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, 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
Purchases	—			—			—			—
Interest income	46,393			(191		)	56,851			103,053
Other income	2,384			—			1,993			4,377
Proceeds from repayments	(120,485		)	(1,400		)	(130,122		)	(252,007		)
Proceeds from sales	(13,505		)	—			—			(13,505		)
Change in fair value	6,153			569			(2,400		)	4,322
Ocwen Transaction (Note 5)	—			—			(71,982		)	(71,982		)
Balance as of December 31, 2017	$	532,233		$	2,913		$	638,567		$	1,173,713


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


(B)	Ocwen Loan Servicing LLC, a subsidiary of Ocwen, services the loans underlying the Excess MSRs and Servicer Advance Investments acquired from HLSS (Note 1).

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:



	December 31, 2017
	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	$	63,839,281	32.5% - 66.7% (53.5%)	0.0% - 40.0%	20.0% - 35.0%	5.8	$	249,003	$	280,033
Recapture Agreements	—		32.5% - 66.7% (53.5%)	0.0% - 40.0%	20.0% - 35.0%	11.4	18,944		44,603
	63,839,281					6.2	267,947		324,636

Non-Agency^(E)
Nationstar and SLS Serviced:
Original and Recaptured Pools	$	64,146,430	33.3% - 100.0% (59.6%)	0.0% - 50.0%	0.0% - 33.3%	5.4	$	154,938	$	190,696
Recapture Agreements	—		33.3% - 100.0% (59.6%)	0.0% - 50.0%	0.0% - 33.3%	11.3	7,489		19,814
Ocwen Serviced Pools	89,135,588		100.0%	—%	—%	6.5	598,149		638,567
	153,282,018					6.3	760,576		849,077
Total	$	217,121,299				6.3	$	1,028,523	$	1,173,713



	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


(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 December 31, 2017 and 2016 (Note 6) on $139.5 billion and $186.4 billion UPB, respectively, underlying these Excess MSRs.

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



	Year Ended December 31,
	2017			2016			2015
Original and Recaptured Pools	$	(5,630	)	$	(11,221	)	$	34,936
Recapture Agreements	9,952			3,924			3,707
	$	4,322		$	(7,297	)	$	38,643

As of December 31, 2017 and 2016, weighted average discount rates of 8.9% 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,
	2017			2016
Excess MSR assets	$	321,197		$	372,391
Other assets	22,333			17,184
Other liabilities	—			—
Equity	$	343,530		$	389,575
New Residential’s investment	$	171,765		$	194,788

New Residential’s ownership	50.0		%	50.0		%



	Year Ended December 31,
	2017			2016			2015
Interest income	$	27,450		$	36,502		$	51,811
Other income (loss)	(2,149		)	(3,359		)	10,615
Expenses	(68		)	(91		)	(107		)
Net income	$	25,233		$	33,052		$	62,319

New Residential’s investments in equity method investees changed during the years ended December 31, 2017 and 2016 as follows:



	2017			2016
Balance at beginning of period	$	194,788		$	217,221
Contributions to equity method investees	—			—
Distributions of earnings from equity method investees	(13,668		)	(22,046		)
Distributions of capital from equity method investees	(21,972		)	(16,913		)
Change in fair value of investments in equity method investees	12,617			16,526
Balance at end of period	$	171,765		$	194,788

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



	December 31, 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	$	50,501,054	66.7%	50.0%	$	209,924	$	271,785	5.7
Recapture Agreements	—		66.7%	50.0%	23,571		49,412		11.4
Total	$	50,501,054			$	233,495	$	321,197	6.3



	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
	$	60,677,300			$	277,079	$	372,391	6.5


(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	2017		2016
California	24.0	%	24.1	%
Florida	8.7	%	8.6	%
New York	8.5	%	7.9	%
Texas	4.6	%	4.6	%
New Jersey	4.1	%	4.2	%
Maryland	3.7	%	3.7	%
Illinois	3.5	%	3.5	%
Georgia	3.1	%	3.1	%
Virginia	3.0	%	3.1	%
Massachusetts	2.7	%	2.7	%
Pennsylvania	2.6	%	2.5	%
Arizona	2.5	%	2.5	%
Other U.S.	29.0	%	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.

INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MORTGAGE SERVICING RIGHTS FINANCING RECEIVABLES

Mortgage Servicing Rights

In 2016, a subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), became a licensed or otherwise eligible 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. 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 December 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 December 31, 2017, these subservicers include Nationstar, Ditech, PHH, Ocwen, Flagstar, and Citi, which subservice 41.2%, 29.9%, 20.9%, 6.3%, 1.1%, and 0.6% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables).

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

Walter 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 year ended December 31, 2016, pursuant to the Walter Purchase Agreement, NRM purchased MSRs, and related servicer advances receivable, with respect to certain Fannie Mae residential mortgage loans with a total UPB of $32.3 billion for a purchase price of approximately $211.4 million. During the year ended December 31, 2017, pursuant to the Walter Purchase Agreement, NRM purchased Walter Flow MSRs with respect to certain Fannie Mae and Freddie Mac residential mortgage loans with a total UPB of $9.3 billion for a purchase price of approximately $73.3 million. Ditech subservices the related residential mortgage loans.

On November 10, 2016, NRM and Walter Capital Opportunity, LP and its subsidiaries entered into an agreement to purchase the MSRs, and related servicer advances receivable, 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. Ditech subservices the related residential mortgage loans.

FirstKey MSRs

On December 1, 2016, NRM and FirstKey Mortgage, LLC (“FirstKey”) entered into an agreement (the “FirstKey Purchase Agreement”) to purchase the MSRs, and related servicer advances receivable, 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. The purchase settled in December 2016. Flagstar and Nationstar subservice the related residential mortgage loans, as described below.

Citi MSRs

On January 27, 2017, NRM entered into an agreement with CitiMortgage, Inc. (“Citi”) to purchase the MSRs and related servicer advances receivable (the “Citi Transaction”) 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 settled in March 2017. As of December 31, 2017, Nationstar subservices primarily all of the related residential mortgage loans.

United Shore MSRs

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 receivable, 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. On August 8, 2017, NRM entered into an agreement with United Shore to purchase the MSRs, and related servicer advances receivable, with respect to a pool of existing Fannie Mae and Freddie Mac residential mortgage loans with approximately $2.1 billion in total UPB for a purchase price of approximately $19.7 million, with a purchase price holdback of approximately $2.0 million. The purchase settled in August 2017. Nationstar subservices the related residential mortgage loans, as described below.

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 receivable, 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 with a purchase price holdback of approximately $4.9 million. The purchase settled in February and March 2017. Ditech subservices 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 2017, subservicing duties for a portion of the residential mortgage loans related to the FirstKey MSRs and Citi MSRs, respectively, were transferred to Nationstar from FirstKey and Citi, respectively. On May 16, 2017, NRM entered into a subservicing agreement with Flagstar Bank, FSB (“Flagstar”). Flagstar was the predecessor subservicer of the remaining portion of the residential mortgage loans related to the FirstKey MSRs. The subservicing duties transferred to Flagstar in May 2017.

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,
	2017			2016
Servicing fee revenue	$	412,971		$	29,168
Ancillary and other fees	79,050			676
Servicing fee revenue and fees	492,021			29,844
Amortization of servicing rights	(223,167		)	(15,354		)
Change in valuation inputs and assumptions	155,495			103,679
Servicing revenue, net	$	424,349		$	118,169

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



Balance as of December 31, 2015	$	—
Purchases	571,158
Amortization of servicing rights^(A)	(15,354		)
Change in valuation inputs and assumptions	103,679
Balance as of December 31, 2016	$	659,483
Purchases	1,143,693
Amortization of servicing rights^(A)	(223,167		)
Change in valuation inputs and assumptions	155,495
Balance as of December 31, 2017	$	1,735,504


(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, 2017 and 2016:



	UPB of Underlying Mortgages		Weighted Average Life (Years)^(A)	Amortized Cost Basis		Carrying Value^(B)
2017
Agency	$	172,392,496	6.3	$	1,476,330	$	1,735,504
Non-Agency	61,654		5.6	—		—
Total	$	172,454,150	6.3	$	1,476,330	$	1,735,504
2016
Agency	$	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, 2017 and 2016, weighted average discount rates of 9.1% and 12.0%, respectively, were used to value New Residential’s investments in MSRs.

Mortgage Servicing Rights Financing Receivables

PHH Transaction

On December 28, 2016, NRM entered into an agreement with PHH Corporation (together with its subsidiaries, including PHH Mortgage Corporation, “PHH”) to purchase the MSRs, and related servicer advances receivables, with respect to approximately $60.1 billion in total UPB of seasoned Agency and private-label residential mortgage loans for a purchase price of approximately $502.5 million. The purchase settled in stages during 2017. As of December 31, 2017, MSRs, and related servicer advances receivables, with respect to private-label residential mortgage loans of approximately $6.0 billion in total UPB with a purchase price of approximately $35.5 million had not been settled. Concurrently with the purchase agreement, NRM entered into a subservicing agreement with PHH, pursuant to which PHH Mortgage, a wholly owned subsidiary of PHH, subservices the residential mortgage loans underlying the MSRs acquired by NRM for an initial term of three years, subject to certain conditions. New Residential has entered into a recapture agreement with respect to each of its MSR investments subserviced by PHH. Under the recapture agreement, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by PHH of a loan in the original portfolio.

As a result of the length of the initial term of the related subservicing agreement between NRM and PHH, although the MSRs were legally sold, solely for accounting purposes New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in mortgage servicing rights financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential has elected to measure the investment at fair value, with changes in fair value flowing through Change in fair value of investments in mortgage servicing rights financing receivables in the Consolidated Statements of Income.

Ocwen Transaction

On July 23, 2017, New Residential entered into a series of agreements with Ocwen that supersede the arrangements among the parties set forth in (i) the Master Servicing Rights Purchase Agreement, dated as of October 1, 2012, as amended by Amendment No. 1 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of December 26, 2012, and Amendment No. 2 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of April 6, 2015 (as so amended, the “Original Ocwen MSR Purchase Agreement”), and (ii) certain sale supplements to the Original Ocwen MSR Purchase Agreement, as amended by Amendment No. 1 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of December 26, 2012, Amendment to Sale Supplements dated as of July 1, 2013, Amendment to Sale Supplement, dated as of September 30, 2013, Amendment to Sale Supplements, dated as of February 4, 2014, Amendment No. 2 to Master Servicing Rights Purchase Agreement and Sale Supplements, dated as of April 6, 2015, and February Amendment, dated as of February 17, 2017 (as so amended, the “Original Ocwen Sale Supplements” and, together with the Original Ocwen MSR Purchase Agreement, the “Original Ocwen Agreements”). These transactions (collectively, the “Ocwen Transaction”) are described in further detail below.

In addition, pursuant to a Transaction Agreement dated July 23, 2017, New Residential acquired from Ocwen in a private placement 6,075,510 shares of Ocwen common stock, par value $0.01 per share, at a price per share of $2.29, for a total of approximately $13.9 million (Note 2).

On July 23, 2017, Ocwen and New Residential entered into a Master Agreement (the “Ocwen Master Agreement”) and a Transfer Agreement (the “Ocwen Transfer Agreement”) pursuant to which Ocwen and New Residential agreed to undertake certain actions to facilitate the transfer from Ocwen to New Residential of Ocwen’s remaining interests in the mortgage servicing rights relating to loans with an aggregate unpaid principal balance of approximately $110.0 billion that are subject to the Original Ocwen Agreements (the “Ocwen Subject MSRs”) and with respect to which New Residential holds the Rights to MSRs (as defined in the Original Ocwen Agreements).

The Ocwen Master Agreement provides for, among other things, the following:


•	The parties will cooperate to obtain any third party consents required to transfer Ocwen’s remaining interests in the Ocwen Subject MSRs to New Residential.

•

Upon obtaining the required third party consents and each Ocwen Subject MSR ceasing to be a Deferred Servicing Agreement (as defined in the Original Ocwen Agreements) covered under the Original Ocwen Agreements, New Residential will make a lump sum payment to Ocwen. These lump sum payments may total up to approximately $400.0 million in the aggregate if all of the Ocwen Subject MSRs are transferred to New Residential.


•	Upon transfer, Ocwen will subservice the mortgage loans related to such Ocwen Subject MSRs pursuant to the Ocwen Subservicing Agreement (as defined below).

•

In the event that the required third party consents are not obtained within one year (by July 23, 2018) or such earlier date mutually agreed to by the parties, the applicable Ocwen Subject MSRs may (i) become subject to a new mortgage servicing rights agreement to be negotiated between Ocwen and New Residential, (ii) be acquired by Ocwen at a price determined in accordance with the terms of the Ocwen Master Agreement, (iii) be sold to one or more third parties in accordance with the terms of the Ocwen Master Agreement, or (iv) remain subject to the Original Ocwen Agreements.

•

New Residential agrees to up to an eighteen month standstill (until January 23, 2019), subject to certain conditions, of its rights with respect to certain Ocwen Subject MSRs under the Original Ocwen Agreements to replace Ocwen as named servicer upon the occurrence of certain specified termination events. New Residential will permanently waive such rights if a specified percentage of the Ocwen Subject MSRs have been transferred to NRM or are not otherwise subject to the Original Ocwen Agreements before the end of the period contemplated by the Ocwen Master Agreement.


•	The resolution of certain payment obligations by New Residential and Ocwen under the terms of the Original Ocwen Agreements.

Pursuant to the Ocwen Transfer Agreement, Ocwen agreed to transfer its legal title and any other remaining interest in certain mortgage servicing rights to New Residential upon satisfaction of customary conditions precedent. The Ocwen Transfer Agreement contains customary representations, warranties, covenants and indemnification obligations of Ocwen as transferor of the Ocwen Subject MSRs.

On July 23, 2017, New Residential and Ocwen entered into a subservicing agreement (the “Ocwen Subservicing Agreement”) pursuant to which Ocwen will subservice the mortgage loans related to the Ocwen Subject MSRs that are transferred to New Residential pursuant to the Ocwen Master Agreement and Ocwen Transfer Agreement. The Ocwen Subservicing Agreement contains customary representations, warranties, covenants and indemnification obligations of Ocwen as subservicer and prior servicer. In consideration for subservicing such mortgage loans, Ocwen will receive a fixed subservicing fee and certain other customary ancillary compensation as set forth in the Ocwen Subservicing Agreement. The initial term of the Ocwen Subservicing Agreement is five years. At any time during the initial term, New Residential may terminate the agreement for convenience, subject to Ocwen’s right to receive a termination fee (amortizing monthly during the initial term) and proper notice. Following the initial term, New Residential may extend the term of the Ocwen Subservicing Agreement for additional three month periods by delivering written notice to Ocwen of its desire to extend such contract thirty days prior to the end of such three month period. Furthermore, at any time following the initial term, the Ocwen Subservicing Agreement may be canceled by Ocwen at the end of each twelve month period following the initial term by delivering proper notice. In addition, New Residential and Ocwen each have the ability to terminate the agreement for cause if certain events specified in the Ocwen Subservicing Agreement occur. If either New Residential or Ocwen terminates the agreement for cause, the other party is required to pay certain fees and costs as set forth in the agreement. If New Residential exercises an early termination provision in a securitization transaction during the initial term and elects not to retain Ocwen as servicer following such early termination with respect to the related mortgage loans, New Residential may be required to pay an exit fee to Ocwen (which decreases monthly during the initial term). The subservicing fees payable by New Residential to Ocwen under the Ocwen Subservicing Agreement are expected to be less than the fees that would have been payable by New Residential under the Original Ocwen Agreements.

As of December 31, 2017, MSRs representing approximately $14.8 billion UPB of underlying loans have been transferred pursuant to the Ocwen Transaction, and MSRs representing approximately $86.8 billion UPB of underlying loans remain to be transferred (after paydowns and other factors). Through December 31, 2017, $54.6 million of related lump sum payments have been made or accrued by New Residential to Ocwen. Upon transfer, any interests already held by New Residential are reclassified (from Excess MSRs or Servicer Advance Investments) to become part of the basis of the MSR financing receivables held by NRM. As a result of the length of the initial term of the related subservicing agreement between NRM and Ocwen, although the MSRs were legally sold, solely for accounting purposes New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in mortgage servicing rights financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential has elected to measure the investment at fair value, with changes in fair value flowing through Change in fair value of investments in mortgage servicing rights financing receivables in the Consolidated Statements of Income.

On August 28, 2017, New Residential Sales Corp. (together with any other future licensed real estate brokerage subsidiary of New Residential, “NRZ Brokerage”), a licensed real estate brokerage subsidiary of New Residential, entered into a Cooperative Brokerage Agreement (the “Altisource Brokerage Agreement”) with REALHome Services and Solutions, Inc. and REALHome Services and Solutions - CT, Inc. (collectively, “RHSS”), two licensed real estate brokerage subsidiaries of Altisource Portfolio Solutions S.A. (together with its subsidiaries, “Altisource”). Under the Altisource Brokerage Agreement, RHSS will exclusively provide marketing and listing services for REO properties included in certain MSR portfolios acquired, or to be acquired, by New Residential, including (i) an approximately $110 billion UPB (as of June 30, 2017) non-agency MSR portfolio that New Residential agreed to acquire from certain subsidiaries of Ocwen in July 2017 and certain other Ocwen-owned portfolios if New Residential were to acquire these portfolios from Ocwen in the future (collectively, the “Ocwen Portfolio”), and (ii) an approximately $6 billion UPB (as of June 30, 2017) non-agency MSR portfolio that New Residential agreed to acquire from certain subsidiaries of PHH in December 2016 (the “PHH Portfolio” and, together with the Ocwen Portfolio, the “Covered Portfolios”). Pursuant to the Altisource Brokerage Agreement, RHSS will begin to receive REO referrals from NRZ Brokerage as the Covered Portfolios are transferred to one or more subsidiaries of New Residential, subject to PHH’s approval of Altisource as a vendor in the case of the PHH Portfolio. NRZ Brokerage will receive a referral commission for each REO property sold by RHSS on behalf of New Residential for which RHSS receives a commission under the Altisource Brokerage Agreement. The Altisource Brokerage Agreement, which extends through August 2025, establishes a direct relationship between the brokerages, irrespective of New Residential’s subservicer.

On August 28, 2017, RHSS and Altisource also entered into a letter agreement with New Residential (the “Altisource Letter Agreement”), which provides for New Residential to directly appoint RHSS (or another real estate brokerage subsidiary designated by Altisource) to perform the real estate brokerage services with respect to REO properties in the Covered Portfolios, subject to certain specified exceptions, in the event that NRZ Brokerage does not refer the business to RHSS and in which case the designated Altisource brokerage subsidiary would retain the seller’s brokerage commission.

Concurrently with the Altisource Brokerage Agreement and the Altisource Letter Agreement, Altisource executed a letter of intent with New Residential to enter into a services agreement (as amended, the “Altisource Services LOI”). Under the anticipated services agreement, to the extent allowable by law and other applicable contractual requirements, Altisource would provide certain fee-based services with respect to the Ocwen Portfolio, also through August 31, 2025. Pursuant to the Altisource Services LOI, the parties have agreed to negotiate in good faith toward the execution of a services agreement through and until February 28, 2018, such date to be automatically extended to March 31, 2018 if the parties are still negotiating in good faith at such time (such period, including as extended, the “Standstill Period”). Except for certain specified commitments, including those described above, all of the terms of the Altisource Services LOI are non-binding. There can be no assurance that the parties will reach an agreement with respect to the terms of a services agreement or that a services agreement will be entered into on a timely basis or at all.

RHSS has the right to terminate the Altisource Brokerage Agreement and the Altisource Letter Agreement upon ninety (90) days’ notice (which period may be shortened by New Residential) if a services agreement is not signed between Altisource and New Residential during the Standstill Period. The Altisource Brokerage Agreement may otherwise only be terminated upon the occurrence of certain specified events. The Altisource Brokerage Agreement also includes standard vendor oversight and audit rights and reporting requirements. New Residential has agreed that, during such notice period and/or the Standstill Period, it will not replace or reduce the role of Altisource as a service provider with respect to transferred MSRs in the Ocwen Portfolio.

Interest income from investments in mortgage servicing rights financing receivables was comprised of the following:



	Year Ended December 31, 2017
Servicing fee revenue	$	94,945
Ancillary and other fees	17,313
Less: subservicing expense	(33,686		)
Interest income, investments in mortgage servicing rights financing receivables	$	78,572

Change in fair value of investments in mortgage servicing rights financing receivables was comprised of the following:



	Year Ended December 31, 2017
Amortization of servicing rights	$	(43,190	)
Change in valuation inputs and assumptions	109,584
Change in fair value of investments in mortgage servicing rights financing receivables	$	66,394

The following table presents activity related to the carrying value of New Residential’s investments in mortgage servicing rights financing receivables:



Balance as of December 31, 2016	$	—
Investments made	467,884
Ocwen Transaction	64,450
Amortization of servicing rights^(A)	(43,190		)
Change in valuation inputs and assumptions	109,584
Balance as of December 31, 2017	$	598,728


(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 mortgage servicing rights financing receivables as of December 31, 2017:



	UPB of Underlying Mortgages		Weighted Average Life (Years)^(A)	Amortized Cost Basis		Carrying Value^(B)
Agency	$	49,498,415	5.9	$	428,657	$	476,206
Non-Agency	14,846,478		5.6	60,487		122,522
Total	$	64,344,893	5.8	$	489,144	$	598,728


(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, 2017, a weighted average discount rate of 9.4% was used to value New Residential’s investments in mortgage servicing rights financing receivables.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs and mortgage servicing rights financing receivables:



	Percentage of Total Outstanding Unpaid Principal Amount
State Concentration	December 31, 2017		December 31, 2016
California	19.0	%	20.5	%
New York	6.3	%	2.8	%
Florida	6.0	%	7.3	%
Texas	5.7	%	6.3	%
New Jersey	5.2	%	4.5	%
Illinois	4.1	%	4.1	%
Massachusetts	3.8	%	4.1	%
Michigan	3.5	%	3.1	%
Pennsylvania	3.3	%	2.9	%
Virginia	3.1	%	2.8	%
Other U.S.	40.0	%	41.6	%
	100.0	%	100.0	%

In connection with its investments in MSRs and MSR financing receivables, New Residential generally acquires any related outstanding servicer advances (not included in the purchase prices described above), which it records at fair value within servicer advances receivable upon acquisition.

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 servicer advances receivable.

See Note 11 regarding the financing of MSRs.