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INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES
 6 Months Ended
Jun. 30, 2020
Equity Method Investments and Joint Ventures [Abstract]  
INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLESThe Company owns and records at fair value the rights to service residential mortgage loans, either as a result of purchase transactions or from the retained mortgage servicing associated with the sales and securitizations of loans originated. Investments in MSRs are comprised of servicing rights of both agency and non-agency loans. In certain cases where New Residential has legally purchased MSRs or the right to the economic interest in MSRs, New Residential has determined 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 MSR financing receivables (“MSR Financing Receivables”). Income from these investments, net of subservicing fees, are recorded as Interest income with changes in fair value flowing through Change in fair value of investments in the Condensed Consolidated Statements of Income.

A subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), engages third party licensed mortgage servicers as subservicers and, in relation to certain MSR purchases, interim 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” in New Residential’s Condensed Consolidated Statements of Income. As of June 30, 2020, these subservicers include PHH Mortgage Corporation (“PHH”), LoanCare, LLC (“LoanCare”), Mr. Cooper, and Flagstar Bank, FSB (“Flagstar”), which subservice 22.2%, 20.8%, 17.7%, and 0.8% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 38.5% of the underlying UPB of the related mortgages is subserviced by the servicing division of NewRez.

NRM has entered into recapture agreements with respect to each of its MSR investments. Under the recapture agreements, NRM is generally entitled to the MSRs on any initial or subsequent refinancing by an NRM subservicer or by NewRez.

New Residential records its investments in MSRs and MSR Financing Receivables at fair value at acquisition and has elected to subsequently measure at fair value pursuant to the fair value measurement method.

The following table presents activity related to the carrying value of New Residential’s investments in MSRs and MSR Financing Receivables:
MSRsMSR Financing ReceivablesTotal
Balance as of December 31, 2019$3,967,960  $1,718,273  $5,686,233  
Purchases, net(A)
456,665  4,362  461,027  
Originations(B)
268,098  —  268,098  
Prepayments(C)
(31,222) (23,369) (54,591) 
Proceeds from sales(9,801) (3,708) (13,509) 
Amortization of servicing rights(D)
(483,639) (145,951) (629,590) 
Change in valuation inputs and assumptions(E)
(624,561) (77,931) (702,492) 
(Gain) loss on sales7,659  (1,749) 5,910  
Balance as of June 30, 2020$3,551,159  $1,469,927  $5,021,086  

(A)Net of purchase price adjustments.
(B)Represents MSRs retained on the sale of originated mortgage loans.
(C)Represents purchase price fully reimbursable from sellers as a result of prepayment protection.
(D)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.
(E)Includes changes in inputs or assumptions used in the valuation model.
Servicing revenue, net recognized by New Residential related to its investments in MSRs was composed of the following:
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Servicing fee revenue$332,376  $196,249  $660,498  $379,275  
Ancillary and other fees18,198  52,813  50,336  92,550  
Servicing fee revenue and fees350,574  249,062  710,834  471,825  
Amortization of servicing rights(288,573) (105,321) (479,940) (177,996) 
Change in valuation inputs and assumptions(A) (B)
(154,416) (229,278) (618,127) (213,513) 
(Gain) loss on sales1,956  —  7,659  —  
Servicing revenue, net$(90,459) $(85,537) $(379,574) $80,316  

(A)Includes changes in inputs or assumptions used in the valuation model.
(B)Includes $1.9 million and $7.6 million for the three months ended June 30, 2020 and 2019, respectively, and $6.4 million and $8.0 million for the six months ended June 30, 2020 and 2019, respectively, of fair value adjustment to excess spread financing.

Interest income from investments in MSR Financing Receivables was composed of the following:
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Servicing fee revenue$106,861  $130,126  $220,443  $256,370  
Ancillary and other fees17,716  29,954  43,716  61,278  
Less: subservicing expense(40,131) (49,577) (82,034) (105,239) 
Interest income, investments in MSR financing receivables
$84,446  $110,503  $182,125  $212,409  

Change in fair value of investments in MSR Financing Receivables was composed of the following:
Three Months Ended
June 30,		Six Months Ended
June 30,
2020201920202019
Amortization of servicing rights$(77,199) $(40,201) $(145,951) $(83,077) 
Change in valuation inputs and assumptions(A)
(44,321) (14,850) (77,931) (7,912) 
(Gain) loss on sales(B)
—  (360) (1,749) (801) 
Change in fair value of investments in MSR financing receivables
$(121,520) $(55,411) $(225,631) $(91,790) 

(A)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 is a summary of New Residential’s investments in MSRs and MSR Financing Receivables as of June 30, 2020:
UPB of Underlying Mortgages
Weighted Average Life (Years)(A)
Carrying Value(B)
MSRs:
Agency(C)
$315,552,886  5.2$2,927,046  
Non-Agency6,065,805  4.318,400  
Ginnie Mae(D)
57,779,101  4.3605,713  
379,397,792  5.13,551,159  
MSR Financing Receivables:
Agency(C)
43,073,285  5.0382,078  
Non-Agency71,380,202  7.71,087,849  
114,453,487  6.71,469,927  
Total$493,851,279  5.4$5,021,086  

(A)Represents the weighted average expected timing of the receipt of expected cash flows for this investment.
(B)Carrying value represents fair value. As of June 30, 2020, weighted average discount rates of 8.2% and 9.5% were used to value New Residential’s investments in MSRs and MSR financing receivables, respectively.
(C)Represents Fannie Mae and Freddie Mac MSRs.
(D)As of June 30, 2020, New Residential holds approximately $1,075.0 million in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its Condensed Consolidated Balance Sheets. See Note 8 for further discussion.

Ocwen MSR Financing Receivable Transactions

In July 2017, Ocwen Loan Servicing, LLC (collectively with certain affiliates, “Ocwen”) and New Residential entered into an agreement in which both parties 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 and with respect to which New Residential already held certain rights (“Rights to MSRs”). Ocwen and New Residential concurrently entered into a subservicing agreement pursuant to which Ocwen agreed to subservice the mortgage loans related to the MSRs that were transferred to New Residential.

In January 2018, 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. PHH (as successor by merger to Ocwen) will continue to service the mortgage loans related to the MSRs until any necessary third-party consents to transferring the MSRs are obtained and all other conditions to transferring the MSRs are satisfied, at which time PHH will transfer the MSRs to New Residential.

As of June 30, 2020, MSRs representing approximately $66.7 billion UPB of underlying loans were transferred from PHH to NRM and NewRez. Although the MSRs transferred 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 or NewRez, and that the purchase agreement would not be treated as a sale under GAAP.
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs and MSR Financing Receivables:
Percentage of Total Outstanding Unpaid Principal Amount
State ConcentrationJune 30, 2020December 31, 2019
California22.9 %21.9 %
Florida7.0 %6.9 %
New York6.4 %6.4 %
Texas5.3 %5.5 %
New Jersey4.8 %4.9 %
Illinois3.5 %3.6 %
Massachusetts3.3 %3.4 %
Washington3.2 %3.3 %
Georgia3.1 %3.1 %
Maryland3.0 %3.0 %
Other U.S.37.5 %38.0 %
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

NewRez performs servicing of residential mortgage loans for third parties under subservicing agreements. Mortgage subservicing does not meet the criteria to be recognized as a mortgage servicing right asset and, therefore, is not recognized on New Residential’s Condensed Consolidated Balance Sheets. The UPB of residential mortgage loans subserviced for others as of June 30, 2020 and 2019 was $82.7 billion and $51.1 billion, respectively. New Residential earned subservicing revenue of $94.2 million and $64.7 million for the six months ended June 30, 2020 and 2019, respectively, related to subserviced UPB which is included within Servicing revenue, net in the Condensed 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), which it records at fair value upon acquisition.

In addition to receiving cash flows from the MSRs, NRM and NewRez, as servicers, have the obligation to fund future servicer advances on the underlying pool of mortgages (Note 15). These servicer advances are recorded when advanced and are included in Servicer Advances Receivable on the Condensed Consolidated Balance Sheets.

The following types of advances are included in the Servicer Advances Receivable:
June 30, 2020December 31, 2019
Principal and interest advances$692,849  $660,807  
Escrow advances (taxes and insurance advances)2,159,978  2,427,384  
Foreclosure advances145,909  163,054  
Total(A)(B)(C)
$2,998,736  $3,251,245  
(A)Includes $394.4 million and $562.2 million of servicer advances receivable related to Agency MSRs, respectively, recoverable from the Agencies.
(B)Includes $105.0 million and $166.5 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)Excludes $51.1 million and $50.1 million, respectively, in unamortized advance discount and reserves, net of accruals for advance recoveries.

New Residential’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority pursuant to the underlying servicing agreements (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, 2019, expected full recovery of the Servicer Advance Receivables. For advances on loans that have been liquidated, sold, paid in full or modified, the Company has reserved $19.7 million for expected non-recovery of advances as of June 30, 2020.

See Note 11 regarding the financing of MSRs.