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INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
 12 Months Ended
Dec. 31, 2018
Transfers and Servicing [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS
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
 
—

 
—

 
(71,982
)
 
(71,982
)
Interest income
 
—

 
—

 
—

 
—

Other income
 
46,393

 
(191
)
 
56,851

 
103,053

Proceeds from repayments
 
2,384

 
—

 
1,993

 
4,377

Proceeds from sales
 
(120,485
)
 
(1,400
)
 
(130,122
)
 
(252,007
)
Change in fair value
 
(13,505
)
 
—

 
—

 
(13,505
)
Ocwen Transaction (Note 5)
 
6,153

 
569

 
(2,400
)
 
4,322

Balance as of December 31, 2017
 
532,233

 
2,913

 
638,567

 
1,173,713

Purchases
 
—

 
—

 
—

 
—

Interest income
 
44,386

 
54

 
—

 
44,440

Other income
 
6,444

 
—

 
40,417

 
46,861

Proceeds from repayments
 
(100,215
)
 
(632
)
 
(26,946
)
 
(127,793
)
Proceeds from sales
 
(19,084
)
 
—

 
—

 
(19,084
)
Change in fair value
 
(18,436
)
 
197

 
(40,417
)
 
(58,656
)
Ocwen Transaction (Note 5)
 
—

 
—

 
(611,621
)
 
(611,621
)
Balance as of December 31, 2018
 
$
445,328

 
$
2,532

 
$
—

 
$
447,860


(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.

In January 2018, New Residential entered into the new Ocwen Agreements as described in Note 5. Subsequent to the New Ocwen Agreements, the Excess MSRs serviced by Ocwen became reclassified, as described in Note 5.

Nationstar, SLS, or Ocwen, as applicable, perform all of the servicing and advancing functions, and retain 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. 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, 2018

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
$
52,368,290

 
32.5% - 66.7% (53.3%)
 
0.0% - 40.0%
 
20.0% - 35.0%
 
5.6
 
$
203,675

 
$
226,452

Recapture Agreements
—

 
32.5% - 66.7% (53.3%)
 
0.0% - 40.0%
 
20.0% - 35.0%
 
12.8
 
15,122

 
30,935


52,368,290

 
 
 
 
 
 
 
6.1
 
218,797

 
257,387


 
 
 
 
 
 
 
 
 
 
 
 
 
Non-Agency(E)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nationstar and SLS Serviced:
 
 
 
 
 
 
 
 
 
 
 
 
 
Original and Recaptured Pools
$
54,058,073

 
33.3% - 100.0% (59.4%)
 
0.0% - 50.0%
 
0.0% - 33.3%
 
5.8
 
$
138,314

 
$
172,712

Recapture Agreements
—

 
33.3% - 100.0% (59.4%)
 
0.0% - 50.0%
 
0.0% - 33.3%
 
12.8
 
4,216

 
17,761


54,058,073

 
 
 
 
 
 
 
6.0
 
142,530

 
190,473

Total
$
106,426,363

 
 
 
 
 
 
 
6.1
 
$
361,327

 
$
447,860


 
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

 
 
 
 
 
 
 
6.4
 
760,576

 
849,077

Total
$
217,121,299

 
 
 
 
 
 
 
6.4
 
$
1,028,523

 
$
1,173,713


(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, 2018 and 2017 (Note 6) on $40.1 billion and $139.5 billion UPB, respectively, underlying these Excess MSRs.

Changes in fair value recorded in other income is comprised of the following:
 
Year Ended December 31,
 
2018
 
2017
 
2016
Original and Recaptured Pools
$
(50,030
)
 
$
(5,630
)
 
$
(11,221
)
Recapture Agreements
(8,626
)
 
9,952

 
3,924

 
$
(58,656
)
 
$
4,322

 
$
(7,297
)


As of December 31, 2018 and 2017, weighted average discount rates of 8.8% and 8.9%, 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,
 
2018
 
2017
Excess MSR assets
$
269,203

 
$
321,197

Other assets
27,411

 
22,333

Other liabilities
(687
)
 
—

Equity
$
295,927

 
$
343,530

New Residential’s investment
$
147,964

 
$
171,765

 
 
 
 
New Residential’s ownership
50.0
%
 
50.0
%

 
Year Ended December 31,
 
2018
 
2017
 
2016
Interest income
$
26,363

 
$
27,450

 
$
36,502

Other income (loss)
(9,649
)
 
(2,149
)
 
(3,359
)
Expenses
—

 
(68
)
 
(91
)
Net income
$
16,714

 
$
25,233

 
$
33,052


New Residential’s investments in equity method investees changed during the years ended December 31, 2018 and 2017 as follows:
 
2018
 
2017
Balance at beginning of period
$
171,765

 
$
194,788

Contributions to equity method investees
—

 
—

Distributions of earnings from equity method investees
(11,059
)
 
(13,668
)
Distributions of capital from equity method investees
(21,099
)
 
(21,972
)
Change in fair value of investments in equity method investees
8,357

 
12,617

Balance at end of period
$
147,964

 
$
171,765


The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
 
December 31, 2018
 
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
$
41,707,963

 
66.7%
 
50.0%
 
$
178,560

 
$
228,779

 
5.5
Recapture Agreements
—

 
66.7%
 
50.0%
 
19,701

 
40,424

 
12.7
Total
$
41,707,963

 
 
 
 
 
$
198,261

 
$
269,203

 
6.2

 
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
 
$
50,501,054

 
 
 
 
 
$
233,495

 
$
321,197

 
6.3

(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.

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. NRM engages third party licensed mortgage servicers as subservicers to perform the operational servicing duties in connection with some of 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, 2018, these subservicers include Nationstar, Ocwen, Ditech Financial LLC (“Ditech,” a subsidiary of Ditech Holding Corporation), PHH Corporation (together with its subsidiaries, including PHH Mortgage Corporation, “PHH”), LoanCare, LLC (“LoanCare”), and Flagstar Bank, FSB (“Flagstar”), which subservice 24.4%, 22.7%, 20.9%, 10.9%, 1.6%, 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, Flagstar, and Nationstar. Under the recapture agreements, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by Ditech, Flagstar, or Nationstar of a loan in the original portfolios.

Shellpoint

On November 29, 2017, concurrently with the Shellpoint Purchaser’s entry into the Shellpoint SPA with Shellpoint, NRM entered into (i) a Bulk Agreement for the Purchase and Sale of Mortgage Servicing Rights (the “Shellpoint MSR Purchase Agreement”) with New Penn, a Delaware limited liability company and a wholly owned subsidiary of Shellpoint, pursuant to which NRM has agreed to purchase from New Penn the mortgage servicing rights relating to a portfolio of Fannie Mae and Freddie Mac mortgage loans having an aggregate UPB of approximately $7.8 billion for a purchase price of approximately $81.0 million (the “Shellpoint MSR Purchase”), which closed on January 16, 2018, and (ii) a Subservicing Agreement (the “Shellpoint Subservicing Agreement”) with New Penn, pursuant to which New Penn has agreed to subservice Fannie Mae and Freddie Mac mortgage loans for which NRM has acquired the right to service such loans. Under the Shellpoint Subservicing Agreement, New Penn is entitled to certain monthly and other servicing compensation, and both NRM and New Penn may terminate the Shellpoint Subservicing Agreement, subject to certain specified terms, notice periods and other requirements.

During the first and second quarters of 2018, New Residential entered into several transactions with New Penn to acquire the rights to the economic value of the servicing rights related to MSRs owned by New Penn with respect to certain mortgage loans guaranteed by Ginnie Mae, together with existing servicer advances and the obligation to fund future servicer advances. New Residential acquired these economic rights related to approximately $11.4 billion UPB of Ginnie Mae guaranteed residential mortgage loans serviced by New Penn for an aggregate purchase price of $139.1 million (the “Ginnie Mae MSRs”). As a result of New Penn continuing to own the MSRs and remaining the named servicer of the Ginnie Mae guaranteed residential mortgage loans, although the rights to the economic value of the MSRs were legally sold, solely for accounting purposes, New Residential determined that each purchase agreement would not be treated as a sale under GAAP and accounted for as Mortgage Servicing Rights Financing Receivable.

As a result of the Shellpoint Acquisition completed on July 3, 2018, New Residential, through its wholly owned subsidiary, New Penn, owns the Ginnie Mae MSRs and now accounts for these assets as Mortgage Servicing Rights rather than Mortgage Servicing Rights Financing Receivable as disclosed in the first and second quarters of 2018.

New Penn, as an approved issuer of Ginnie Mae MBS, originates, sells and securitizes government-insured residential mortgage loans into Ginnie Mae guaranteed securitizations and New Penn retains the right to service the underlying residential mortgage loans. As the servicer, New Penn, holds the Ginnie Mae Buy-Back Option to repurchase delinquent loans from the securitization at its discretion. In accordance with the accounting guidance in ASC No. 860, New Penn recognizes any delinquent loans subject to the Ginnie Mae Buy-Back Option and an offsetting repurchase liability on its balance sheet regardless of whether New Penn executes its option to repurchase. As of December 31, 2018, New Residential holds approximately $121.6 million in Residential mortgage loans subject to repurchase and Residential mortgage loans repurchase liability on its Consolidated Balance Sheets.

During the year ended December 31, 2018, New Residential, through its wholly owned subsidiaries, completed the following MSR acquisitions accounted for as Mortgage Servicing Rights:
Date of Acquisition
 
Collateral Type(A)
 
UPB
(in billions)
 
Purchase Price
(in millions)
January 16, 2018
 
Agency
 
$
11.5

 
$
101.5

January 16, 2018
 
Agency
 
7.8

 
81.0

February 28, 2018
 
Agency
 
3.3

 
33.5

March 28, 2018
 
 Agency & Ginnie Mae
 
8.1

 
96.6

May 1, 2018
 
 Ginnie Mae
 
4.6

 
36.2

May 25, 2018
 
 Agency
 
2.1

 
26.3

May 31, 2018
 
 Agency & Ginnie Mae
 
6.1

 
79.9

June 1, 2018
 
 Ginnie Mae
 
0.5

 
6.1

June 4, 2018
 
 Agency
 
2.1

 
19.3

June 28, 2018
 
 Ginnie Mae
 
4.7

 
66.5

August 31, 2018
 
 Agency & Ginnie Mae
 
18.5

 
220.5

September 28, 2018
 
 Agency
 
1.1

 
13.6

September 28, 2018
 
 Agency
 
10.1

 
126.4

November 8, 2018
 
Ginnie Mae
 
0.1

 
1.5

December 31, 2018
 
 Agency & Ginnie Mae
 
7.0

 
81.4

December 31, 2018
 
 Agency
 
9.8

 
135.7

Various(B)
 
 Agency
 
5.6

 
60.0

Total
 
 
 
$
103.0

 
$
1,186.0


(A)
“Agency” represents Fannie Mae and Freddie Mac MSRs.
(B)
Represents Flow MSR acquisitions primarily from Ditech and Shellpoint for the year ended December 31, 2018.

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,
 
2018
 
2017
 
2016
Servicing fee revenue
$
589,546

 
$
412,971

 
$
29,168

Ancillary and other fees
130,294

 
79,050

 
676

Servicing fee revenue and fees
719,840

 
492,021

 
29,844

Amortization of servicing rights(A)
(256,915
)
 
(223,167
)
 
(15,354
)
Change in valuation inputs and assumptions(B) (C)
68,587

 
155,495

 
103,679

(Gain)/loss on sales(D)
(2,917
)
 
—

 
—

Servicing revenue, net
$
528,595

 
$
424,349

 
$
118,169



(A)
Includes $1.2 million, $0.0 million and $0.0 million of amortization to Excess spread financing for the years ended December 31, 2018, 2017, and 2016, respectively.
(B)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(C)
Includes $7.4 million, $0.0 million and $0.0 million of fair value adjustment to Excess spread financing for the years ended December 31, 2018, 2017, and 2016, respectively.
(D)
Represents the realization of unrealized gain/(loss) as a result of sales.

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
 
1,143,693

Amortization of servicing rights(A)
 
(223,167
)
Change in valuation inputs and assumptions(B)
 
155,495

Balance as of December 31, 2017
 
$
1,735,504

Purchases
 
1,042,933

Transfer In(C)
 
124,652

Shellpoint Acquisition(D) (E)
 
151,312

Originations(F)
 
35,311

Proceeds from sales
 
(5,776
)
Amortization of servicing rights(A)
 
(258,068
)
Change in valuation inputs and assumptions(B)
 
61,149

(Gain)/loss on sales(G)
 
(2,917
)
Balance as of December 31, 2018
 
$
2,884,100



(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.
(B)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(C)
Represents Ginnie Mae MSRs previously accounted for as Mortgage Servicing Rights Financing Receivable.
(D)
Represents MSRs acquired through New Residential’s acquisition of Shellpoint Partners LLC.
(E)
Includes $48.3 million of MSRs legally sold by New Penn treated as a secured borrowing as it did not meet the criteria for sale treatment. New Residential elected to record the excess spread financing liability at fair value pursuant to the fair value option.
(F)
Represents MSRs retained on the sale of originated mortgage loans.
(G)
Represents the realization of unrealized gain/(loss) as a result of sales.
The following is a summary of New Residential’s investments in MSRs as of December 31, 2018 and 2017:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
2018
 
 
 
 
 
 
 
Agency(C)
$
226,295,778

 
6.4
 
$
2,189,039

 
$
2,506,676

Non-Agency
2,143,212

 
6.6
 
19,982

 
22,438

Ginnie Mae
30,023,713

 
7.4
 
357,673

 
354,986

Total
$
258,462,703

 
6.5
 
$
2,566,694

 
$
2,884,100

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


(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, 2018 and 2017, weighted average discount rates of 8.7% and 9.1%, respectively, were used to value New Residential’s investments in MSRs.
(C)
Represents Fannie Mae and Freddie Mac MSRs.

Mortgage Servicing Rights Financing Receivable

In certain cases, New Residential has legally purchased MSRs or the right to the economic interest in MSRs; however, New Residential has determined that each 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.

PHH Transaction

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. 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.

Ocwen Transaction

As of December 31, 2018, MSRs representing approximately $36.1 billion UPB of underlying loans have been transferred pursuant to the Ocwen Transaction, including $20.6 billion transferred to New Penn during the fourth quarter of 2018. Economics related to the remaining MSRs subject to the Ocwen Transaction were transferred pursuant to the New Ocwen Agreements (described below). Through December 31, 2018, $334.2 million of related lump sum payments have been made by New Residential to Ocwen. Upon such transfer, or subsequent to the New Ocwen Agreements (described below), 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 or servicer advances receivable, as appropriate, 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 transferred pursuant to the Ocwen Transaction 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.

In July 2017, New Residential and Ocwen entered into the Ocwen Transaction. While New Residential continues the process of obtaining the third party consents necessary to transfer the related MSRs to New Residential’s subsidiary, NRM, Ocwen and New Residential have entered into new agreements, which have accelerated the implementation of certain parts of the Ocwen Transaction in order to achieve its intent sooner. These new agreements are described in further detail below.

On January 18, 2018, New Residential entered into a new agreement regarding the rights to MSRs (the “New Ocwen RMSR Agreement”) including a servicing addendum thereto (the “Ocwen Servicing Addendum”), Amendment No. 1 to Transfer Agreement (the “New Ocwen Transfer Agreement”) and a Brokerage Services Agreement (the “Ocwen Brokerage Services Agreement” and, collectively, the “New Ocwen Agreements”) with Ocwen. The New Ocwen Agreements modify and supplement the arrangements among the parties set forth in the Original Ocwen Agreements, the Ocwen Master Agreement, the Ocwen Transfer Agreement, and the Ocwen Subservicing Agreement (together with the Original Ocwen Agreements, the Ocwen Master Agreement, and the Ocwen Transfer Agreement, the “Existing Ocwen Agreements”). NRM made a lump-sum “Fee Restructuring Payment” of $279.6 million to Ocwen on January 18, 2018, the date of the New Ocwen RMSR Agreement, with respect to such Existing Ocwen Subject MSRs.

Under the Existing Ocwen Agreements, Ocwen sold and transferred to New Residential certain “Rights to MSRs” and other assets related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion as of the opening balances in January 2018 (the “Existing Ocwen Subject MSRs”).

Pursuant to the New Ocwen Agreements, Ocwen will continue to service the mortgage loans related to the Existing Ocwen Subject MSRs until the necessary third party consents are obtained in order to transfer the Existing Ocwen Subject MSRs in accordance with the New Ocwen Agreements.

The New Ocwen RMSR Agreement provides, among other things:

•
the Existing Ocwen Subject MSRs will remain in the parties’ ownership structure under the Existing Ocwen Agreements while they continue to seek third party consents to transfer Ocwen’s remaining rights to the Existing Ocwen Subject MSRs to New Residential or any permitted assignee of New Residential;
•
Ocwen will continue to service the related mortgage loans pursuant to the terms of the Ocwen Servicing Addendum until the transfer of the Existing Ocwen Subject MSRs;
•
under the arrangements contemplated by the New Ocwen RMSR Agreement, Ocwen will receive substantially identical compensation for servicing the related mortgage loans underlying the Existing Ocwen Subject MSRs that it would receive if the Existing Ocwen Subject MSRs had been transferred to NRM as named servicer and Ocwen subserviced such mortgage loans for NRM as named servicer;
•
in the event that the required third party consents are not obtained with respect to any Existing Ocwen Subject MSRs by certain dates specified in the New Ocwen RMSR Agreement, in accordance with the process set forth in the New Ocwen RMSR Agreement, the Rights to MSRs (as defined in the Existing Ocwen Agreements) related to such Existing Ocwen Subject MSRs could either: (i) remain subject to the New Ocwen RMSR Agreement at the option of New Residential, (ii) if New Residential does not opt for the New Ocwen RMSR Agreement to remain in place with respect to certain Existing Ocwen Subject MSRs, Ocwen may acquire such Existing Ocwen Subject MSRs at a price determined in accordance with the terms of the New Ocwen RMSR Agreement, or (iii) if Ocwen does not acquire such Existing Ocwen Subject MSRs, be sold to a third party in accordance with the terms of the New Ocwen RMSR Agreement, as determined pursuant to the terms of the New Ocwen RMSR Agreement;
•
New Residential agreed to waive any rights New Residential may have had under the Existing Ocwen Agreements to replace Ocwen as named servicer with respect to the Existing Ocwen Subject MSRs based on Ocwen’s residential servicer rating agency related downgrades; and
•
Ocwen will offer refinancing opportunities to borrowers and New Residential is entitled to the MSRs on any initial or subsequent refinancing by Ocwen of a loan in the original portfolio.

Pursuant to the Ocwen Servicing Addendum, Ocwen will service the mortgage loans related to the Existing Ocwen Subject MSRs. In consideration of servicing such mortgage loans, Ocwen will receive a servicing fee based on the unpaid principal balance as of the first of each month as set forth in the Ocwen Servicing Addendum. The initial term of the Ocwen Servicing Addendum is for the five years following July 23, 2017. At any time during the initial term, New Residential may terminate the Ocwen Servicing Addendum for convenience, subject to Ocwen’s right to receive a termination fee calculated in accordance with the Ocwen Servicing Addendum and specified notice. Following the initial term, (i) New Residential may extend the term of the Ocwen Servicing Addendum 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 and (ii) the Ocwen Servicing Addendum may be terminated by Ocwen on an annual basis. In addition, New Residential and Ocwen will have the right to terminate the Ocwen Servicing Addendum for cause if certain conditions specified in the Ocwen Servicing Addendum occur. If the Ocwen Servicing Addendum is terminated or not renewed in accordance with these provisions, New Residential will have the right to direct the transfer of servicing to a third party, subject to Ocwen’s option to purchase the Existing Ocwen Subject MSRs and related assets in certain cases. To the extent that servicing of the loans cannot be transferred in accordance with these provisions, the Ocwen Servicing Addendum will remain in place with respect to the servicing of any remaining loans.

Pursuant to the Ocwen Brokerage Services Agreement, Ocwen will engage NRZ Brokerage to perform brokerage and marketing services for all REO properties serviced by Ocwen pursuant to the Subject Servicing Agreements as defined in the New Ocwen RMSR Agreement. Such REO properties are subject to the Altisource Brokerage Agreement and Altisource Letter Agreement.

Interest income from investments in mortgage servicing rights financing receivables was comprised of the following:
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
Servicing fee revenue
$
705,812

 
$
94,945

Ancillary and other fees
146,829

 
17,313

Less: subservicing expense
(251,184
)
 
(33,686
)
Interest income, investments in mortgage servicing rights financing receivables
$
601,457

 
$
78,572


Change in fair value of investments in mortgage servicing rights financing receivables was comprised of the following:
 
Year Ended December 31, 2018
 
Year Ended December 31, 2017
Amortization of servicing rights
$
(197,703
)
 
$
(43,190
)
Change in valuation inputs and assumptions(A)
230,036

 
109,584

(Gain)/loss on sales(B)
(783
)
 
—

Change in fair value of investments in mortgage servicing rights financing receivables
$
31,550

 
$
66,394



(A)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(B)
Represents the realization of unrealized gain/(loss) as a result of sales.
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
 
$
—

Purchases
 
467,884

Ocwen Transaction
 
64,450

Amortization of servicing rights(A)
 
(43,190
)
Change in valuation inputs and assumptions(B)
 
109,584

Balance as of December 31, 2017
 
$
598,728

Purchases
 
128,357

Transfer Out(C)
 
(124,652
)
New Ocwen Agreements
 
1,017,993

Proceeds from sales
 
(7,472
)
Amortization of servicing rights(A)
 
(197,703
)
Change in valuation inputs and assumptions(B)
 
230,036

(Gain)/loss on sales(D)
 
(783
)
Balance as of December 31, 2018
 
$
1,644,504


(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.
(B)
Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.
(C)
Represents Ginnie Mae MSRs owned by New Penn accounted for as Mortgage Servicing Rights as a result of the Shellpoint Acquisition.
(D)
Represents the realization of unrealized gain/(loss) as a result of sales.

The following is a summary of New Residential’s investments in mortgage servicing rights financing receivables:
 
UPB of Underlying Mortgages
 
Weighted Average Life (Years)(A)
 
Amortized Cost Basis
 
Carrying Value(B)
December 31, 2018
 
 
 
 
 
 
 
Agency
$
42,265,547

 
5.9
 
$
366,946

 
$
434,110

Non-Agency
88,251,018

 
7.2
 
936,792

 
1,210,394

Total
$
130,516,565

 
6.8
 
$
1,303,738

 
$
1,644,504

December 31, 2017
 
 
 
 
 
 
 
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, 2018 and 2017, weighted average discount rates of 10.3% and 9.4%, respectively, were 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, 2018
 
December 31, 2017
California
 
21.7
%
 
19.0
%
New York
 
7.8
%
 
6.3
%
Florida
 
6.9
%
 
6.0
%
Texas
 
5.3
%
 
5.7
%
New Jersey
 
5.0
%
 
5.2
%
Illinois
 
3.7
%
 
4.1
%
Massachusetts
 
3.5
%
 
3.8
%
Maryland
 
3.4
%
 
2.8
%
Pennsylvania
 
3.1
%
 
3.3
%
Virginia
 
3.1
%
 
3.1
%
Other U.S.
 
36.5
%
 
40.7
%
 
 
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.

Mortgage Subservicing

New Penn performs servicing of residential mortgage loans for third parties under subservicing agreements. Mortgage subservicing does not meet the criteria to be recognized as a servicing right asset and, therefore, is not recognized on New Residential’s consolidated balance sheets. The UPB of residential mortgage loans subserviced for others as of December 31, 2018 was $47.3 billion and subservicing revenue of $61.3 million is included within servicing revenue, net in the Consolidated Statements of Income.

Servicer Advances Receivable

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 and New Penn, as servicers, have 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.

The following types of advances are included in the Servicer Advances Receivable:
 
 
December 31, 2018
 
December 31, 2017
Principal and interest advances
 
$
793,790

 
$
172,467

Escrow advances (taxes and insurance advances)
 
2,186,831

 
482,884

Foreclosure advances
 
199,203

 
16,017

Total(A) (B) (C)
 
$
3,179,824

 
$
671,368


(A)
Includes $231.2 million and $167.9 million of servicer advances receivable related to Fannie Mae and Freddie Mac MSRs, respectively, recoverable from such agencies.
(B)
Includes $41.6 million and $0.0 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from Ginnie Mae. Reserves for advances associated with Ginnie Mae loans in the MSR portfolio are considered in the MSR fair valuation through a nonreimbursable advance loss assumption.
(C)
Net of $98.0 million in accrued advance recoveries and $4.2 million in unamortized discount and accrual for advance recoveries, respectively.

New Residential’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority (i.e., “top of the waterfall”) and New Residential is generally entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. Furthermore, to the extent that advances are not recoverable by New Residential as a result of the subservicer’s failure to comply with applicable requirements in the relevant servicing agreements, New Residential has a contractual right to be reimbursed by the subservicer. New Residential assesses the recoverability of Servicer Advance Receivables periodically and as of December 31, 2018 and December 31, 2017, expected full recovery of the Servicer Advance Receivables.

See Note 11 regarding the financing of MSRs.