MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

3 Months Ended

Mar. 31, 2021

Transfers and Servicing of Financial Assets [Abstract]

MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

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 Consolidated Balance Sheets:

	March 31, 2021		December 31, 2020
Direct investments in Excess MSRs	$	303,568	$	310,938
Excess MSR Joint Ventures	98,886		99,917
Excess mortgage servicing rights assets, at fair value	$	402,454	$	410,855

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, 2020	$	309,009	$	1,929	$	310,938
Interest income	12,499		(268)		12,231
Other income	3		(325)		(322)
Proceeds from repayments	(14,563)		(89)		(14,652)
Proceeds from sales	(9)		—		(9)
Change in fair value	(5,090)		472		(4,618)
Balance as of March 31, 2021	$	301,849	$	1,719	$	303,568

(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).

The following is a summary of New Residential’s direct investments in Excess MSRs:

	March 31, 2021										December 31, 2020
	UPB of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years(A)	Amortized Cost Basis(B)		Carrying Value(C)		Carrying Value(C)
			New Residential(D)	Fortress-managed funds	Mr. Cooper
Agency
Original and Recaptured Pools	$	32,373,398	32.5% - 66.7% (53.3%)	0.0% - 40%	20.0% - 35.0%	6.1	$	139,870	$	157,633	$	162,645
Non-Agency(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools	35,993,960		33.3% - 100.0% (59.4%)	0.0% - 50%	0.0% - 33.3%	6.7	108,277		145,935		148,293
Total	$	68,367,358				6.4	$	248,147	$	303,568	$	310,938

(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 March 31, 2021 (Note 6) on $24.4 billion UPB underlying these Excess MSRs.

Changes in fair value of investments consists of the following:

	Three Months Ended March 31,
	2021		2020
Original and Recaptured Pools	$	(4,618)	$	(11,024)

As of March 31, 2021, 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:

	March 31, 2021			December 31, 2020
Excess MSR assets	$	177,408		$	179,762
Other assets	21,051			20,759
Other liabilities	(687)			(687)
Equity	$	197,772		$	199,834
New Residential’s investment	$	98,886		$	99,917
New Residential’s percentage ownership	50.0		%	50.0		%

	Three Months Ended March 31,
	2021		2020
Interest income	$	9,158	$	7,313
Other income (loss)	(2,820)		(8,219)
Expenses	(8)		(8)
Net income (loss)	$	6,330	$	(914)

The following table summarizes the activity of New Residential’s investments in equity method investees:

Balance at December 31, 2020	$	99,917
Distributions of capital from equity method investees	(4,196)
Change in fair value of investments in equity method investees	3,165
Balance at March 31, 2021	$	98,886

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:

	March 31, 2021
	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	$	27,025,920	66.7	%	50.0	%	$	139,722	$	177,408	5.8

(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.

MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

The 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. MSRs are composed 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. Income from MSR Financing Receivables, net of subservicing fees, are recorded as Interest Income with changes in fair value flowing through Change in Fair Value of Investments in the 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 and reflected as part of General and Administrative Expenses in New Residential’s Consolidated Statements of Income. As of March 31, 2021, these subservicers include LoanCare, LLC (“LoanCare”), PHH Mortgage Corporation (“PHH”), Mr. Cooper, and Flagstar Bank, FSB (“Flagstar”), which subservice 15.7%, 15.4%, 15.3%, and 0.6% of the underlying UPB of the related mortgages, respectively (includes both MSRs and MSR Financing Receivables). The remaining 53.0% 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 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 MSRs and MSR Financing Receivables:

	MSRs		MSR Financing Receivables		Total
Balance as of December 31, 2020	$	3,489,675	$	1,096,166	$	4,585,841
Purchases, net(A)	4,044		—		4,044
Transfers(B)	47,831		(47,831)		—
Originations(C)	255,473		—		255,473
Proceeds from sales	(1,016)		(777)		(1,793)
Change in fair value due to:
Realization of cash flow(D)	(319,029)		(21,954)		(340,983)
Change in valuation inputs and assumptions(E)	547,510		(3,554)		543,956
(Gain) loss realized	(929)		(270)		(1,199)
Balance as of March 31, 2021	$	4,023,559	$	1,021,780	$	5,045,339

(A)Net of purchase price adjustments and purchase price fully reimbursable from MSR sellers as a result of prepayment protection.    

(B)Represents MSRs previously accounted for as MSR Financing Receivables. As a result of the length of the initial term of the related subservicing agreement between NRM and Mr. Cooper, although the MSRs were legally sold, solely for accounting purposes, the purchase agreement was not treated as a sale under GAAP through January 31, 2021.

(C)Represents MSRs retained on the sale of originated mortgage loans.

(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 MSRs consists of the following:

	Three Months Ended March 31,
	2021		2020
Servicing fee revenue	$	263,743	$	328,122
Ancillary and other fees	31,894		32,138
Servicing fee revenue and fees	295,637		360,260
Change in fair value due to:
Realization of cash flows(A)	(317,716)		(191,367)
Change in valuation inputs and assumptions(B)(C)	545,379		(463,711)
Change in fair value of derivative instruments	(8,823)		—
(Gain) loss realized	(929)		5,703
Servicing revenue, net	$	513,548	$	(289,115)

(A)Includes $1.3 million and $1.9 million of fair value adjustment due to realization of cash flows to Excess spread financing for the three months ended March 31, 2021 and 2020, respectively.

(B)Includes changes in inputs or assumptions used in the valuation model.

(C)Includes $2.1 million and $4.5 million for the three months ended March 31, 2021 and 2020, respectively, of fair value adjustment to Excess spread financing.

Interest Income from MSR Financing Receivables consists of the following:

	Three Months Ended March 31,
	2021		2020
Servicing fee revenue	$	76,733	$	113,582
Ancillary and other fees	8,699		26,000
Less: subservicing expense	(32,644)		(41,903)
Interest income, MSR financing receivables	$	52,788	$	97,679

Change in Fair Value of MSR Financing Receivables consists of the following:

	Three Months Ended March 31,
	2021		2020
Realization of cash flows	$	(21,954)	$	(68,752)
Change in valuation inputs and assumptions(A)	(3,554)		(33,610)
(Gain) loss realized	(270)		(1,749)
Change in fair value of MSR financing receivables	$	(25,778)	$	(104,111)

(A)Includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.

The following is a summary of New Residential’s MSRs and MSR Financing Receivables as of March 31, 2021:

	UPB of Underlying Mortgages		Weighted Average Life (Years)(A)	Carrying Value(B)
MSRs:
Agency(C)	$	290,005,816	5.9	$	3,199,914
Non-Agency	6,124,672		3.9	15,409
Ginnie Mae(D)	57,996,508		4.8	808,236
	354,126,996		5.7	4,023,559
MSR Financing Receivables:
Non-Agency	64,387,370		8.1	1,021,780
Total	$	418,514,366	6.1	$	5,045,339

(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 March 31, 2021, weighted average discount rates of 7.7% (range 7.4% - 13.0%) and 9.5% were used to value New Residential’s MSRs and MSR Financing Receivables, respectively.

(C)Represents Fannie Mae and Freddie Mac MSRs.

(D)As of March 31, 2021, New Residential holds approximately $1.5 billion in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its 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 March 31, 2021, New Residential holds approximately $1.5 billion in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its 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 March 31, 2021, New Residential holds approximately $843.8 million of reacquired residential mortgage loans on its 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 March 31, 2021, 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 MSRs and MSR Financing Receivables:

	Percentage of Total Outstanding Unpaid Principal Amount
State Concentration	March 31, 2021		December 31, 2020
California	20.6	%	21.2	%
Florida	7.6	%	7.4	%
New York	7.1	%	7.0	%
Texas	5.8	%	5.6	%
New Jersey	4.8	%	4.8	%
Illinois	3.6	%	3.6	%
Massachusetts	3.4	%	3.4	%
Georgia	3.4	%	3.3	%
Pennsylvania	3.2	%	3.1	%
Maryland	3.1	%	3.1	%
Other U.S.	37.4	%	37.5	%
	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 Consolidated Balance Sheets. The UPB of residential mortgage loans subserviced for others as of March 31, 2021 and 2020 was $74.6 billion and $74.0 billion, respectively. New Residential earned subservicing revenue of $43.5 million and $41.2 million for the three months ended March 31, 2021 and 2020, respectively, related to subserviced UPB which is included within Servicing Revenue, Net in the Consolidated Statements of Income.

Servicer Advances Receivable

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 Consolidated Balance Sheets.

The following types of advances are included in the Servicer Advances Receivable:

	March 31, 2021		December 31, 2020
Principal and interest advances	$	609,948	$	665,538
Escrow advances (taxes and insurance advances)	1,485,409		1,547,796
Foreclosure advances	821,519		816,400
Total(A)(B)(C)	$	2,916,876	$	3,029,734

(A)Includes $603.3 million and $583.9 million of servicer advances receivable related to Agency MSRs, respectively, recoverable either from the borrower or the Agencies.

(B)Includes $176.3 million and $181.2 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 $21.8 million and $27.5 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. For advances on loans that have been liquidated, sold, paid in full or modified, the Company has reserved $27.5 million and $22.9 million for expected non-recovery of advances as of March 31, 2021 and December 31, 2020, respectively.

See Note 11 regarding the financing of MSRs.