VARIABLE INTEREST ENTITIES

6 Months Ended

Jun. 30, 2022

Organization, Consolidation and Presentation of Financial Statements [Abstract]

In the normal course of business, Rithm Capital enters into transactions with special purpose entities (SPEs), which primarily consist of trusts established for a limited purpose. The SPEs have been formed for the purpose of transactions in which the Company transfers assets into an SPE in return for various forms of debt obligations supported by those assets. In these transactions, the Company typically receives cash and/or other interests in the SPE as proceeds for the transferred assets. The Company retains the right to service the transferred receivables. The Company evaluates its interests in each SPE for classification as a variable interest entity (VIE).

VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

To assess whether Rithm Capital has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, Rithm Capital considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. To assess whether Rithm Capital has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, Rithm Capital considers all of its economic interests and applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. When an SPE meets the definition of a VIE and the Company determines that it is the primary beneficiary, the Company includes the SPE in its consolidated financial statements.

For certain consolidated VIEs, Rithm Capital has elected to account for the assets and liabilities of these entities as collateralized financing entities (“CFE”). A CFE is a variable interest entity that holds financial assets and issues beneficial interests in those assets, and these beneficial interests have contractual recourse only to the related assets of the CFE. Accounting guidance under GAAP for CFEs allows companies to elect to measure both the financial assets and financial liabilities of a CFE using the more observable of the fair value of the financial assets or fair value of the financial liabilities. The net equity in an entity accounted for under the CFE election effectively represents the fair value of the beneficial interests Rithm Capital owns in the entity.

Consolidated VIEs

Servicer Advances

Rithm Capital, through a taxable wholly owned subsidiary, is the managing member of the Buyer and owned approximately 89.3% of the Buyer as of June 30, 2022. In 2013, Rithm Capital created the Buyer to acquire the then outstanding servicing advance receivables related to a portfolio of residential mortgage loans from a third party. The Buyer is required to purchase all future servicer advances made with respect to this portfolio of residential mortgage loans and is entitled to receive cash flows from advance recoveries and a basic fee component of the related MSRs, net of subservicing compensation paid.

The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including Rithm Capital. As of June 30, 2022, the noncontrolling third-party co-investors and Rithm Capital had previously funded their commitments, however the Buyer may recall $71.5 million and $597.9 million of capital distributed to the third-party co-investors and Rithm Capital, respectively. Neither the third-party co-investors nor Rithm Capital is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer.

Shelter Joint Ventures

A wholly owned subsidiary of Newrez, Shelter Mortgage Company LLC (“Shelter”), is a mortgage originator specializing in retail originations. Shelter operates its business through a series of joint ventures (“Shelter JVs”) and is deemed to be the primary beneficiary of the joint ventures as a result of its ability to direct activities that most significantly impact the economic performance of the entities and its ownership of a significant equity investment.

Residential Mortgage Loans

During the third quarter of 2020, Rithm Capital formed several entities that separately issued securitized debt collateralized by non-performing and reperforming residential mortgage loans. Rithm Capital determined that these securitizations should be evaluated for consolidation under the VIE model rather than the voting interest entity model as the equity holders as a group lack the characteristics of a controlling financial interest. Under the VIE model, Rithm Capital’s consolidated subsidiaries had both 1) the power to direct the most significant activities of the securitizations and 2) significant variable interests in each of the securitizations, through their control of the related optional redemption feature and their ownership of certain notes issued by the securitizations and, therefore, met the primary beneficiary criterion and, accordingly, the Company consolidated the securitizations. As of June 30, 2022, no securitizations remain outstanding.

On October 1, 2019, as a result of Rithm Capital’s acquisition of servicing assets from the bankruptcy estate of Ditech Holding Company and Ditech Financial LLC (“Ditech”) and its pre-existing ownership of the equity, Rithm Capital consolidated the MDST Trusts. Rithm Capital’s determination to consolidate the MDST Trusts is a result of its ownership of the equity in these trusts in conjunction with the ability to direct activities that most significantly impact the economic performance of the entities with the acquisition of the servicing by Newrez.

In May 2021, Newrez issued $750.0 million in notes through a securitization facility (the “2021-1 Securitization Facility”) that bear interest at 30-day LIBOR plus a margin. The 2021-1 Securitization Facility is secured by newly originated, first-lien, fixed- and adjustable-rate residential mortgage loans eligible for purchase by the GSEs and Ginnie Mae. Through a master repurchase agreement, Newrez sells its originated residential mortgage loans to the 2021-1 Securitization Facility, which then issues notes to third party qualified investors, with Newrez retaining the trust certificate. The loans serve as collateral with the proceeds from the note issuance ultimately financing the originations. The 2021-1 Securitization Facility will terminate on the earlier of (i) the three-year anniversary of the initial closing date, (ii) the Company exercising its right to optional prepayment in full, or (iii) a repurchase triggering event. The Company determined it is the primary beneficiary of the 2021-1 Securitization Facility as it has both (i) the power to direct the activities of a VIE that most significantly impact its economic performance and (ii) the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

Caliber Mortgage Participant I, LLC was formed to acquire, receive, participate, hold, release, and dispose of participation interests in certain of Caliber’s residential mortgage loans held for sale (“MLHFS PC”). The Caliber Mortgage Participant I, LLC transfers the MLHFS PC in exchange for cash. Caliber is the primary beneficiary of the VIE and therefore, consolidates the SPE. The transferred MLHFS PC is classified on the Consolidated Balance Sheets as Residential Mortgage Loans, Held-for-Sale and the related warehouse credit facility liabilities as part of Secured Financing Agreements. Caliber retains the risks and benefits associated with the assets transferred to the SPEs.

Caliber remains the servicer of the underlying residential mortgage loans and has the power to direct the SPE’s activities. Holders of the term notes issued by the Trust can look only to the assets of the Trust for satisfaction of the debt and have no recourse against Caliber.

Consumer Loan Companies

Rithm Capital has a co-investment in a portfolio of consumer loans held through the Consumer Loan Companies. As of June 30, 2022, Rithm Capital owns 53.5% of the limited liability company interests in, and consolidates, the Consumer Loan Companies.

On September 25, 2020, certain entities comprising the Consumer Loan Companies, in a private transaction, issued $663.0 million of asset-backed notes (“SCFT 2020-A”) securitized by a portfolio of consumer loans.

The Consumer Loan Companies consolidate certain entities that issued securitized debt collateralized by the consumer loans (the “Consumer Loan SPVs”). The Consumer Loan SPVs are VIEs of which the Consumer Loan Companies are the primary beneficiaries.

Securitized Mortgage Loans Receivable

In March 2022, Rithm Capital formed a securitization facility that issued securitized debt collateralized by mortgage loans receivable (the “2022-RTL1 Securitization”). The 2022-RTL1 Securitization consists of a pool of performing, adjustable-rate and fixed-rate, interest-only, mortgage loans (construction, renovation and bridge), secured by a first lien or a first and second lien on a non-owner occupied mortgaged property with original terms to maturity of up to 36 months, with an aggregate UPB of approximately $352.9 million and an aggregate principal limit of approximately $472.1 million. In addition to pass-through certificates sold to third parties, Rithm Capital acquired all of the residual tranche certificate, which bears no interest, for $40.0 million. Rithm Capital evaluated the purchased residual tranche certificate as a variable interest in the trust and concluded that the residual tranche certificate will absorb a majority of the trust’s expected losses or receive a majority of the trust’s expected residual returns. Rithm Capital also concluded that the securitization’s asset manager, a wholly owned subsidiary of Rithm Capital, has the ability to direct activities that could impact the trust’s economic performance. As a result, Rithm Capital consolidates the trust.

MSR Financing Facilities

CHL GMSR Issuer Trust is an SPE created for the purpose of transferring a participation certificate (“MSR PC”) representing a beneficial interest in Caliber’s GNMA MSRs in exchange for a variable funding note (“MSR Financing VFN”) and a trust certificate with Caliber, as well for the issuance of term notes in exchange for cash. Caliber consolidates this SPE because it is the primary beneficiary of the VIE. The MSR PC is classified in Mortgage Servicing Rights and MSR Financing Receivables, at Fair Value and the MSR Financing VFN and term notes are classified as Secured Notes and Bonds Payable on the Consolidated Balance Sheets. The SPE uses collections from a specified portion of GNMA MSR net service fees collected to repay principal and interest and to pay the expenses of the entity.

Additionally, Caliber has also transferred a participation certificate representing a beneficial interest certain of Caliber’s GNMA servicer advances (“Servicer Advance PC”) to CHL GMSR Issuer Trust in exchange for a VFN (“Servicer Advance VFN”). The transferred Servicer Advance PC is classified on the Consolidated Balance Sheets as Servicing Advances Receivable and the related liabilities as part of Accrued Expenses and Other Liabilities. CHL GMSR Issuer Trust uses collections of the pledged advances to repay principal and interest and to pay the expenses of the Servicer Advance VFN.

The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on the Consolidated Balance Sheets:


	The Buyer		Shelter Joint Ventures		Residential Mortgage Loans		Consumer Loan SPVs		Servicer Advance Facilities		MSR Financing Facilities		Mortgage Loans Receivable		Total
June 30, 2022
Assets
Mortgage servicing rights, at fair value	$	—	$	—	$	—	$	—	$	—	$	617,658	$	—	$	617,658
Servicer advance investments, at fair value	367,653		—		—		—		—		—		—		367,653
Residential mortgage loans, held-for-investment, at fair value	—		—		26,479		—		—		—		—		26,479

Residential mortgage loans, held-for-sale, at fair value	—		—		735,235		—		—		—		—		735,235
Consumer loans	—		—		—		423,735		—		—		—		423,735
Mortgage loans receivable	—		—		—		—		—		—		352,867		352,867
Cash and cash equivalents	36,479		33,372		27,676		—		—		—		—		97,527
Restricted cash	2,092		—		224,940		6,902		—		—		4,771		238,705
Servicer advance receivable	—		—		—		—		98,331		—		—		98,331
Other assets	9		1,347		266,756		5,827		30,253		315,050		87		619,329
Total Assets	$	406,233	$	34,719	$	1,281,086	$	436,464	$	128,584	$	932,708	$	357,725	$	3,577,519
Liabilities
Secured financing agreements(A)	$	—	$	—	$	451,596	$	—	$	—	$	—	$	—	$	451,596
Secured notes and bonds payable(A)	315,294		—		771,584		357,663		85,949		513,907		317,414		2,361,811
Accrued expenses and other liabilities	929		7,786		38,270		922		41,551		162		309		89,929
Total Liabilities	$	316,223	$	7,786	$	1,261,450	$	358,585	$	127,500	$	514,069	$	317,723	$	2,903,336

December 31, 2021
Assets
Mortgage servicing rights, at fair value	$	—	$	—	$	—	$	—	$	—	$	403,301	$	—	$	403,301
Servicer advance investments, at fair value	409,475		—		—		—		—		—		—		409,475
Residential mortgage loans, held-for-investment, at fair value	—		—		93,226		—		—		—		—		93,226

Residential mortgage loans, held-for-sale, at fair value	—		—		798,644		—		—		—		—		798,644
Consumer loans	—		—		—		507,291		—		—		—		507,291
Cash and cash equivalents	33,777		37,369		2,882		—		—		—		—		74,028
Restricted cash	2,210		—		171		7,249		—		—		—		9,630
Servicer advance receivable	—		—		—		—		94,306		—		—		94,306
Other assets	9		903		2,902		6,851		24,699		332,521		—		367,885
Total Assets	$	445,471	$	38,272	$	897,825	$	521,391	$	119,005	$	735,822	$	—	$	2,757,786
Liabilities
Secured financing agreements	$	—	$	—	$	24,683	$	—	$	—	$	—	$	—	$	24,683
Secured notes and bonds payable(A)	348,670		—		802,526		458,580		93,145		367,871		—		2,070,792
Accrued expenses and other liabilities	806		6,588		10,163		862		27,771		134		—		46,324
Total Liabilities	$	349,476	$	6,588	$	837,372	$	459,442	$	120,916	$	368,005	$	—	$	2,141,799

(A)The creditors of the VIEs do not have recourse to the general credit of Rithm Capital, and the assets of the VIEs are not directly available to satisfy Rithm Capital’s obligations.

Non-Consolidated VIEs

The following table comprises bonds held in unconsolidated VIEs and retained pursuant to required risk retention regulations:


	As of and for the Six Months Ended June 30,
	2022			2021
Residential mortgage loan UPB and other collateral	$	11,481,471		$	11,855,823
Weighted average delinquency(A)	3.4		%	5.3		%
Net credit losses	$	129,047		$	105,652
Face amount of debt held by third parties(B)	$	10,584,528		$	10,929,618

Carrying value of bonds retained by Rithm Capital(C)(D)	$	905,695		$	1,014,469
Cash flows received by Rithm Capital on these bonds	$	124,942		$	381,606

(A)Represents the percentage of the UPB that is 60+ days delinquent.

(B)Excludes bonds retained by Rithm Capital.

(C)Includes bonds retained pursuant to required risk retention regulations.

(D)Classified within Level 3 of the fair value hierarchy as the valuation is based on certain unobservable inputs including discount rate, prepayment rates and loss severity. See Note 19 for details on unobservable inputs.

Noncontrolling Interests

Noncontrolling interests represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Rithm Capital. These interests are related to noncontrolling interests in consolidated entities that hold Rithm Capital’s Servicer Advance Investments (Note 6), the Shelter JVs, (Note 8) and Consumer loans (Note 9).

Others’ interests in the equity of consolidated subsidiaries is computed as follows:


	June 30, 2022									December 31, 2021
	The Buyer(A)			Shelter Joint Ventures			Consumer Loan Companies			The Buyer(A)			Shelter Joint Ventures			Consumer Loan Companies
Total consolidated equity	$	90,011		$	26,933		$	98,205		$	95,995		$	31,684		$	83,597
Others’ ownership interest	10.7		%	49.5		%	46.5		%	10.7		%	49.5		%	46.5		%
Others’ interest in equity of consolidated subsidiary	$	9,613		$	13,345		$	46,213		$	10,251		$	15,683		$	39,414

Others’ interests in the net income (loss) is computed as follows:


	Three Months Ended June 30,
	2022									2021
	The Buyer(A)			Shelter Joint Ventures			Consumer Loan Companies			The Buyer(A)			Shelter Joint Ventures			Consumer Loan Companies
Net income (loss)	$	380		$	2,597		$	27,642		$	(6,817)		$	6,516		$	18,608
Others’ ownership interest	10.7		%	49.5		%	46.5		%	26.8		%	49.5		%	46.5		%
Others’ interest in net income of consolidated subsidiary	$	41		$	1,287		$	12,854		$	(1,825)		$	3,225		$	8,653

(A)Rithm Capital owned 89.3% and 73.2% of the Buyer as of June 30, 2022 and 2021, respectively.


	Six Months Ended June 30,
	2022									2021
	The Buyer(A)			Shelter Joint Ventures			Consumer Loan Companies			The Buyer(A)			Shelter Joint Ventures			Consumer Loan Companies
Net income (loss)	$	2,515		$	3,419		$	38,340		$	(1,932)		$	13,639		$	28,417
Others’ ownership interest	10.7		%	49.5		%	46.5		%	26.8		%	49.5		%	46.5		%
Others’ interest in net income of consolidated subsidiary	$	269		$	1,694		$	17,828		$	(517)		$	6,750		$	13,214

(A)Rithm Capital owned 89.3% and 73.2% of the Buyer as of June 30, 2022 and 2021, respectively.