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INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES
 9 Months Ended
Sep. 30, 2020
Transfers and Servicing of Financial Assets [Abstract]  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS ASSETS INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS ASSETS
Excess mortgage servicing rights assets include New Residential’s direct investments in Excess MSRs and investments in joint ventures jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. The table below summarizes the components of excess mortgage servicing rights assets as presented on the condensed consolidated balance sheets:
September 30, 2020December 31, 2019
Direct investments in Excess MSRs$328,623 $379,747 
Excess MSR Joint Ventures107,359 125,596 
Excess mortgage servicing rights assets, at fair value$435,982 $505,343 

Direct Investments in Excess MSRs

The following table presents activity related to the carrying value of New Residential’s direct investments in Excess MSRs:
Servicer
Mr. Cooper
SLS(A)
Total
Balance as of December 31, 2019$377,692 $2,055 $379,747 
Interest income25,167 9 25,176 
Other income(12,175)— (12,175)
Proceeds from repayments(51,980)(311)(52,291)
Proceeds from sales(61)— (61)
Change in fair value(11,939)166 (11,773)
Balance as of September 30, 2020$326,704 $1,919 $328,623 
(A)Specialized Loan Servicing LLC (“SLS”).

Mr. Cooper or SLS, 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 direct Excess MSR investments serviced by Mr. Cooper and SLS. Under such arrangements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any refinancing by Mr. Cooper 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 direct investments in Excess 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 prepayment risk and other market factors on the Excess MSRs.

The following is a summary of New Residential’s direct investments in Excess MSRs:
September 30, 2020December 31, 2019
UPB of Underlying MortgagesInterest in Excess MSR
Weighted Average Life Years(A)
Amortized Cost Basis(B)
Carrying Value(C)
Carrying Value(C)
New Residential(D)
Fortress-managed fundsMr. Cooper
Agency
Original and Recaptured Pools
$37,356,300 
32.5% - 66.7%
(53.3%)
0.0% - 40%
20.0% - 35.0%
5.8$150,403 $173,549 $209,633 
Non-Agency(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools
39,995,269 
33.3% - 100.0%
(59.4%)
0.0% - 50%
0.0% - 33.3%
6.6113,724 155,074 170,114 
Total$77,351,569 6.1$264,127 $328,623 $379,747 
 
(A)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 and recapture agreements, as applicable.
(D)Amounts in parentheses represent weighted averages.
(E)New Residential is also invested in related Servicer Advance Investments, including the basic fee component of the related MSR as of September 30, 2020 (Note 6) on $27.5 billion UPB underlying these Excess MSRs.

Changes in fair value of investments is composed of the following:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Original and Recaptured Pools$(664)$2,407 $(11,773)$(1,421)

As of September 30, 2020, a weighted average discount rate of 7.8% was used to value New Residential’s investments in Excess MSRs (directly and through equity method investees).

Excess MSR Joint Ventures
New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.
The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential:
September 30, 2020December 31, 2019
Excess MSR assets$190,246 $226,843 
Other assets25,158 25,035 
Other liabilities(687)(687)
Equity$214,717 $251,191 
New Residential’s investment$107,359 $125,596 
New Residential’s ownership50.0 %50.0 %

Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Interest income$12,249 $7,990 $20,099 $12,251 
Other income (loss)(13,027)1,528 (25,879)(4,029)
Expenses(8)(16)(24)(48)
Net income (loss)$(786)$9,502 $(5,804)$8,174 

The following table summarizes the activity of New Residential’s investments in equity method investees:
Balance at December 31, 2019$125,596 
Distributions of earnings from equity method investees(1,170)
Distributions of capital from equity method investees(14,165)
Change in fair value of investments in equity method investees(2,902)
Balance at September 30, 2020$107,359 

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:
September 30, 2020
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$30,232,940 66.7 %50.0 %$146,014 $190,246 5.7
 
(A)The remaining interests are held by Mr. Cooper.
(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 and recapture agreements, as applicable.
(D)Represents the weighted average expected timing of the receipt of cash flows of each investment.
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 September 30, 2020, these subservicers include LoanCare, LLC (“LoanCare”), PHH Mortgage Corporation (“PHH”), Mr. Cooper, and Flagstar Bank, FSB (“Flagstar”), which subservice 19.1%, 18.5%, 17.1%, and 0.7% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 44.6% 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)
446,964 (18,227)428,737 
Transfers320,613 (320,613)— 
Originations(B)
424,451 — 424,451 
Proceeds from sales(10,452)(3,708)(14,160)
Amortization of servicing rights(C)
(959,482)(182,085)(1,141,567)
Change in valuation inputs and assumptions(D)
(542,361)(62,072)(604,433)
(Gain) loss realized4,112 (1,749)2,363 
Balance as of September 30, 2020$3,651,805 $1,129,819 $4,781,624 

(A)Net of purchase price adjustments and purchase price fully reimbursable from MSR sellers as a result of prepayment protection.    
(B)Represents MSRs retained on the sale of originated mortgage loans.
(C)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.
(D)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
September 30,		Nine Months Ended
September 30,
2020201920202019
Servicing fee revenue$320,880 $222,966 $945,568 $602,241 
Ancillary and other fees30,255 58,489 80,591 151,039 
Servicing fee revenue and fees351,135 281,455 1,026,159 753,280 
Amortization of servicing rights(473,490)(168,776)(953,430)(346,772)
Change in valuation inputs and assumptions(A) (B)
81,973 (61,858)(536,154)(275,371)
(Gain) loss realized(3,547)2,229 4,112 2,229 
Servicing revenue, net$(43,929)$53,050 $(459,313)$133,366 

(A)Includes changes in inputs or assumptions used in the valuation model.
(B)Includes $(0.2) million and $(3.6) million for the three months ended September 30, 2020 and 2019, respectively, and $6.2 million and $4.4 million for the nine months ended September 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
September 30,		Nine Months Ended
September 30,
2020201920202019
Servicing fee revenue$83,493 $128,936 $303,936 $385,306 
Ancillary and other fees16,231 21,417 59,947 82,695 
Less: subservicing expense(35,655)(40,410)(117,689)(145,649)
Interest income, investments in MSR financing receivables
$64,069 $109,943 $246,194 $322,352 

Change in fair value of investments in MSR Financing Receivables was composed of the following:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2020201920202019
Amortization of servicing rights$(36,134)$(48,340)$(182,085)$(131,417)
Change in valuation inputs and assumptions(A)
15,859 9,349 (62,072)1,437 
(Gain) loss on sales(B)
— (2,419)(1,749)(3,220)
Change in fair value of investments in MSR financing receivables
$(20,275)$(41,410)$(245,906)$(133,200)

(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 September 30, 2020:
UPB of Underlying Mortgages
Weighted Average Life (Years)(A)
Carrying Value(B)
MSRs:
Agency(C)
$323,473,921 5.4$3,012,602 
Non-Agency5,605,074 4.516,598 
Ginnie Mae(D)
57,290,646 4.3622,605 
386,369,641 5.23,651,805 
MSR Financing Receivables:
Agency(C)
6,159,819 5.657,410 
Non-Agency69,089,988 7.81,072,409 
75,249,807 7.61,129,819 
Total$461,619,448 5.6$4,781,624 

(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 September 30, 2020, weighted average discount rates of 7.7% and 9.4% 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 September 30, 2020, New Residential holds approximately $1,458.3 million in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its condensed consolidated balance sheets.

Ginnie Mae Loans Subject to Repurchase Right

NewRez, as an approved issuer of Ginnie Mae MBS, originates and securitizes government-insured residential mortgage loans. As the issuer of the Ginnie Mae-guaranteed securitizations, NewRez has the unilateral right to repurchase loans from the securitizations when they are delinquent for more than 90 days. Loans in forbearance that are three or more consecutive payments delinquent are included as delinquent loans permitted to be repurchased. Under GAAP, NewRez is required to recognize the right to loans on its balance sheet and establish a corresponding liability upon the triggering of the repurchase right regardless of whether NewRez intends to repurchase the loans. As of September 30, 2020, New Residential holds approximately $1,458.3 million in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its condensed consolidated balance sheets. New Residential may re-pool reacquired loans into new Ginnie Mae securitizations upon re-performance of the loan or otherwise sell to third-party investors. Upon recognizing loans eligible for repurchase, the Company does not change the accounting for MSRs related to previously sold loans. Upon reacquisition of a loan the MSR is written off. As of September 30, 2020, New Residential holds approximately $491.4 million of reacquired residential mortgage loans on its condensed consolidated balance sheets.

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 September 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 ConcentrationSeptember 30, 2020December 31, 2019
California21.9 %21.9 %
Florida7.3 %6.9 %
New York6.7 %6.4 %
Texas5.4 %5.5 %
New Jersey4.8 %4.9 %
Illinois3.5 %3.6 %
Massachusetts3.3 %3.4 %
Georgia3.2 %3.1 %
Maryland3.1 %3.0 %
Washington3.1 %3.3 %
Other U.S.37.7 %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 September 30, 2020 and 2019 was $77.1 billion and $54.7 billion, respectively. New Residential earned subservicing revenue of $138.6 million and $99.7 million for the nine months ended September 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:
September 30, 2020December 31, 2019
Principal and interest advances$595,367 $660,807 
Escrow advances (taxes and insurance advances)2,171,877 2,427,384 
Foreclosure advances137,231 163,054 
Total(A)(B)(C)
$2,904,475 $3,251,245 
(A)Includes $461.0 million and $562.2 million of servicer advances receivable related to Agency MSRs, respectively, recoverable either from the borrower or the Agencies.
(B)Includes $113.1 million and $166.5 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from either the borrower or Ginnie Mae. Expected losses 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 $47.4 million and $50.1 million, respectively, in unamortized advance discount and reserves, net of accruals for advance recoveries. These reserves relate to inactive loans in the foreclosure or liquidation process.

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 $18.2 million for expected non-recovery of advances as of September 30, 2020.

See Note 11 regarding the financing of MSRs.