INVESTMENTS IN SERVICER ADVANCES

In December 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) consolidated by New Residential, agreed to purchase the outstanding Servicer Advances on a portfolio of loans, which is a subset of the same portfolio of loans in which New Residential invests in a portion of the Excess MSR (Notes 4 and 5), including the basic fee component of the related MSRs. A taxable wholly owned subsidiary of New Residential is the managing member of the Buyer and owned an approximately 44.5% interest in the Buyer as of December 31, 2015. As of December 31, 2015, noncontrolling third-party investors, owning the remaining interest in the Buyer have funded capital commitments to the Buyer of $389.6 million and New Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of December 31, 2015, the third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $253.2 million and $203.2 million of capital distributed to the third-party co-investors and New Residential, respectively. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer.

The Buyer has purchased Servicer Advances from Nationstar, is required to purchase all future Servicer Advances made with respect to certain residential loan pools from Nationstar, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Nationstar in consideration of Nationstar’s servicing activities. The compensation paid to Nationstar as of December 31, 2015 was approximately 9.3% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

As discussed in Note 2, New Residential early adopted the guidance in ASU 2015-02 and, as a result, determined that the Buyer is a VIE. The following table presents information on the assets and liabilities related to this consolidated VIE.



	As of December 31,
	2015		2014
Assets
Servicer advance investments, at fair value	$	2,344,245	$	3,186,830
Cash and cash equivalents	40,761		58,983
All other assets	25,092		31,092
Total assets^(A)	$	2,410,098	$	3,276,905
Liabilities
Notes payable	$	2,060,347	$	2,811,371
All other liabilities	6,111		7,990
Total liabilities^(A)	$	2,066,458	$	2,819,361


(A)	The creditors of the Buyer do not have recourse to the general credit of New Residential and the assets of the Buyer are not directly available to satisfy New Residential’s obligations.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs and all of the Servicer Advances and related basic fee portion of the MSR (the “SLS Advance Fee”) which is serviced by SLS. New Residential continues to evaluate the call rights it purchased from SLS, and its ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. The actual UPB of the mortgage loans on which New Residential can successfully exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions. Fortress-managed funds acquired the other 50% of the Excess MSRs. The aggregate purchase price was approximately $229.7 million. The par amount of the total advance commitments for the SLS Transaction was $219.2 million (with related financing of $195.5 million). As of December 31, 2014, the closed portion of the purchase of $93.8 million included $8.4 million for 50% of the Excess MSRs, $83.8 million for Servicer Advances and the SLS Advance Fee (of which $74.3 million was financed as of December 31, 2014), and $1.6 million to fund a portion of the call rights on 57 of the 99 underlying securitization trusts. The remaining portion of the purchase price of $135.9 million included Servicer Advances and the SLS Advance Fee unfunded commitments of approximately $133.8 million that were funded in January 2015 (with approximately $121.2 million of related financing) and $2.1 million to fund the remaining portion of the call rights on 57 of the 99 underlying securitization trusts. SLS will continue to service the loans in exchange for a servicing fee of 10.75 bps and an incentive fee (the “SLS Incentive Fee”) which is based on the ratio of the outstanding Servicer Advances to the UPB of the underlying loans.

On April 6, 2015, New Residential acquired Servicer Advances in connection with the HLSS Acquisition (Note 1).

In April 2015, New Residential acquired the call rights related to an underlying pool of residential mortgage loans from Ocwen. The pool of underlying mortgage loans represents the mortgage loans underlying the Excess MSR and Servicer Advances investments acquired from HLSS (Note 1). New Residential continues to evaluate the call rights it acquired from Ocwen, and its ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. The actual UPB of the mortgage loans on which New Residential can successfully exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions.

New Residential elected to record its investments in Servicer Advances, including the right to the basic fee component of the related MSRs, 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 market factors.

The following is a summary of the investments in Servicer Advances, including the right to the basic fee component of the related MSRs, made by New Residential:



	Amortized Cost Basis		Carrying Value^(A)		Weighted Average Discount Rate		Weighted Average Yield		Weighted Average Life (Years)^(B)	Change in Fair Value Recorded in Other Income for Year then Ended
December 31, 2015
Servicer Advances^(C)	$	7,400,068	$	7,426,794	5.6	%	5.5	%	4.4	$	(57,491	)
December 31, 2014
Servicer Advances	$	3,186,622	$	3,270,839	5.4	%	5.8	%	4.0	$	84,217


(A)	Carrying value represents the fair value of the investments in Servicer Advances, including the basic fee component of the related MSRs.


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


(C)	Excludes asset-backed securities collateralized by Servicer Advances with an aggregate face amount of $431.0 million and an aggregate carrying value of $430.3 million as of December 31, 2015. See Note 7 for details related to these securities.

The following is additional information regarding the Servicer Advances and related financing:



									Loan-to-Value^(A)				Cost of Funds^(C)
	UPB of Underlying Residential Mortgage Loans		Outstanding Servicer Advances		Servicer Advances to UPB of Underlying Residential Mortgage Loans		Face Amount of Notes Payable		Gross		Net^(B)		Gross		Net
December 31, 2015
Servicer Advances^(D)	$	220,256,804	$	7,578,110	3.4	%	$	7,058,094	91.2	%	90.2	%	3.4	%	2.6	%
December 31, 2014
Servicer Advances^(D)	$	96,547,773	$	3,102,492	3.2	%	$	2,890,230	91.4	%	90.4	%	3.0	%	2.3	%

(A)

Based on outstanding Servicer Advances, excluding purchased but unsettled Servicer Advances and certain deferred servicing fees (“DSF”) which New Residential receives financing on. If New Residential were to include these DSF in the servicer advance balance, gross and net LTV as of December 31, 2015 would be 86.9% and 85.9%, respectively. Also excludes retained non-agency bonds with a current face amount of $175.8 million from the outstanding servicer advances debt. If New Residential were to sell these bonds, gross and net LTV as of December 31, 2015 would be 93.4% and 92.4%, respectively.


(B)	Ratio of face amount of borrowings to par amount of Servicer Advance collateral, net of any general reserve.


(C)	Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees. Net Cost of Funds excludes facility fees.


(D)	The following types of advances comprise the investments in Servicer Advances:



	December 31,
	2015		2014
Principal and interest advances	$	2,229,468	$	729,713
Escrow advances (taxes and insurance advances)	3,687,559		1,600,713
Foreclosure advances	1,661,083		772,066
Total	$	7,578,110	$	3,102,492

Interest income recognized by New Residential related to its investments in Servicer Advances was comprised of the following:



	Year Ended December 31,
	2015			2014			2013
Interest income, gross of amounts attributable to servicer compensation	$	754,717		$	290,309		$	6,708
Amounts attributable to base servicer compensation	(97,351		)	(26,092		)	(2,287		)
Amounts attributable to incentive servicer compensation	(305,050		)	(74,011		)	—
Interest income from investments in Servicer Advances	$	352,316		$	190,206		$	4,421

Others’ interests in the equity of the Buyer is computed as follows:



	December 31,
	2015			2014
Total Advance Purchaser LLC equity	$	343,640		$	457,545
Others’ ownership interest	55.5		%	55.5		%
Others’ interest in equity of consolidated subsidiary	$	190,647		$	253,836

Others’ interests in the Buyer’s net income (loss) is computed as follows:



	Year Ended December 31,
	2015			2014			2013
Net Advance Purchaser LLC income (loss)	$	33,180		$	159,374		$	(517	)
Others’ ownership interest as a percent of total^(A)	55.5		%	56.0		%	63.1		%
Others’ interest in net income (loss) of consolidated subsidiaries^(B)	$	18,407		$	89,222		(326		)


(A)	As a result, New Residential owned 44.5%, 44.0% and 36.9% of the Buyer, on average during the years ended December 31, 2015, 2014 and 2013, respectively.


(B)	Excludes HLSS shareholders’ interests in the net income (loss) of HLSS of $5.2 million during the year ended December 31, 2015.

See Note 11 regarding the financing of Servicer Advances.