SERVICER ADVANCE INVESTMENTS

In December 2013, New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) consolidated by New Residential, purchased the outstanding servicer advances related to a portfolio of residential mortgage loans that is serviced by Nationstar and is a subset of the same portfolio of loans in which New Residential has invested in a portion of the Excess MSRs (Note 4), including the basic fee component of the related MSRs. In August 2017, New Residential purchased an additional 27.0% interest in the Buyer from third-party co-investors for an aggregate purchase price of $65.9 million. A taxable wholly-owned subsidiary of New Residential is the managing member of the Buyer and owned an approximately 72.8% interest in the Buyer as of December 31, 2017. As of December 31, 2017, noncontrolling third-party co-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, 2017, the third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $309.1 million and $254.8 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 this portfolio of loans 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, 2017 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.

New Residential also acquired a portion of the call rights related to this portfolio of loans.

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, and a portion of the call rights related to a portfolio of residential mortgage loans which is serviced by SLS. Fortress-managed funds acquired the other 50% of the Excess MSRs. SLS services the loans in exchange for a servicing fee of 10.75 basis points (“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.

In April 2015, New Residential acquired Servicer Advance Investments and Excess MSRs in connection with the HLSS Acquisition (Note 1). Ocwen services the underlying loans in exchange for a servicing fee of 12% times the servicing fee collections of the underlying loans, which as of December 31, 2017 is equal to 6.1 bps times the UPB of the underlying loans, and an incentive fee which is reduced by LIBOR plus 2.75% per annum of the amount, if any, of servicer advances outstanding in excess of a defined target. In July 2017, New Residential entered into the Ocwen Transaction as described in Note 5. Subsequent to the Ocwen Transaction, the Servicer Advance Investments (including the related basic fee portion of the MSR) formerly serviced by Ocwen become reclassified, as described in Note 5, as the underlying MSRs are transferred to NRM.

In connection with the HLSS Acquisition, New Residential acquired from Ocwen the call rights related to the residential mortgage loans underlying the Excess MSRs and Servicer Advance Investments acquired from HLSS. New Residential continues to evaluate the call rights it acquired from Nationstar, SLS and 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 residential mortgage loans on which New Residential can successfully exercise call rights and realize the benefits therefrom may differ materially from its initial assumptions.

All of New Residential’s Servicer Advance Investments are comprised of outstanding servicer advances, the requirement to purchase all future servicer advances made with respect to a specified pool of residential mortgage loans, and the basic fee component of the related MSR. New Residential elected to record its Servicer Advance Investments, 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 New Residential’s Servicer Advance Investments, including the right to the basic fee component of the related MSRs:



	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, 2017
Servicer Advance Investments^(C)	$	3,924,003	$	4,027,379	6.8	%	7.3	%	5.1	$	84,418
December 31, 2016
Servicer Advance Investments^(C)	$	5,687,635	$	5,706,593	5.6	%	5.5	%	4.6	$	(7,768	)


(A)	Carrying value represents the fair value of the Servicer Advance Investments, 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, which had an aggregate face amount of $100.0 million and an aggregate carrying value of $100.1 million as of December 31, 2016.

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



									Loan-to-Value (“LTV”)^(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 and Bonds Payable		Gross		Net^(B)		Gross		Net
December 31, 2017
Servicer Advance Investments^(D)	$	139,460,371	$	3,581,876	2.6	%	$	3,461,718	93.2	%	92.0	%	3.3	%	3.0	%
December 31, 2016
Servicer Advance Investments^(D)	$	186,362,657	$	5,617,759	3.0	%	$	5,560,412	94.5	%	93.4	%	3.2	%	2.8	%

(A)

Based on outstanding servicer advances, excluding purchased but unsettled servicer advances and certain deferred servicing fees (“DSF”) on which New Residential receives financing. If New Residential were to include these DSF in the servicer advance balance, gross and net LTV as of December 31, 2017 would be 87.4% and 86.3%, respectively. Also excludes retained Non-Agency bonds with a current face amount of $80.0 million from the outstanding servicer advance debt. If New Residential were to sell these bonds, gross and net LTV as of December 31, 2017 would be 95.3% and 94.1%, 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 are included in the Servicer Advance Investments:



	December 31,
	2017		2016
Principal and interest advances	$	909,133	$	1,489,929
Escrow advances (taxes and insurance advances)	1,636,381		2,613,050
Foreclosure advances	1,036,362		1,514,780
Total	$	3,581,876	$	5,617,759

Interest income recognized by New Residential related to its Servicer Advance Investments was comprised of the following:



	Year Ended December 31,
	2017			2016			2015
Interest income, gross of amounts attributable to servicer compensation	$	871,506		$	922,006		$	799,126
Amounts attributable to base servicer compensation^(A)	(227,585		)	(127,631		)	(107,929		)
Amounts attributable to incentive servicer compensation^(A)	(115,565		)	(430,025		)	(338,881		)
Interest income from Servicer Advance Investments^(A)	$	528,356		$	364,350		$	352,316


(A)	Total interest income of $528.4 million for the year ended December 31, 2017 includes retrospective adjustments of $204.1 million, mainly due to changes in cash flow assumptions relating to the HLSS portfolio, including a change in the cost of subservicing assumption to 13 bps.

New Residential has 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,
	2017		2016
Assets
Servicer advance investments, at fair value	$	1,002,102	$	1,731,633
Cash and cash equivalents	40,929		37,854
All other assets	13,011		19,799
Total assets^(A)	$	1,056,042	$	1,789,286
Liabilities
Notes and bonds payable	$	789,979	$	1,464,851
All other liabilities	3,308		5,187
Total liabilities^(A)	$	793,287	$	1,470,038


(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.

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



	December 31,
	2017			2016
Total Advance Purchaser LLC equity	$	262,755		$	319,248
Others’ ownership interest	27.2		%	54.2		%
Others’ interest in equity of consolidated subsidiary	$	71,491		$	173,057

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



	Year Ended December 31,
	2017			2016			2015
Net Advance Purchaser LLC income	$	23,604		$	72,159		$	33,180
Others’ ownership interest as a percent of total^(A)	47.6		%	55.6		%	55.5		%
Others’ interest in net income of consolidated subsidiaries	$	11,227		$	40,136		$	18,407


(A)	As a result, New Residential owned 52.4%, 44.4% and 44.5% of the Buyer, on average during the years ended December 31, 2017, 2016 and 2015, respectively.

See Note 11 regarding the financing of Servicer Advance Investments.