	$	1,950,018	$	3,409,916	$	5,359,934


(A)	The notional amount represents the total unpaid principal balance of the mortgage loans underlying the Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.

New Residential’s financial assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:



	Level 3
	Excess MSRs^(A)						Excess MSRs in Equity Method Investees^(A)(B)
	Agency			Non-Agency			Agency			Non-Agency			Servicer Advances			Non-Agency RMBS			Linked Transactions			Total
Balance at December 31, 2014	$	217,519		$	200,214		$	232,618		$	98,258		$	3,270,839		$	723,000		$	32,402		$	4,774,850
Transfers^(C)
Transfers from Level 3	—			—			—			—			—			—			—			—
Transfers to Level 3	—			—			—			—			—			—			—			—
Transfers from investments in excess mortgage servicing rights, equity method investees, to investments in excess mortgage servicing rights	—			98,258			—			(98,258		)	—			—			—			—
Gains (losses) included in net income
Included in other-than-temporary impairment (“OTTI”) on securities^(D)	—			—			—			—			—			(1,071		)	—			(1,071		)
Included in change in fair value of investments in excess mortgage servicing rights^(D)	(234		)	(1,527		)	—			—			—			—			—			(1,761		)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(D)	—			—			4,921			—			—			—			—			4,921
Included in change in fair value of investments in servicer advances	—			—			—			—			(7,669		)	—			—			(7,669		)
Included in gain on settlement of investments, net	—			—			—			—			—			3,808			—			3,808
Included in other income^(D)	730			—			—			—			—			—			—			730
Gains (losses) included in other comprehensive income, net of tax^(E)	—			—			—			—			—			(481		)	—			(481		)
Interest income	6,458			8,579			—			—			42,349			8,450			—			65,836
Purchases, sales, repayments and transfers
Purchases	26,479			—			—			—			1,765,294			222,102			—			2,013,875
Proceeds from sales	—			—			—			—			—			(389,719		)	—			(389,719		)
Proceeds from repayments	(11,973		)	(17,841		)	(12,428		)	—			(1,825,356		)	(23,002		)	—			(1,890,600		)
De-linked transactions^(F)	—			—			—			—			—			116,832			(32,402		)	84,430
Balance at March 31, 2015	$	238,979		$	287,683		$	225,111		$	—		$	3,245,457		$	659,919		$	—		$	4,657,149


(A)	Includes the Recapture Agreement for each respective pool.


(B)	Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New Residential has a 50% interest.


(C)	Transfers are assumed to occur at the beginning of each respective period.


(D)	The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates.


(E)	These gains (losses) were included in net unrealized gain (loss) on securities in the Condensed Consolidated Statements of Comprehensive Income.


(F)	See Note 10 for a discussion of transactions formerly accounted for as linked transactions.

Investments in Excess MSRs and Excess MSRs Equity Method Investees Valuation

The following table summarizes certain information regarding the weighted average inputs used in valuing the Excess MSRs owned directly and through equity method investees as of March 31, 2015:



	Significant Inputs^(A)
Directly Held (Note 4)	Prepayment Speed^(B)		Delinquency^(C)		Recapture Rate^(D)		Excess Mortgage Servicing Amount (bps)^(E)
Agency
Original and Recaptured Pools	10.1	%	5.4	%	31.5	%	21
Recapture Agreement	7.9	%	5.0	%	19.9	%	21
	10.0	%	5.4	%	30.8	%	21
Non-Agency^(F)
Original and Recaptured Pools	12.7	%	N/A		10.2	%	14
Recapture Agreement	8.0	%	N/A		20.0	%	20
	12.5	%	N/A		10.7	%	14
Total/Weighted Average--Directly Held	11.5	%	5.4	%	18.9	%	17

Held through Equity Method Investees (Note 5)
Agency
Original and Recaptured Pools	13.0	%	6.5	%	33.5	%	19
Recapture Agreement	8.0	%	5.0	%	20.0	%	23
Total/Weighted Average--Held through Investees	12.1	%	6.2	%	31.1	%	19

Total/Weighted Average--All Pools	11.7	%	5.7	%	24.5	%	18


(A)	Weighted by amortized cost basis of the mortgage loan portfolio.


(B)	Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.


(C)	Projected percentage of mortgage loans in the pool that will miss their mortgage payments.


(D)	Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar.


(E)	Weighted average total mortgage servicing amount in excess of the basic fee.


(F)	For certain pools, the Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO). For these pools, no delinquency assumption is used.

As of March 31, 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).

Investments in Servicer Advances Valuation

The following table summarizes certain information regarding the inputs used in valuing the servicer advances:



	Significant Inputs
	Weighted Average
	Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans		Prepayment Speed		Delinquency		Mortgage Servicing Amount^(A)		Discount Rate
March 31, 2015	2.1	%	12.5	%	14.3	%	19.4	bps	5.4	%


(A)	Mortgage servicing amount excludes the amounts New Residential pays Nationstar and SLS as a monthly servicing fee.

Real Estate Securities Valuation

As of March 31, 2015, New Residential’s securities valuation methodology and results are further detailed as follows:



					Fair Value
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Multiple Quotes^(A)		Single Quote^(B)		Total		Level
Agency RMBS	$	1,575,759	$	1,659,781	$	1,664,996	$	—	$	1,664,996	2
Non-Agency RMBS^(C)	1,820,536		647,915		650,746		9,173		659,919		3
Total	$	3,396,295	$	2,307,696	$	2,315,742	$	9,173	$	2,324,915

(A)

Management generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold New Residential the security) for Non-Agency RMBS. Management selected one of the quotes received as being most representative of the fair value and did not use an average of the quotes. Even if New Residential receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes New Residential receives. Management believes using an average of the quotes in these cases would not represent the fair value of the asset. Based on New Residential’s own fair value analysis, management selects one of the quotes which is believed to more accurately reflect fair value. New Residential never adjusts quotes received. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” — meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price.


(B)	Management was unable to obtain quotations from more than one source on these securities. The one source was the seller (the party that sold New Residential the security).


(C)	Includes New Residential’s investments in interest-only notes for which the fair value option for financial instruments was elected.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment. For residential mortgage loans held-for-sale and foreclosed real estate accounted for as REO, New Residential applies the lower of cost or fair value accounting and may be required, from time to time, to record a nonrecurring fair value adjustment.

At March 31, 2015 and December 31, 2014, assets measured at fair value on a nonrecurring basis were $213.1 million and $666.6 million, respectively. The $213.1 million represents residential mortgage loans held-for-sale and the $666.6 million includes approximately $610.1 million of residential mortgage loans held-for-sale and $56.5 million of REO. The fair value of New Residential’s mortgage loans held-for-sale are estimated based on a discounted cash flow model analysis using internal pricing models and categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these residential mortgage loans as of March 31, 2015:



March 31, 2015	Fair Value		Discount Rate		Weighted Average Life (Years) ^(A)	Prepayment Rate		CDR^(B)	Loss Severity^(C)
PCI Loans	$	213,058	5.5	%	2.4	3.0	%	N/A	50.0	%


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


(B)	Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.


(C)	Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.

The fair value of REO is estimated using a broker’s price opinion discounted based upon New Residential’s experience with actual liquidation values and, therefore, is categorized within Level 3 of the fair value hierarchy. These discounts to the broker price opinion are generally 10%. As of March 31, 2015, New Residential’s REO did not show evidence of impairment and continued to be measured at cost.

The total change in the recorded value of assets for which a fair value adjustment was included in the Consolidated Statements of Income for the period ended March 31, 2015 was a reduction of approximately $0.8 million for residential mortgage loans held-for-sale.

Residential Mortgage Loans for Which Fair Value is Only Disclosed

The fair value of New Residential’s residential mortgage loans are estimated based on a discounted cash flow model analysis using internal pricing models and are categorized within Level 3 of the fair value hierarchy.

The following table summarizes the inputs used in valuing residential mortgage loans as of March 31, 2015:



	Carrying Value		Fair Value		Valuation Provision/ (Reversal) In Current Year		Discount Rate		Weighted Average Life (Years)^(A)	Prepayment Rate		CDR^(B)		Loss Severity^(C)
Reverse Mortgage Loans^(D)	$	23,294	$	23,294	$	202	10.0	%	4.0	N/A		N/A		6.3	%
Performing Loans	292,080		296,970		N/A		4.9	%	6.9	6.0	%	2.1	%	46.1	%
PCI Loans	16,709		19,564		N/A		5.5	%	2.4	3.0	%	N/A		50.0	%
Total/Weighted Average	$	332,083	$	339,828	$	202	5.3	%	6.4					43.5	%


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


(B)	Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.


(C)	Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.


(D)	Carrying value and fair value represent a 70% interest New Residential holds in the reverse mortgage loans.

Derivative Valuation

New Residential enters into economic hedges including interest rate swaps and TBAs, which are categorized as Level 2 in the valuation hierarchy. Management generally values such derivatives using quotations, similarly to the method of valuation used for New Residential’s other assets that are categorized as Level 2.

Liabilities for Which Fair Value is Only Disclosed

Repurchase agreements and notes payable are not measured at fair value. They are generally considered to be Level 2 and Level 3 in the valuation hierarchy, respectively, with significant valuation variables including the amount and timing of expected cash flows, interest rates and collateral funding spreads.

Short-term repurchase agreements and short-term notes payable have an estimated fair value equal to their carrying value due to their short duration and generally floating interest rates. Longer-term notes payable are valued based on internal models utilizing both observable and unobservable inputs. As of March 31, 2015, these longer-term notes have an estimated fair value of $2,875.4 million and a carrying value of $2,875.4 million.