INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

12 Months Ended

Dec. 31, 2016

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

The following table presents activity related to the carrying value of New Residential’s direct 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	254,149			—			917,078			1,171,227
Interest income	66,039			180			68,346			134,565
Other income	2,999			—			—			2,999
Proceeds from repayments	(131,621		)	(1,291		)	(148,996		)	(281,908		)
Change in fair value	(596		)	(2,239		)	41,478			38,643
Balance as of December 31, 2015	698,304			5,307			877,906			1,581,517
Purchases	—			124			—			124
Interest income	63,772			(244		)	86,613			150,141
Other income	2,802			—			—			2,802
Proceeds from repayments	(145,186		)	(1,015		)	(181,631		)	(327,832		)
Change in fair value	(8,399		)	(237		)	1,339			(7,297		)
Balance as of December 31, 2016	$	611,293		$	3,935		$	784,227		$	1,399,455


(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 (Note 1).

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.

New Residential has entered into a “recapture agreement” with respect to each of the Excess MSR investments serviced by Nationstar and SLS. Under such arrangements, 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:



	December 31, 2016
	UPB of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years^(A)	Amortized Cost Basis^(B)		Carrying Value^(C)
			New Residential^(D)	Fortress-managed funds	Nationstar
Agency
Original and Recaptured Pools	$	78,295,454	32.5% - 66.7% (53.3%)	0.0% - 40.0%	20.0% - 35.0%	5.9	$	296,508	$	330,323
Recapture Agreements	—		32.5% - 66.7% (53.3%)	0.0% - 40.0%	20.0% - 35.0%	12.3	25,524		51,434
	78,295,454					6.4	322,032		381,757

Non-Agency^(E)
Nationstar and SLS Serviced:
Original and Recaptured Pools	$	78,209,375	33.3% - 100.0% (59.4%)	0.0% - 50.0%	0.0% - 33.3%	5.2	$	183,775	$	219,980
Recapture Agreements	—		33.3% - 100.0% (59.4%)	0.0% - 50.0%	0.0% - 33.3%	12.2	11,370		13,491
Ocwen Serviced Pools	121,471,168		100.0%	—%	—%	6.6	741,411		784,227
	199,680,543					6.4	936,556		1,017,698
Total	$	277,975,997				6.4	$	1,258,588	$	1,399,455



	December 31, 2015
	UPB of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years^(A)	Amortized Cost Basis^(B)		Carrying Value^(C)
			New Residential^(D)	Fortress-managed funds	Nationstar
Agency
Original and Recaptured Pools	$	93,441,696	32.5% - 66.7% (53.2%)	0.0% - 40.0%	20.0% - 35.0%	5.8	$	335,478	$	378,083
Recapture Agreements	—		32.5% - 66.7% (53.2%)	0.0% - 40.0%	20.0% - 35.0%	12.0	36,627		59,118
	93,441,696					6.4	372,105		437,201

Non-Agency^(E)
Nationstar and SLS Serviced:
Original and Recaptured Pools	$	94,923,975	33.3% - 80.0% (58.9%)	0.0% - 50.0%	0.0% - 33.3%	5.2	$	210,691	$	250,662
Recapture Agreements	—		33.3% - 80.0% (58.9%)	0.0% - 50.0%	0.0% - 33.3%	12.3	14,130		15,748
Ocwen Serviced Pools	141,002,300		100.0%	—%	—%	6.2	836,428		877,906
	235,926,275					6.1	1,061,249		1,144,316
Total	$	329,367,971				6.2	$	1,433,354	$	1,581,517


(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)	Amounts in parentheses represent weighted averages.


(E)	New Residential also invested in related Servicer Advances, including the basic fee component of the related MSR as of December 31, 2016 and 2015 (Note 6) on $186.4 billion and $220.3 billion UPB, respectively, underlying these Excess MSRs.

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



	Year Ended December 31,
	2016			2015		2014
Original and Recaptured Pools	$	(11,221	)	$	34,936	$	35,000
Recapture Agreements	3,924			3,707		6,615
	$	(7,297	)	$	38,643	$	41,615

As of December 31, 2016 and 2015, weighted average discount rates of 9.8% and 9.8%, respectively, were used to value New Residential’s investments in Excess MSRs (directly and through 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.

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



	December 31,
	2016			2015
Excess MSR assets	$	372,391		$	421,999
Other assets	17,184			12,442
Other liabilities	—			—
Equity	$	389,575		$	434,441
New Residential’s investment	$	194,788		$	217,221

New Residential’s ownership	50.0		%	50.0		%



	Year Ended December 31,
	2016			2015			2014
Interest income	$	36,502		$	51,811		$	67,698
Other income (loss)	(3,359		)	10,615			46,961
Expenses	(91		)	(107		)	(99		)
Net income	$	33,052		$	62,319		$	114,560

New Residential’s investments in equity method investees changed during the years ended December 31, 2016 and 2015 as follows:



	2016			2015
Balance at beginning of period	$	217,221		$	330,876
Contributions to equity method investees	—			—
Transfers to direct ownership	—			(98,258		)
Distributions of earnings from equity method investees	(22,046		)	(37,874		)
Distributions of capital from equity method investees	(16,913		)	(8,683		)
Change in fair value of investments in equity method investees	16,526			31,160
Balance at end of period	$	194,788		$	217,221

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



	December 31, 2016
	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	$	60,677,300	66.7%	50.0%	$	247,105	$	314,401	5.8
Recapture Agreements	—		66.7%	50.0%	29,974		57,990		12.2
Total	$	60,677,300			$	277,079	$	372,391	6.5



	December 31, 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	$	73,058,050	66.7%	50.0%	$	275,338	$	351,275	5.7
Recapture Agreements	—		66.7%	50.0%	45,421		70,724		11.9
	$	73,058,050			$	320,759	$	421,999	6.6


(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.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSR investments:



	Aggregate Direct and Equity Method Investees
	Percentage of Total Outstanding Unpaid Principal Amount
	December 31,
State Concentration	2016		2015
California	24.1	%	24.2	%
Florida	8.6	%	8.6	%
New York	7.9	%	7.4	%
Texas	4.6	%	4.6	%
New Jersey	4.2	%	4.1	%
Maryland	3.7	%	3.7	%
Illinois	3.5	%	3.5	%
Virginia	3.1	%	3.1	%
Georgia	3.1	%	3.1	%
Massachusetts	2.7	%	2.7	%
Washington	2.6	%	2.7	%
Arizona	2.5	%	2.5	%
Other U.S.	29.4	%	29.8	%
	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.

See Note 11 regarding the financing of Excess MSRs.

INVESTMENTS IN MORTGAGE SERVICING RIGHTS

In 2016, a subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), became a licensed mortgage servicer. NRM is presently licensed or otherwise eligible to hold MSRs in all states within the United States and the District of Columbia. Additionally, NRM has received approval from the FHA to hold MSRs associated with FHA-insured mortgage loans, from the Federal National Mortgage Association (“Fannie Mae”) to hold MSRs associated with loans owned by Fannie Mae, and from the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to hold MSRs associated with loans owned by Freddie Mac. As an approved Fannie Mae Servicer, Freddie Mac Servicer and FHA-approved mortgagee, NRM is required to conduct aspects of its operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals. As of December 31, 2016, NRM is in compliance with such policies and guidelines, as well as with other ongoing requirements applicable to mortgage loan servicers under applicable state and federal laws. NRM engages third party licensed mortgage servicers as subservicers to perform the operational servicing duties in connection with the MSRs it acquires, in exchange for a subservicing fee which is recorded as “Subservicing expense” on New Residential’s Consolidated Statements of Income.

New Residential has entered into a “recapture agreement” with respect to each of its MSR investments subserviced by Ditech (defined below). Under the recapture agreements, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by Ditech of a loan in the original portfolio.

Walter Transaction

On August 8, 2016, NRM entered into a flow and bulk agreement for the purchase and sale of mortgage servicing rights (the “Walter Purchase Agreement”) with Ditech Financial LLC (“Ditech”), a subsidiary of Walter Investment Management Corp. Pursuant to the Walter Purchase Agreement, NRM agreed to (i) purchase the MSRs and related Servicer Advances with respect to a pool of existing Fannie Mae residential mortgage loans with a total UPB of approximately $32.3 billion (the “Walter Existing MSRs”) for a purchase price of approximately $211.4 million and $27.4 million, respectively, subject to certain adjustments set forth in the Walter Purchase Agreement, and (ii) provide ongoing daily pricing to Ditech for the purchase of MSRs from Ditech relating to new residential mortgage loans originated or purchased by Ditech on a flow basis and pooled into Fannie Mae, Freddie Mac or, if applicable, Ginnie Mae securities (the “Walter Flow MSRs”). The purchase of the Walter Existing MSRs closed on October 3, 2016. The initial term of the Walter Purchase Agreement is three years, with annual, one-year renewals thereafter, subject to certain termination rights; provided, that, NRM may decline to provide pricing for Walter Flow MSRs on any day and may terminate the Walter Purchase Agreement with respect to Walter Flow MSRs on 30 days’ notice. The purchase of the Walter Existing MSRs and any Walter Flow MSRs is subject to, among other customary conditions, the approval of the applicable Agencies, all of which were obtained for the Walter Existing MSRs purchased. Ditech will initially service the residential mortgage loans related to the Walter Existing MSRs and the Walter Flow MSRs pursuant to the Walter Subservicing Agreement referred to below.

On August 8, 2016, in connection with the Walter Purchase Agreement, Walter Investment Management Corp. (together with its applicable subsidiaries, including Ditech, “Walter”), a Maryland corporation and the parent of Ditech, provided NRM with a payment and performance guaranty of Ditech’s obligations, including repurchase and indemnification obligations, under the Walter Purchase Agreement.

On August 8, 2016, in connection with the Walter Purchase Agreement, NRM and Ditech entered into a subservicing agreement (the “Walter Subservicing Agreement”), pursuant to which Ditech agreed to act as subservicer for NRM and perform all of the actual servicing activities (“subservicing”) required under the servicing agreements relating to the Walter Existing MSRs, any Walter Flow MSRs purchased by NRM under the Walter Purchase Agreement and certain other MSRs that may be acquired in the future by NRM. Under the Walter Subservicing Agreement and related documents, Ditech will perform all daily servicing obligations on behalf of NRM, including collecting payments from borrowers and offering refinancing options to borrowers for purposes of minimizing portfolio runoff. Ditech agreed to perform subservicing on behalf of NRM at fixed prices set forth in the Walter Subservicing Agreement for an initial term of one year, with annual, one-year renewals thereafter, subject to certain termination rights set forth in the Walter Subservicing Agreement. With respect to NRM, the initial term of the Walter Subservicing Agreement will expire on the first anniversary of the effective date and shall automatically terminate unless renewed on a month-by-month basis, subject to certain termination rights set forth in the Walter Subservicing Agreement. NRM is responsible for all advance obligations related to the Walter Existing MSRs and Walter Flow MSRs. Based on the terms of the Walter Subservicing Agreement, the estimated weighted average subservicing rate for the life of the Walter Existing MSRs is 7.7 basis points (bps).

In addition, on August 8, 2016, New Residential entered into a “recapture agreement” with respect to the MSRs subserviced by Ditech. Under the recapture agreement, New Residential is entitled to the MSRs on any initial or subsequent refinancing by Ditech of a loan underlying the Walter Existing MSRs or Walter Flow MSRs.

On December 1, 2016, pursuant to the Walter Purchase Agreement, NRM purchased Walter Flow MSRs and Servicer Advances with respect to a pool of Fannie Mae and Freddie Mac residential mortgage loans with a total UPB of approximately $4.8 billion for a purchase price of approximately $26.4 million and $3.9 million, respectively. Ditech will subservice the related residential mortgage loans under the Walter Subservicing Agreement described above.

WCO Transaction

On November 10, 2016, NRM and Walter Capital Opportunity, LP and its subsidiaries (“WCO”) entered into an agreement to purchase the MSRs and related Servicer Advances with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage loans with a total UPB of approximately $32.5 billion for a purchase price of approximately $244.3 million and $34.8 million, respectively. The purchase included multiple settlement dates in December 2016. Ditech will subservice the related residential mortgage loans under the Walter Subservicing Agreement described above.

FirstKey Transaction

On December 1, 2016, NRM and FirstKey Mortgage, LLC (“FirstKey”) entered into an agreement to purchase the MSRs and related Servicer Advances (the “FirstKey Purchase Agreement”) with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage loans with an aggregate total UPB of approximately $12.5 billion for a purchase price of approximately $89.1 million and $2.1 million, respectively. The purchase settled in December 2016. Pursuant to the FirstKey Purchase Agreement, FirstKey will continue to perform the servicing duties for the related residential mortgage loans until those duties are transferred to a subservicer appointed by NRM.

PHH Transaction

On December 28, 2016, NRM entered into an agreement with PHH Mortgage Corporation and its subsidiaries (“PHH”) to purchase the MSRs and related Servicer Advances with respect to approximately $72.0 billion in total UPB of seasoned Agency and private-label residential mortgage loans, which is expected to close beginning in the second quarter of 2017, subject to GSE and other regulatory approvals and other customary closing conditions. Concurrently with the purchase agreement, NRM entered into a subservicing agreement with PHH, pursuant to which PHH Mortgage, a wholly owned subsidiary of PHH, will subservice the residential mortgage loans underlying the MSRs acquired by NRM.

New Residential records its investments in MSRs at fair value at acquisition and has elected to subsequently measure at fair value pursuant to the fair value measurement method.

Servicing revenue, net recognized by New Residential related to its investments in MSRs was comprised of the following:



	Year Ended December 31, 2016
Servicing fee revenue	$	29,168
Ancillary and other fees	676
Servicing fee revenue and fees	29,844
Amortization of servicing rights	(15,354		)
Change in valuation inputs and assumptions	103,679
Servicing revenue, net	$	118,169

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



	Subservicer
	Ditech			FirstKey			Total
Balance as of December 31, 2015	$	—		$	—		$	—
Purchases	482,102			89,056			571,158
Amortization of servicing rights^(A)	(13,895		)	(1,459		)	(15,354		)
Change in valuation inputs and assumptions	77,804			25,875			103,679
Balance as of December 31, 2016	$	546,011		$	113,472		$	659,483


(A)	Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the underlying residential mortgage loans.

The following is a summary of New Residential’s investments in MSRs as of December 31, 2016:



	UPB of Underlying Mortgages		Weighted Average Life (Years)^(A)	Amortized Cost Basis		Carrying Value^(B)
Agency
Ditech subserviced pools	$	67,560,362	7.1	$	468,207	$	546,011
FirstKey subserviced pools	12,374,940		6.8	87,597		113,472
Total	$	79,935,302	7.0	$	555,804	$	659,483


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


(B)	Carrying Value represents fair value. As of December 31, 2016, a weighted average discount rate of 12.0% was used to value New Residential’s investments in MSRs.

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



	Percentage of Total Outstanding Unpaid Principal Amount
State Concentration	December 31, 2016
California	20.5	%
Florida	7.3	%
Texas	6.3	%
New Jersey	4.5	%
Illinois	4.1	%
Massachusetts	4.1	%
Arizona	3.3	%
Washington	3.2	%
Michigan	3.1	%
Maryland	3.0	%
Other U.S.	40.6	%
	100.0	%

In addition to receiving cash flows from the MSRs, NRM as servicer has the obligation to fund future Servicer Advances on the underlying pool of mortgages (Note 14). These Servicer Advances are recorded when advanced and are included in Other Assets.

- Definition

The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows.

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