“Agency” residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as Fannie Mae or Freddie Mac. “Non-Agency” RMBS are issued by either public trusts or private label securitization entities.

Effective January 1, 2020, New Residential elected to apply the fair value option for any new purchases of Non-Agency RMBS. Effective April 1, 2020, New Residential elected to apply the fair value option for any new purchases of Agency RMBS. The fair value option provides an election which allows a company to irrevocably elect fair value for certain financial assets and liabilities on an instrument-by-instrument basis at initial recognition. For RMBS of high credit quality accounted for under the fair value option, generally Agency RMBS, the Company recognizes interest income based on the stated coupon rate and the outstanding principal amount. The original purchase premium or discount is not amortized or accreted as part of interest income but rather reflected as part of the instrument’s fair value. For RMBS that are deemed not to be of high credit quality at the time of purchase, generally Non-Agency RMBS, interest income is recognized based on the security’s effective yield.

For securities for which the fair value option was not elected, any unrealized gains (losses) from the change in fair value are recorded as a component of accumulated other comprehensive income in the condensed consolidated statement of changes in stockholders’ equity, to the extent impairment losses are considered non-credit related. Expected credit losses are reflected in the Provision (reversal) for credit losses in the condensed consolidated statements of income. The Company estimates expected credit losses using a discounted cash flow (“DCF”) approach. The DCF approach considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, default rates, and loss severities.

Realized gains (losses) on securities are recorded in Gain (loss) on settlement of investments, net in the condensed consolidated statements of income. Interest income is recognized over the life of the security using the effective interest method and is recorded on the accrual basis.


	Three Months Ended September 30,								Nine Months Ended September 30,
	2020				2019				2020				2019
(in millions)	Agency		Non-Agency		Agency		Non-Agency		Agency		Non-Agency		Agency		Non-Agency
Purchases
Face	$	6,300.0	$	—	$	12,306.4	$	3,324.9	$	17,162.6	$	5,083.1	$	25,123.5	$	7,899.1
Purchase price	6,538.0		—		12,610.9		247.0		17,687.4		575.0		25,700.0		1,164.9

Sales
Face	$	1,195.5	$	716.6	$	6,073.4	$	1,325.2	$	18,590.6	$	8,204.4	$	17,898.5	$	2,162.7
Amortized cost	1,231.8		526.3		6,233.5		832.40		18,911.0		6,083.5		18,339.1		1,571.0
Sale price	1,251.5		514.6		6,252.8		910.90		19,120.5		5,139.2		18,451.4		1,662.9
Gain (loss) on sale	19.7		(11.6)		19.3		78.5		209.5		(944.3)		112.3		91.9

As of September 30, 2020, New Residential had sold and purchased $1.2 billion and $300.0 million face amount of Agency RMBS for $1.3 billion and $309.0 million, respectively, which had not yet been settled. As of September 30, 2019, New Residential had sold and purchased $4.3 billion and $2.5 billion face amount of Agency RMBS for $4.4 billion and $2.5 billion, respectively, which had not yet been settled. These unsettled sales and purchases were recorded on the condensed consolidated balance sheets on trade date as Trades receivable and Trades payable. There were no sales or purchases of Non-Agency RMBS which had not yet been settled as of September 30, 2020, or September 30, 2019.

New Residential has exercised its call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO contained in such trusts prior to their termination. In certain cases, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. Refer to Notes 8 and 16 for further details on these transactions.


	September 30, 2020																			December 31, 2019
					Gross Unrealized							Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses		Carrying Value(A)		Number of Securities	Rating(B)	Coupon(C)		Yield		Life (Years)(D)	Principal Subordination(E)		Carrying Value
Agency RMBS	$	114,401	$	115,223	$	12,254	$	—	$	127,476	1	AAA	3.50	%	3.50	%	8.8	—		$	11,519,943
Agency RMBS at FVO	8,921,032		9,247,334		48,905		(2,891)		9,293,347		53	AAA	2.24	%	2.24	%	4.1	—		—
Total Agency RMBS(F)(G)	9,035,433		9,362,557		61,159		(2,891)		9,420,823		54	AAA	2.25	%	2.25	%	4.2	—		11,519,943
Non-Agency RMBS(H)(I)	21,276,175		1,386,243		92,192		(69,191)		1,409,244		599	AA	3.03	%	4.86	%	5.9	16.5	%	7,957,785
Total/ Weighted Average	$	30,311,608	$	10,748,800	$	153,351	$	(72,082)	$	10,830,067	653	AAA	2.80	%	4.09	%	5.4			$	19,477,728

(B)Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. This excludes the ratings of the collateral underlying 305 bonds with a carrying value of $647.1 million which either have never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were determined by third party rating agencies and represent the most recent credit ratings available as of the reporting date and may not be current.

(H)The total outstanding face amount was $13.0 billion (including $11.9 billion of residual and fair value option notional amount) for fixed rate securities and $8.3 billion (including $7.7 billion of residual and fair value option notional amount) for floating rate securities as of September 30, 2020.

(I)Includes other asset-backed securities (“ABS”) consisting primarily of (i) interest-only securities and servicing strips (fair value option securities) which New Residential elected to carry at fair value and record changes to valuation through the income statement, (ii) bonds backed by consumer loans, and (iii) corporate debt.


					Gross Unrealized							Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses		Carrying Value		Number of Securities	Rating	Coupon		Yield		Life (Years)	Principal Subordination
Corporate debt	$	500	$	500	$	10	$	—	$	510	1	B-	8.25	%	8.25	%	4.5	N/A
Consumer loan bonds	13,847		11,069		—		—		11,069		6	N/A	N/A		N/A		—	N/A
Fair value option securities:
Interest-only securities	10,506,022		272,207		17,641		(33,893)		255,954		126	AA+	1.16	%	7.80	%	2.7	N/A
Servicing strips	5,418,547		55,861		4,314		(9,009)		51,167		59	N/A	0.61	%	7.60	%	3.8	N/A

Unrealized losses attributable to credit impairment are recognized in earnings. During the nine months ended September 30, 2020, New Residential recorded credit impairment charges of $15.2 million with respect to real estate securities. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using its best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell and is not more likely than not to be required to sell these securities.


Securities in an Unrealized Loss Position	Outstanding Face Amount		Amortized Cost Basis						Gross Unrealized Losses		Carrying Value		Number of Securities	Weighted Average
			Before Credit Impairment		Credit Impairment(A)		After Credit Impairment							Rating	Coupon		Yield		Life (Years)
Less than 12 Months	$	10,511,509	$	3,144,203	$	(2,072)	$	3,142,131	$	(51,194)	$	3,090,937	112	AAA	2.30	%	2.05	%	6.1
12 or More Months	3,758,699		112,034		(8,297)		103,737		(20,889)		82,848		70	AA+	0.89	%	2.59	%	2.4
Total/Weighted Average	$	14,270,208	$	3,256,237	$	(10,369)	$	3,245,868	$	(72,083)	$	3,173,785	182	AAA	2.26	%	2.07	%	6.0

New Residential performed an assessment of all debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of credit impairment, exceeds its fair value) and determined the following:


	September 30, 2020								December 31, 2019
					Gross Unrealized Losses								Gross Unrealized Losses
	Fair Value		Amortized Cost Basis After Credit Impairment		Credit(A)		Non-Credit(B)		Fair Value		Amortized Cost Basis After Credit Impairment		Credit(A)		Non-Credit(B)
Securities New Residential intends to sell	$	—	$	—	$	—	N/A		$	—	$	—	$	—	$	—
Securities New Residential is more likely than not to be required to sell(C)	—		—		—		N/A		—		—		—		N/A
Securities New Residential has no intent to sell and is not more likely than not to be required to sell:
Credit impaired securities	122,086		134,639		(10,369)		(12,553)		228,228		237,626		(3,232)		(9,398)
Non-credit impaired securities	3,051,699		3,111,229		—		(59,530)		4,726,409		4,767,837		—		(41,428)
Total debt securities in an unrealized loss position	$	3,173,785	$	3,245,868	$	(10,369)	$	(72,083)	$	4,954,637	$	5,005,463	$	(3,232)	$	(50,826)

(A)This amount is required to be recorded through earnings. In measuring the portion of credit losses, New Residential estimates the expected cash flow for each of the securities. This evaluation included a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows included New Residential’s expectations of prepayment rates, default rates and loss severities. Credit losses were measured as the decline in the present value of the expected future cash flows discounted at the security’s effective interest rate.

(C)New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.

The following table summarizes the activity related to the allowance for credit losses on debt securities (excluding credit impairment relating to securities New Residential intends to sell or is more likely than not required to sell):


	Purchased Credit Deteriorated		Non-Purchased Credit Deteriorated		Total
Allowance for credit losses on available-for-sale debt securities at December 31, 2019	$	—	$	—	$	—
Additions to the allowance for credit losses on securities for which credit losses were not previously recorded	—		—		—
Additions to the allowance for credit losses arising from purchases of available-for-sale debt securities accounted for as purchased financial assets with credit deterioration	—		—		—
Reductions for securities sold during the period	—		—		—
Reductions in the allowance for credit losses because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis	—		—		—
Additional increases (decreases) to the allowance for credit losses on securities that had credit losses or an allowance recorded in a previous period	10,359		10		10,369
Write-offs charged against the allowance	—		—		—
Recoveries of amounts previously written off	—		—		—
Allowance for credit losses on available-for-sale debt securities at September 30, 2020	$	10,359	$	10	$	10,369


	September 30, 2020				December 31, 2019
Geographic Location(A)	Outstanding Face Amount		Percentage of Total Outstanding		Outstanding Face Amount		Percentage of Total Outstanding
Western U.S.	$	7,347,342	34.6	%	$	9,048,847	36.6	%
Southeastern U.S.	5,543,854		26.1	%	5,983,966		24.2	%
Northeastern U.S.	4,876,703		22.9	%	5,416,137		21.9	%
Midwestern U.S.	2,354,349		11.1	%	2,562,269		10.4	%
Southwestern U.S.	1,130,535		5.3	%	1,440,467		5.8	%
Other(B)	8,995		—	%	296,273		1.1	%
	$	21,261,778	100.0	%	$	24,747,959	100.0	%

(A)Excludes $13.8 million and $25.0 million face amount of bonds backed by consumer loans and $0.5 million and $85.0 million face amount of bonds backed by corporate debt as of September 30, 2020 and December 31, 2019, respectively.

New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments.

The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, excluding residual and fair value option securities:


	Nine Months Ended September 30, 2020
Balance at December 31, 2019	$	1,882,476
Additions	76,959
Accretion	(51,840)
Reclassifications from (to) non-accretable difference	(2,858,719)
Disposals	1,317,537
Balance at September 30, 2020	$	366,413