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NRZ > SEC Filings for NRZ > Form 10-K on 28-Mar-2014All Recent SEC Filings

Show all filings for NEW RESIDENTIAL INVESTMENT CORP.

Form 10-K for NEW RESIDENTIAL INVESTMENT CORP.


28-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Residential. The following should be read in conjunction with the consolidated financial statements and notes thereto included herein, and with Part I, Item 1A, "Risk Factors."

GENERAL

New Residential is a publicly traded REIT primarily focused on investing in residential mortgage related assets. We are externally managed by an affiliate of Fortress. Our goal is to drive strong risk-adjusted returns primarily through investments in servicing related assets, residential securities and loans and other investments including, but not limited to, Excess MSRs, servicer advances, real estate securities and real estate loans. New Residential's investment guidelines are purposefully broad to enable us to make investments in a wide array of assets in diverse markets, including non-real estate related assets such as consumer loans. We generally target assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We aim to generate attractive returns for our stockholders without the excessive use of financial leverage.

Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments. Our asset allocation and target assets may change over time, depending on our Manager's investment decisions in light of prevailing market conditions. The assets in our portfolio are described in more detail below under "-Our Portfolio."

On May 15, 2013, Newcastle completed the distribution of shares of New Residential to Newcastle stockholders of record as of May 6, 2013. Following the distribution, New Residential is an independent, publicly-traded REIT (NYSE:
NRZ).

MARKET CONSIDERATIONS

Various market factors, which are outside of our control, affect our results of operations and financial condition. One such factor is developments in the U.S. residential housing market, which we believe are generating significant investment opportunities. Since the 2008 financial crisis, the residential mortgage industry has been undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced.


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Since 2010, banks have sold or committed to sell MSRs totaling more than $1 trillion of the approximately $10 trillion mortgage market. An MSR provides a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This amount typically ranges from 25 to 50 bps multiplied by the UPB of the mortgages. Approximately 77% of MSRs were owned by banks as of the fourth quarter of 2013, according to Inside Mortgage Finance. We expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment. As a result, we believe the volume of MSR sales is likely to be substantial for some period of time.

We estimate that MSRs on approximately $200 - 300 billion of mortgages are currently for sale, which would require a capital investment of approximately $2
- 3 billion based on current pricing dynamics. We believe many non-bank servicers, who acquire MSRs and are constrained by capital limitations, will continue to sell a portion of the Excess MSRs. We also estimate that approximately $1 - 2 trillion of MSRs could be sold over the next several years. In addition, approximately $1.2 trillion of new loans are expected to be created annually, according to the Mortgage Bankers Association. We believe this creates an opportunity to enter into "flow arrangements," whereby loan originators agree to sell Excess MSRs on newly originated loans on a recurring basis (often monthly or quarterly). We believe that MSRs are being sold at a discount to historical pricing levels, although increased competition for these assets has driven prices higher recently. There can be no assurance that any future investment in Excess MSRs will generate returns similar to the returns on our current investments in Excess MSRs.

As of the fourth quarter of 2013, approximately $7 trillion of the $10 trillion of residential mortgages outstanding has been securitized, according to Inside Mortgage Finance. Approximately $6 trillion are Agency RMBS according to Inside Mortgage Finance, which are securities issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The balance has been securitized by either public trusts or PLS, and are referred to as Non-Agency RMBS.

Since the financial crisis, there has been significant volatility in the prices for Non-Agency RMBS, which resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have started to recover from their lows, we believe a meaningful gap still exists between current prices and the recovery value of many Non-Agency RMBS. Accordingly, we believe there are opportunities to acquire Non-Agency RMBS at attractive risk-adjusted yields, with the potential for meaningful upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing Non-Agency RMBS may also rise if the number of buyers returns to pre-2007 levels. The primary causes of mark-to-market changes in our RMBS portfolio are changes in interest rates and credit spreads.

Interest rates have risen significantly in recent months and may continue to increase, although the timing of any further increases is uncertain. In periods of rising interest rates, the rates of prepayments and delinquencies with respect to mortgage loans generally decline. Generally, the value of our Excess MSRs is expected to increase when interest rates rise or delinquencies decline, and the value is expected to decrease when interest rates decline or delinquencies increase, due to the effect of changes in interest rates on prepayment speeds and delinquencies. However, prepayment speeds and delinquencies could increase even in the current interest rate environment, as a result of, among other things, a general economic recovery, government programs intended to foster refinancing activity or other reasons, which could reduce the value of our investments. Moreover, the value of our Excess MSRs is subject to a variety of factors, as described under "Risk Factors." In the fourth quarter of 2013, the fair value of our investments in Excess MSRs (directly and through equity method investees) increased by approximately $8.2 million and the weighted average discount rate of the portfolio remained relatively unchanged at 12.5%.

We do not expect changes in interest rates to have a meaningful impact on the net interest spread of our Agency ARM and Non-Agency portfolios. Our RMBS are primarily floating rate or hybrid (i.e., fixed to floating rate) securities, which we generally finance with floating rate debt. Therefore, while rising interest rates will generally result in a higher cost of financing, they will also result in a higher coupon payable on the securities. The net interest spread on our Agency ARM RMBS portfolio as of December 31, 2013 was 0.94%, which was the same as the net interest spread as of September 30, 2013. The net interest spread on our Non-Agency RMBS portfolio as of December 31, 2013 was 2.83%, compared to 2.85% as of September 30, 2013.


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Credit performance also affects the value of our portfolio. Higher rates of delinquency and/or defaults can reduce the value of our Excess MSRs, Non-Agency RMBS, Agency RMBS and consumer loan portfolios. For our Excess MSRs on Agency portfolios and our Agency RMBS, delinquency and default rates have an effect similar to prepayment rates. Our Excess MSRs on Non-Agency RMBS are not affected by delinquency rates because the servicer continues to advance the Excess MSR until a default occurs on the applicable loan; defaults have an effect similar to prepayments. For the Non-Agency RMBS and consumer loans, higher default rates can lead to greater loss of principal.

Credit spreads continued to decrease, or "tighten," in the fourth quarter of 2013 relative to the first three quarters of 2013, which has had a favorable impact on the value of our securities and loan portfolio. Credit spreads measure the yield relative to a specified benchmark that the market demands on securities and loans based on such assets' credit risk. For a discussion of the way in which interest rates, credit spreads and other market factors affect us, see "Quantitative and Qualitative Disclosures About Market Risk."

The value of our consumer loan portfolio is influenced by, among other factors, the U.S. macroeconomic environment, and unemployment rates in particular. We believe that losses are highly correlated to unemployment; therefore, we expect that an improvement in unemployment rates would support the value of our investment, while deterioration in unemployment rates would result in a decline in its value.

OUR PORTFOLIO

Our portfolio is currently composed of servicing related assets, residential
securities and loans and other investments, as described in more detail below.
Our asset allocation and target assets may change over time, depending on our
Manager's investment decisions in light of prevailing market conditions. The
assets in our portfolio are described in more detail below.



                                                                                  Percentage of
                                                                                      Total                                    Weighted
                                         Outstanding          Amortized             Amortized                                Average Life
                                         Face Amount        Cost Basis (A)         Cost Basis           Carrying Value        (years) (B)
Investments in:
Excess MSRs (C)                         $ 252,573,092      $        586,288                 10.7 %     $        676,917                6.0
Servicer Advances (C)                       2,661,130             2,665,551                 48.7 %            2,665,551                2.7
Agency RMBS                                 1,314,130             1,403,215                 25.7 %            1,402,764                4.1
Non-Agency RMBS                               872,866               566,760                 10.4 %              570,425                8.0
Residential Mortgage Loans                     57,552                33,539                  0.6 %               33,539                3.7
Consumer Loans (C)                          3,298,769               215,062                  3.9 %              215,062                3.2

Total / Weighted Average                  260,777,539      $      5,470,415                100.0 %     $      5,564,258                5.9


Reconciliation to GAAP total assets:
Cash and restricted cash                                                                                        305,332
Derivative assets                                                                                                35,926
Other assets                                                                                                     53,142

GAAP total assets                                                                                      $      5,958,658

(A) Net of impairment.

(B) Weighted average life is based on the timing of expected principal reduction on the asset.

(C) The outstanding face amount of Excess MSRs, servicer advances, and consumer loans is based on 100% of the face amount of the underlying residential mortgage loans, currently outstanding advances, and consumer loans respectively.

Servicing Related Assets

Excess MSRs

As of December 31, 2013, we had approximately $676.9 million estimated carrying value of Excess MSRs (held directly and through joint ventures). As of December 31, 2013, our completed investments represent an effective 33% to 80% interest in the Excess MSRs (held either directly or through joint ventures) on pools of mortgage loans with an aggregate UPB of approximately $252.6 billion. Nationstar is the servicer of the loans underlying all of our investments in Excess MSRs to date, and it earns a basic fee in exchange for providing all servicing functions. In addition, Nationstar retains a 20% to 35% interest in the Excess MSRs and all ancillary income associated with the portfolios. In our capacity as owner of the Excess MSR, we do not have any servicing duties, liabilities or obligations associated with the servicing of the portfolios underlying any of our Excess MSRs. However, we, through co-investments made by our subsidiaries, may separately agree to do so and have separately purchased the servicer advances, including the right to receive the basic fee component of related MSRs, on the Non-Agency portfolios (Pools 5, 10, 12, 17 and 18) underlying our Excess MSR investments. See "-Servicer Advances" below.


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Each of our Excess MSR investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan.

The tables below summarize the terms of our investments in Excess MSRs completed as of December 31, 2013.

        Summary of Direct Excess MSR Investments as of December 31, 2013



                                                                                                       MSR Component (A)                                           Excess MSR
                                      Commitment/        Initial        Current                                       Excess            Interest in         Purchase        Carrying
                                      Investment           UPB            UPB            Loan       MSR                 MSR             Excess MSR           Price           Value
                                         Date             (bn)          (bn) (B)       Type (C)    (bps)               (bps)                (%)               (mm)            (mm)
Pool 1                                      Dec-11      $     9.9      $      6.9      GSE             32  bps             26  bps                65 %     $     43.7      $     43.1
Pool 2                                      Jun-12           10.4             7.9      GSE             30                  22                     65 %           42.3            41.8
Pool 3                                      Jun-12            9.8             7.8      GSE             31                  22                     65 %           36.2            39.6
Pool 4                                      Jun-12            6.3             5.1      GSE             26                  17                     65 %           15.4            17.9
Pool 5 (D)                                  Jun-12           47.6            36.9      PLS             32                  13                     80 %          151.5           146.3
Pool 11 (direct portion) (E)                May-13             -              0.4      GSE             25                  19                     67 %            2.4             2.3
Pool 12 (D)                                 Sep-13            5.4             5.2      PLS             49                  26                     40 %           17.4            16.5
Pool 18 (F)                                 Nov-13            9.2             8.8      PLS             38                  16                     40 %           17.0            16.7

Total/Weighted Average                                  $    98.6      $     79.0                      33  bps             17  bps                         $    325.9      $    324.2

(A) The MSR is a weighted average as of December 31, 2013, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).

(B) As of December 31, 2013.

(C) "GSE" refers to loans in Fannie Mae or Freddie Mac securitizations. "PLS" refers to loans in private label securitizations.

(D) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR subsequent to December 31, 2013 (Note 18 to our consolidated financial statements included herein).

(E) A portion of our investment in Pool 11 was made as a direct investment, and the remainder was made as an investment through a joint venture accounted for as an equity method investee, as described in the chart below. The direct investment in Pool 11 includes loans that, upon refinancing by a third-party, became serviced by Nationstar and subject to a 67% Excess MSR owned by us.

(F) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of December 31, 2013 (Note 6 to our consolidated financial statements included herein).

    Summary of Excess MSR Investments Through Equity Method Investees as of
                               December 31, 2013



                                                                                               MSR Component (A)
                                                                                                                                  NRZ            Investee        NRZ        Investee
                                   Commitment/      Initial       Current                                    Excess           Interest in       Interest in   Effective     Carrying
                                   Investment         UPB           UPB           Loan      MSR                MSR             Investee         Excess MSR    Ownership      Value
                                      Date            (bn)        (bn) (B)      Type (C)   (bps)              (bps)               (%)             (%)(D)        (%)(D)        (mm)
Pool 6                                   Jan-13     $   13.0     $     10.2     GM             39  bps            24  bps               50 %        67%         33.5%      $     57.1
Pool 7                                   Jan-13         38.0           31.5     GSE            27                 16                    50 %        67%         33.5%           129.3
Pool 8                                   Jan-13         17.6           14.0     GSE            29                 20                    50 %        67%         33.5%            69.5
Pool 9                                   Jan-13         33.8           30.8     GM             40                 22                    50 %        67%         33.5%           161.8
Pool 10 (E)                              Jan-13         75.6           68.9     PLS            35                 11                    50 %      67-77%      33.5-38.5%        215.2
Pool 11 (indirect portion)  (F)          May-13         22.8           18.2     GSE            25                 19                    50 %        67%         33.5%            70.8

Total/Weighted Average                              $  200.8     $    173.6                    33  bps            16  bps                                                  $    703.7

(A) The MSR is a weighted average as of December 31, 2013, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).

(B) As of December 31, 2013.

(C) "GM" refers to loans in Ginnie Mae securitizations. "GSE" refers to loans in Fannie Mae or Freddie Mac securitizations. "PLS" refers to loans in private label securitizations.

(D) The equity method investee purchased an additional interest in a portion of Pool 10. Investee interest in Excess MSR and NRZ effective ownership in Pool 10 represent the range of ownership interests in the pool.


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(E) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of December 31, 2013 (Note 6 to our consolidated financial statements included herein).

(F) A portion of our investment in Pool 11 was made as a direct investment and the remainder was made as an investment through a joint venture accounted for as an equity method investee, as described in the chart above.

The tables below summarize the terms of our investments in Excess MSRs that were not yet completed as of December 31, 2013.

      Summary of Pending Excess MSR Investments (Committed but Not Closed)




                                                                                                             MSR Component (A)                                                          NRZ
                                                                                                                                                                   Direct             Excess
                                                                                                                                                  NRZ            Interest in            MSR
                                                               Initial        Current                                       Excess            Interest in          Excess             Initial
                                             Commitment          UPB            UPB            Loan       MSR                 MSR              Investee              MSR            Investment
                                                Date            (bn)          (bn) (B)       Type (C)    (bps)               (bps)                (%)                (%)             (mm) (D)
Pool 13 (Direct Investment)                       Nov-13      $     7.1      $      7.1      GSE             25  bps             19  bps               N/A                 33 %     $      17.3
Pool 14 (Direct Investment)                       Nov-13            0.7             0.7      GSE             25                  19                    N/A                 33 %             1.7
Pool 15 (Direct Investment)                       Nov-13            3.2             3.2      GSE             38                  28                    N/A                 33 %             9.2
Pool 16 (Direct Investment)                       Nov-13            2.1             2.1      GSE             28                  18                    N/A                 33 %             4.1
Pool 17 (Direct Investment) (E)                   Nov-13            0.9             0.9      PLS             29                  14                    N/A                 33 %             1.5

Total/Weighted Average                                        $    14.0      $     14.0                      29  bps             21  bps                                            $      33.8

(A) The MSR is a weighted average as of the commitment date, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).

(B) As of commitment date.

(C) "PLS" refers to loans in private label securitizations. "GSE" refers to loans in Fannie Mae or Freddie Mac securitizations.

(D) The actual amount invested will be based on the UPB at the time of close.

(E) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of December 31, 2013 (Note 6 to our consolidated financial statements included herein).

Subsequent to December 31, 2013, we invested approximately $19.1 million in Excess MSRs on a portfolio of PLS residential mortgage loans with an UPB of approximately $8.1 billion. We have remaining commitments of approximately $1.5 million to fund additional investments in this portfolio of PLS residential mortgage loans, which have not yet closed and will increase the UPB by approximately $0.9 billion. In addition, we have committed $32.3 million to invest in Excess MSRs on portfolios of GSE residential mortgage loans with an aggregate outstanding UPB of $13.1 billion. In each transaction, we agreed to acquire a one-third interest in Excess MSRs on the portfolio. Fortress-managed funds and Nationstar each agreed to acquire a one-third interest in the Excess MSRs. Nationstar as servicer will perform all servicing and advancing functions, and retain the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolios. Commitments related to GSE residential mortgage loans are contingent upon GSE approval of Nationstar to service such loans and transfer Excess MSRs to us.

The following table summarizes our Excess MSR investments closed subsequent to December 31, 2013:

                                                                                                            MSR Component (A)                                                      NRZ
                                                                                                                                                              Direct             Excess
                                                                                                                                                            Interest in            MSR
                                                               Initial        Current                                      Excess           Interest          Excess             Initial
                                             Commitment          UPB            UPB           Loan       MSR                 MSR            Investee            MSR            Investment
                                                Date            (bn)         (bn) (B)       Type (C)    (bps)               (bps)              (%)              (%)             (mm) (D)
Pool 17 (Direct Investment) (E)                   Nov-13      $     8.1      $     8.1      PLS             34                  19                N/A                 33 %     $      19.1

Total/Weighted Average                                        $     8.1      $     8.1                      34  bps             19  bps                                        $      19.1

(A) The MSR is a weighted average as of the date the transaction closed and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).

(B) As of the date the transaction closed.

(C) "PLS" refers to loans in private label securitizations.

(D) Amounts invested based on the UPB at the time of close.

(E) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of December 31, 2013 (Note 6 to our consolidated financial statements included herein).


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The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of December 31, 2013 (dollars in thousands):

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