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, 2016	$	611,293		$	3,935		$	784,227		$	1,399,455
Purchases	—			—			—			—
Interest income	33,837			(255		)	41,656			75,238
Other income	1,948			—			1,993			3,941
Proceeds from repayments	(98,802		)	(1,215		)	(95,677		)	(195,694		)
Change in fair value	(6,442		)	381			(26,589		)	(32,650		)
Ocwen Transaction (Note 5)	—			—			(71,982		)	(71,982		)
Balance as of September 30, 2017	$	541,834		$	2,846		$	633,628		$	1,178,308


(A)	Specialized Loan Servicing LLC (“SLS”).


(B)	Ocwen Loan Servicing LLC, a subsidiary of Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), services the loans underlying the Excess MSRs and Servicer Advance Investments acquired from HLSS.

In July 2017, New Residential entered into the Ocwen Transaction as described in Note 5. Subsequent to the Ocwen Transaction, the Excess MSRs formerly serviced by Ocwen become reclassified, as described in Note 5, as the underlying MSRs are transferred to NRM.

Nationstar, SLS or Ocwen, as applicable, as servicer, performs all of the 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 Servicer Advance Investments (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, 2017													December 31, 2016
	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^(D)		Fortress-managed funds		Nationstar
Agency
Original and Recaptured Pools	$	68,449,802	32.5% - 66.7% (53.3%)		0.0% - 40.0%		20.0% - 35.0%		5.8	$	263,374	$	288,345	$	330,323
Recapture Agreements	—		32.5% - 66.7% (53.3%)		0.0% - 40.0%		20.0% - 35.0%		12.6	20,299		45,504		51,434
	68,449,802								6.3	283,673		333,849		381,757

Non-Agency^(E)
Nationstar and SLS Serviced:
Original and Recaptured Pools	$	67,453,347	33.3% - 100.0% (59.4%)		0.0% - 50.0%		0.0% - 33.3%		5.3	$	160,665	$	191,270	$	219,980
Recapture Agreements	—		33.3% - 100.0% (59.4%)		0.0% - 50.0%		0.0% - 33.3%		12.5	8,352		19,561		13,491
Ocwen Serviced Pools	92,270,579		100.0	%	—	%	—	%	6.0	617,401		633,628		784,227
	159,723,926								5.9	786,418		844,459		1,017,698
Total	$	228,173,728							6.0	$	1,070,091	$	1,178,308	$	1,399,455


(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 Advance Investments, including the basic fee component of the related MSR as of September 30, 2017 (Note 6) on $145.8 billion UPB underlying these Excess MSRs.

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Original and Recaptured Pools	$	(12,047	)	$	(15,395	)	$	(41,032	)	$	(28,392	)
Recapture Agreements	(2,244		)	(1,665		)	8,382			3,995
	$	(14,291	)	$	(17,060	)	$	(32,650	)	$	(24,397	)

As of September 30, 2017, a weighted average discount rate of 9.7% was 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:



	September 30, 2017			December 31, 2016
Excess MSR assets	$	329,986		$	372,391
Other assets	21,279			17,184
Other liabilities	—			—
Equity	$	351,265		$	389,575
New Residential’s investment	$	175,633		$	194,788

New Residential’s ownership	50.0		%	50.0		%



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest income	$	6,969		$	12,205		$	20,083		$	24,526
Other income (loss)	(2,843		)	339			(7,908		)	(7,244		)
Expenses	(18		)	(22		)	(63		)	(66		)
Net income	$	4,108		$	12,522		$	12,112		$	17,216

New Residential’s investments in equity method investees changed during the nine months ended September 30, 2017 as follows:



Balance at December 31, 2016	$	194,788
Contributions to equity method investees	—
Transfers to direct ownership	—
Distributions of earnings from equity method investees	(11,054		)
Distributions of capital from equity method investees	(14,157		)
Change in fair value of investments in equity method investees	6,056
Balance at September 30, 2017	$	175,633

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



	September 30, 2017
	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	$	53,675,234	66.7	%	50.0	%	$	221,830	$	279,722	5.8
Recapture Agreements	—		66.7	%	50.0	%	24,827		50,264		12.5
Total	$	53,675,234					$	246,657	$	329,986	6.4


(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
State Concentration	September 30, 2017		December 31, 2016
California	24.1	%	24.1	%
Florida	8.6	%	8.6	%
New York	8.3	%	7.9	%
Texas	4.6	%	4.6	%
New Jersey	4.1	%	4.2	%
Maryland	3.7	%	3.7	%
Illinois	3.6	%	3.5	%
Georgia	3.1	%	3.1	%
Virginia	3.0	%	3.1	%
Massachusetts	2.7	%	2.7	%
Pennsylvania	2.5	%	2.5	%
Arizona	2.5	%	2.5	%
Other U.S.	29.2	%	29.5	%
	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.