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 Federal Housing Administration (“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. Fannie Mae and Freddie Mac are collectively referred to as the Government Sponsored Enterprises (“GSEs”). 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 March 31, 2017, 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. As of March 31, 2017, these subservicers include Ditech, Nationstar, Citi, and FirstKey, which subservice 38.6%, 10.2%, 49.5%, and 1.6% of the underlying UPB of the related mortgages, respectively.

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

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 $67.0 billion in total UPB of seasoned Agency and private-label residential mortgage loans for a purchase price of approximately $520.0 million and $252.0 million, respectively, which is expected to close beginning in the second quarter of 2017, subject to GSE and other regulatory approvals, various consents and approvals from third-parties, 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.

Walter Flows MSRs

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. During the three months ended March 31, 2017, pursuant to the Walter Purchase Agreement, NRM purchased Walter Flow MSRs with respect to certain Fannie Mae residential mortgage loans with a total UPB of $1.3 billion for a purchase price of approximately $11.1 million. Ditech will subservice the related residential mortgage loans.

Citi Transaction

On January 27, 2017, NRM entered into an agreement with CitiMortgage, Inc. (“Citi”) to purchase the MSRs and related Servicer Advances (the “Citi Purchase Agreement”) with respect to a pool of seasoned Fannie Mae and Freddie Mac residential mortgage loans with approximately $92.5 billion in total UPB for a purchase price of approximately $906.0 million, with a purchase price holdback of approximately $45.3 million. The purchase of the MSRs settled in March 2017, with the purchase of the related advances to follow at the time of the operational servicing transfers from Citi to Nationstar. NRM also entered into an agreement pursuant to which Nationstar will subservice the portfolio on behalf of NRM. The transfer of subservicing to Nationstar began in April 2017, and Citi has agreed to continue to subservice the remainder of the portfolio on an interim basis.

United Shore Transaction

On January 31, 2017, NRM entered into an agreement with United Shore Financial Services, LLC (“United Shore”) to purchase the MSRs and related Servicer Advances with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage loans with approximately $9.8 billion in total UPB for a purchase price of approximately $94.8 million, with a purchase price holdback of approximately $9.5 million. The purchase settled in February 2017, and subservicing transferred to Nationstar during March and April 2017.

RCS Transaction

On February 17, 2017, NRM entered into an agreement with Residential Credit Solutions, Inc. (“RCS”) to purchase the MSRs and related Servicer Advances with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage loans with approximately $5.2 billion in total UPB for a purchase price of approximately $48.6 million and $1.3 million, respectively, with a purchase price holdback of approximately $4.9 million. The purchase included multiple settlement dates in February and March 2017. Ditech will subservice the related residential mortgage loans.

Subservicing Agreements

On January 27, 2017, NRM entered into agreements pursuant to which Nationstar will subservice certain MSR portfolios on behalf of NRM, subject to GSE and other regulatory approvals. In March 2017, subservicing duties for a portion of the residential mortgage loans related to the FirstKey Transaction have been transferred to Nationstar from FirstKey.

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:



	Three Months Ended March 31, 2017
Servicing fee revenue	$	65,469
Ancillary and other fees	2,188
Servicing fee revenue and fees	67,657
Amortization of servicing rights	(26,296		)
Change in valuation inputs and assumptions	(759		)
Servicing revenue, net	$	40,602

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



Balance as of December 31, 2016	$	659,483
Purchases	1,062,364
Amortization of servicing rights^(A)	(26,296		)
Change in valuation inputs and assumptions	(759		)
Balance as of March 31, 2017	$	1,694,792


(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 March 31, 2017:



	UPB of Underlying Mortgages		Weighted Average Life (Years)^(A)	Amortized Cost Basis		Carrying Value^(B)
Mortgage Servicing Rights	$	185,291,769	6.8	$	1,591,872	$	1,694,792


(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 March 31, 2017, a weighted average discount rate of 11.5% 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	March 31, 2017		December 31, 2016
California	21.3	%	20.5	%
Texas	6.0	%	6.3	%
Florida	5.9	%	7.3	%
New York	5.8	%	2.8	%
Illinois	4.4	%	4.1	%
New Jersey	4.4	%	4.5	%
Massachusetts	4.1	%	4.1	%
Michigan	4.0	%	3.1	%
Georgia	3.1	%	2.7	%
Pennsylvania	3.0	%	2.9	%
Other U.S.	38.0	%	41.7	%
	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 MSRs.

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.

See Note 11 regarding the financing of MSRs.