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)			Ocwen^(B)			Total
Balance as of December 31, 2014	$	409,076		$	8,657		$	—		$	417,733
Transfers from indirect ownership	98,258			—			—			98,258
Purchases	131,488			—			919,531			1,051,019
Interest income	46,840			176			40,858			87,874
Other income	2,246			—			—			2,246
Proceeds from repayments	(94,212		)	(997		)	(101,957		)	(197,166		)
Change in fair value^(C)	1,854			(1,890		)	(238		)	(274		)
Balance as of September 30, 2015	$	595,550		$	5,946		$	858,194		$	1,459,690


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


(B)	Ocwen services the loans underlying the Excess MSRs and Servicer Advances acquired from HLSS. See Note 1.


(C)	In the third quarter of 2015, New Residential recorded a cumulative positive prior period adjustment of $4.4 million (of which $4.2 million related to 2014 and prior) resulting from adjustments to certain modeling assumptions.

Nationstar, SLS or Ocwen, 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.

During the six months ended June 30, 2015, New Residential invested approximately $54.2 million to acquire a 33.3% interest in the Excess MSR on two portfolios of Freddie Mac and one portfolio of Fannie Mae residential mortgage loans with an aggregate UPB of $17.3 billion and $1.6 billion, respectively. In addition, New Residential invested approximately $72.4 million to acquire a 40% interest in the Excess MSR on a portfolio of Ginnie Mae residential mortgage loans with an aggregate UPB of $18.5 billion. Fortress-managed funds and Nationstar each agreed to acquire a 33% interest in the Freddie Mac and Fannie Mae Excess MSR and a 40% and 20% interest in the Ginnie Mae Excess MSR, respectively. Nationstar as servicer agreed to 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. Furthermore, on April 6, 2015, New Residential acquired Excess MSRs in connection with the HLSS Acquisition (Note 1).

On July 16, 2015, New Residential invested approximately $2.4 million to acquire a 33.3% interest in the Excess MSRs on a portfolio of Freddie Mac residential mortgage loans with an aggregate UPB of $0.8 billion. Fortress-managed funds and Nationstar each agreed to acquire a 33.3% interest in the Excess MSRs. Nationstar as servicer agreed to 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.

New Residential has entered into a “Recapture Agreement” in each of the Excess MSR investments serviced by Nationstar and SLS, 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. New Residential has a similar recapture agreement with Ocwen; however, this agreement allows for Ocwen to retain the Excess MSR on recaptured loans up to a threshold and no payments have been made to New Residential under such arrangement to date. 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:



	September 30, 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	$	78,057,699	32.5% - 66.7%		0.0% - 40.0%		20.0% - 35.0%		5.9	$	236,787	$	284,805	$	188,733
Recapture Agreements	—		32.5% - 66.7%		0.0% - 40.0%		20.0% - 35.0%		11.7	25,127		47,270		28,786
	78,057,699								6.5	261,914		332,075		217,519

Non-Agency^(D)
Nationstar and SLS Serviced:
Original and Recaptured Pools	$	98,914,180	33.3% - 80.0%		0.0% - 50.0%		0.0% - 33.3%		5.1	$	215,268	$	252,674	$	189,812
Recapture Agreements	—		33.3% - 80.0%		0.0% - 50.0%		0.0% - 33.3%		12.0	14,830		16,748		10,402
Ocwen Serviced Pools	145,781,953		100.0	%	—	%	—	%	5.4	858,431		858,193		—
	244,696,133								5.4	1,088,529		1,127,615		200,214
Total	$	322,753,832							5.6	$	1,350,443	$	1,459,690	$	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 September 30, 2015 (Note 6).

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2015			2014		2015			2014
Original and Recaptured Pools	$	1,485		$	24,124	$	(3,933	)	$	34,012
Recapture Agreements	(354		)	4,442		3,659			6,658
	$	1,131		$	28,566	$	(274	)	$	40,670

In the third quarter of 2015, a weighted average discount rate of 9.8% 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	September 30, 2015		December 31, 2014
California	26.6	%	31.5	%
Florida	9.1	%	7.7	%
New York	7.3	%	4.3	%
Texas	4.4	%	4.2	%
New Jersey	4.0	%	3.2	%
Maryland	3.8	%	4.0	%
Illinois	3.4	%	3.2	%
Virginia	3.2	%	3.3	%
Washington	2.8	%	3.6	%
Massachusetts	2.6	%	2.1	%
Other U.S.	32.8	%	32.9	%
	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.