INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS, EQUITY METHOD INVESTEES

New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.

During the first quarter of 2015, New Residential and the Fortress-managed funds restructured their investments in two of the Excess MSR joint ventures and now each directly owns its share of the underlying assets of the joint ventures.

The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential:



	September 30, 2015			December 31, 2014
Excess MSR assets	$	415,120		$	653,293
Other assets	11,516			8,472
Other liabilities	—			(13		)
Equity	$	426,636		$	661,752
New Residential’s investment	$	213,318		$	330,876

New Residential’s ownership	50.0		%	50.0		%



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Interest income	$	12,399		$	18,341		$	33,316		$	54,126
Other income (loss)	4,492			45,354			(348		)	47,843
Expenses	(38		)	(29		)	(82		)	(70		)
Net income	$	16,853		$	63,666		$	32,886		$	101,899

New Residential’s investments in equity method investees changed during the nine months ended September 30, 2015 as follows:



Balance at December 31, 2014	$	330,876
Contributions to equity method investees	—
Transfers to direct ownership	(98,258		)
Distributions of earnings from equity method investees	(31,876		)
Distributions of capital from equity method investees	(3,867		)
Change in fair value of investments in equity method investees^(A)	16,443
Balance at September 30, 2015	$	213,318


(A)	In the third quarter of 2015, New Residential recorded a cumulative positive prior period adjustment of $3.5 million (of which $2.7 million related to 2014 and prior) resulting from adjustments to certain modeling assumptions.

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:



	September 30, 2015
	Unpaid Principal Balance		Investee Interest in Excess MSR^(A)		New Residential Interest in Investees		Amortized Cost Basis^(B)		Carrying Value^(C)		Weighted Average Life (Years)^(D)
Agency
Original and Recaptured Pools	$	76,072,734	66.7	%	50.0	%	$	274,979	$	343,007	5.8
Recapture Agreements	—		66.7	%	50.0	%	49,875		72,113		11.8
Total	$	76,072,734					$	324,854	$	415,120	6.7


(A)	The remaining interests are held by Nationstar.


(B)	Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. 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)	Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools or Recapture Agreements, as applicable.


(D)	The weighted average life represents the weighted average expected timing of the receipt of cash flows of each investment.

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 Excess MSR investments made through equity method investees:



	Percentage of Total Outstanding Unpaid Principal Amount as of
State Concentration	September 30, 2015		December 31, 2014
California	12.9	%	23.5	%
Florida	7.4	%	8.9	%
Texas	6.1	%	4.8	%
New York	5.7	%	5.6	%
Georgia	5.6	%	4.1	%
New Jersey	4.2	%	3.9	%
Illinois	4.0	%	3.5	%
Maryland	3.2	%	3.3	%
Virginia	3.2	%	3.2	%
Pennsylvania	3.1	%	2.3	%
Other U.S.	44.6	%	36.9	%
	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.