RITHM CAPITAL CORP. 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 unaudited Condensed Consolidated Financial Statements and notes thereto, and with "Risk Factors."
GENERAL
New Residential is a publicly traded REIT primarily focused on opportunistically investing in, and actively managing, investments related to the residential real estate market. We seek to generate long-term value for our investors by using our investment expertise to identify and invest primarily in mortgage related assets, including operating companies, that offer attractive risk-adjusted returns. Our investment strategy also involves opportunistically pursuing acquisitions and seeking to establish strategic partnerships that we believe enable us to maximize the value of the mortgage loans we originate and service by offering products and services to customers, servicers, and other parties through the lifecycle of transactions that affect each mortgage loan and underlying residential property. For more information about our investment guidelines, see "Item 1. Business - Investment Guidelines" of our annual report on Form 10-K for the year endedDecember 31, 2019 .
As of
We have elected to be treated as a REIT for
OUR MANAGER
We are externally managed by an affiliate of
On
MARKET CONSIDERATIONS
Beginning in the first quarter of 2020 and continuing into the second quarter, financial and mortgage-related asset markets experienced significant volatility as a result of the ongoing COVID-19 pandemic. While volatility generally subsided in May and June of 2020, it may return and continue throughout 2020 due to the uncertainty relating to the duration and ongoing impact of the pandemic, including efforts to "reopen" theU.S. economy. The significant dislocation in the financial markets caused, among other things, credit spread widening, a sharp decrease in interest rates, higher unemployment levels, unprecedented illiquidity in repurchase agreement financing, and declines in the fair value of many of our investments. These conditions continue to put pressure on the mortgage REIT industry, including financing operations, asset pricing and liquidity demands. The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets, which is driven by numerous factors, including the supply and demand for mortgage, housing and credit assets in the marketplace, the ability of borrowers of loans that underlie our investments to meet their payment obligations, the terms and availability of adequate financing and capital, general economic and real estate conditions, the impact of government actions in the real estate, mortgage, credit and financial markets, and the credit performance of our credit sensitive assets.
The market conditions discussed below significantly influence our investment
strategy and results, many of which have been significantly impacted since
Global andU.S. equity markets experienced the steepest decline since the 2008 recession during the first quarter of 2020, driven by the response to the COVID-19 pandemic. As a result of stay-at-home or shelter-in-place orders issued by state and local governments throughout the country, many businesses switched to remote work or canceled or reduced operations. Consumers responded by reducing or redirecting their spending. As summarized in the table below, the latestU.S. economic data shows that theU.S. economy contracted withU.S. gross domestic product ("GDP") decreasing during the first quarter of 2020. 66 --------------------------------------------------------------------------------
Three Months Ended
March 31, December 31,
2020 2019
(Percent change from the preceding quarter)
Real GDP (5.0) % 2.1 %
The U.S. labor market remained strong through February before declining as many
businesses began responding to the stay-at-home orders by laying off employees.
As summarized in the table below, according to the U.S. Department of Labor , the
U.S. unemployment rate increased during the first half of 2020.
June 30, March 31, December 31,
2020 2020 2019
Unemployment rate 11.10 % 4.40 % 3.50 %
The residential real estate market displayed signals of modest growth into the
first quarter of 2020. We believe the housing market will remain favorable
through 2020 and 2021. According to the June 2020 Freddie Mac Economic and
Housing Market Outlook, total originations are forecasted to be $2,916 billion
and $2,524 billion , respectively. The 2020 refinance market is forecasted to be
$1,872 billion , or 64% of total forecasted originations, with a shift to the
purchase market forecast for 2021, reducing the refinance market to $1,279
billion , or 51%. As summarized in the table below, the latest data released by
the S&P Dow Jones Indices for their S&P CoreLogic Case-Shiller Home Price
Indices showed home price increases in 2020.
March 31, December 31,
2020 2019
(Percent change from the preceding month)
Change in annual home price 3.50 % 2.50 %
As summarized in the table below, the 10-year
June 30 ,March 31 ,
2020 2020 2019
10-year U.S. Treasury rate 0.66 % 0.70 % 1.92 %
30-year fixed mortgage rate 3.16 % 3.45 % 3.72 %
During the first half of 2020, the Federal Reserve took a number of actions to
stabilize markets and mitigate the negative impact of the COVID-19 pandemic. On
March 15, 2020 , the Federal Reserve announced a $700 billion asset purchase
program to provide liquidity to the U.S. Treasury and Agency RMBS markets.
Specifically, the Federal Reserve announced that it would purchase at least $500
billion of U.S. Treasuries and at least $200 billion of Agency RMBS. The Federal
Reserve also lowered the federal funds rate by 100 basis points to a range of
0.0% - 0.25%, after having already lowered the federal funds rate by 50 basis
points on March 3, 2020 . The markets for U.S. Treasuries, mortgage-backed
securities and other mortgage and fixed income markets continued to deteriorate
following this announcement as investors liquidated investments in response to
the economic crisis. Many of these markets experienced severe dislocations
during the second half of March, which resulted in forced selling of assets to
satisfy margin calls. To address these issues in the fixed income and funding
markets, on March 23, 2020 , the Federal Reserve announced a program to acquire
U.S. Treasuries and Agency RMBS in the amounts needed to support a smooth
functioning market. Since then, the Federal Reserve and the Federal Housing
Finance Agency ("FHFA") have taken various other steps to support certain other
fixed income markets, to support mortgage servicers and to implement various
portions of the CARES Act. The FHFA announced in April 2020 that the GSEs would
limit mortgage servicers' servicer advance obligations on GSE loans in
forbearance to a period of four months, in addition to other policies announced
by FHFA and HUD designed to mitigate liquidity risk for mortgage servicers and
provide temporary relief and protections for homeowners facing financial
hardship due to the COVID-19 pandemic. In addition, governors of several states
have issued executive orders, and certain state legislatures have enacted laws,
prohibiting evictions and foreclosures for specified periods of time. Many
courts have enacted emergency rules delaying hearings related to evictions or
foreclosures. The scope and nature of the actions the Federal Reserve and other
governmental authorities will ultimately undertake are unknown due to, among
other factors, the COVID-19 pandemic and the upcoming presidential and
Congressional elections in the United States . There can be
67
--------------------------------------------------------------------------------no assurance as to how, in the long term, these and other actions, as well as the negative impacts from the ongoing COVID-19 pandemic, will affect the efficiency, liquidity and stability of the financial, credit and mortgage markets, and thus, our business.
We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as ofJune 30, 2020 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as ofJune 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may materially differ from those estimates. The COVID-19 pandemic and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity and ability to pay distributions. SERVICING The CARES Act allows borrowers with federally backed mortgage loans who are affected by COVID-19 to request temporary loan forbearance. Servicers must provide such forbearance for up to 180 days if requested by the borrower. Borrowers may request additional forbearance period of up to 180 days. During any period of forbearance granted pursuant to the CARES Act, servicers are also required to provide other relief to borrowers, including, but not limited to, suspending late fees and ceasing foreclosure and eviction activity. Generally, borrowers will be required to repay their forborne mortgage payments after the forbearance period ends, unless an alternate loss mitigation solution is reached, which may include extensions of forbearance, repayment plans, payment deferrals, and loan modifications, depending on the borrower's situation, account status, and applicable investor guidelines. Loan forbearances may continue to rise in the near term in response to the increasing unemployment rate. Additionally, the continued economic downturn may result in many borrowers in forbearance not returning to their jobs and becoming delinquent at the end of their forbearance periods. Given the unprecedented circumstances caused by the COVID-19 pandemic, it is difficult to predict the severity and timing of this potential increase in forbearances and delinquencies. An increase in loans in forbearance or an increase in delinquencies may temporarily reduce our servicing revenue or may delay the timing of revenue recognition. We earn fees for servicing and subservicing mortgage loans underlying our investments in MSRs. We collect servicing and subservicing fees, generally expressed as a percent of UPB, from the borrowers' payments. In addition to servicing and subservicing fees, we also earn late fees, prepayment penalties, float earnings and other ancillary fees. These revenues are reported as Servicing revenue, net in our Condensed Consolidated Statements of Income. We recognize servicing and subservicing fees as revenue when the fees are earned, which is generally when the borrowers' payments are collected or when loans are modified or liquidated through the sale of the underlying real estate collateral or otherwise. In accordance with the GSE andGinnie Mae guides, we do not collect any servicing fees on delinquent loans underlying our GSE andGinnie Mae MSR portfolio. In addition, for certain GSE loans, we may not recognize any servicing fees during the forbearance periods. Conditions will also affect ancillary income timing and may reduce such income. While higher delinquencies tend to increase the assessment of some ancillary income, such as late fees, we do not assess late fees on loans in forbearance. The deferral of servicing fee collections due to forbearances is not expected to significantly impact our total cumulative revenue over the life of the loan but will reduce near term revenue and cash flow. An increase in loans in forbearance or an increase in delinquencies would increase our cost to service and operating expenses. Loans in default typically require more intensive effort by the servicer or subservicer to bring the loan current or manage the foreclosure process. As forbearance periods end, additional efforts will be required to administer repayment plans, loan modifications, extensions of forbearance, payment deferrals, or other loss mitigation solutions. Upon the successful completion of the forbearance period for a GSE loan where the borrower is brought current through a payment deferral, repayment plan, or flex modification, our subservicers will earn an incentive fee from the GSEs as compensation for the additional cost to service.
An increase in loans in forbearance or an increase in delinquencies would increase our servicing advances and may increase the related interest expense.
CAPITAL ACTIVITIES
We have sought to increase our liquidity and stabilize financing sources, both
to strengthen our balance sheet and take advantage of opportunities when market
conditions stabilize. Prior to the recent turmoil in the financial markets, we
financed the majority of our investments with repurchase agreements and other
short-term financing arrangements that contained daily mark-to-market
provisions. As a result of the severe market dislocations related to the
COVID-19 pandemic and, more
68
--------------------------------------------------------------------------------
specifically, the unprecedented illiquidity in repurchase agreement financing,
we procured and continue to procure financing, such as securitizations and term
financings, that provide less or no exposure to fluctuations in the daily
collateral repricing determinations. While the cost of funds for such financings
may be greater relative to repurchase agreement funding, we believe, given
current market conditions, financing with non-daily mark-to-market provisions
may allow us to better manage our liquidity risk and reduce exposures to events
like those caused by the COVID-19 pandemic. We will continue in the near term to
explore additional financing arrangements to further strengthen our balance
sheet and position ourselves for future investment opportunities, including,
without limitation, additional issuances of our equity and debt securities and
longer-termed financing arrangements; however, there can be no assurance that we
will be able to access any such financing or to successfully negotiate the size,
timing or terms thereof.
On May 19, 2020 , the Company entered into a three-year senior secured term loan
facility agreement in the principal amount of $600.0 million . See Note 11 to our
Condensed Consolidated Financial Statements for further details.
PROPOSED CHANGES TO LIBOR
LIBOR is used extensively in theU.S. and globally as a "benchmark" or "reference rate" for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either cause LIBOR to stop publication immediately or cause LIBOR's regulator to determine that its quality has degraded to the degree that it is no longer representative of its underlying market. TheU.S. and other countries are currently working to replace LIBOR with alternative reference rates. In theU.S. , the Alternative Reference Rates Committee, or ARRC, has identified the Secured Overnight Financing Rate, or SOFR, as its preferred alternative rate forU.S. dollar-based LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized byU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. Some market participants may continue to explore whether otherU.S. dollar-based reference rates would be more appropriate for certain types of instruments. The ARRC has proposed a paced market transition plan to SOFR, and various organizations are currently working on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity, and evaluating the related risks and our exposure.
OUR PORTFOLIO
Our portfolio, as ofJune 30, 2020 , is composed of servicing and origination, including our subsidiary operating entities, residential securities and loans and other investments, as described in more detail below (dollars in thousands).Residential Securities Servicing and Origination and Loans MSR Related Total Servicing Real Estate Residential Origination Servicing Investments Elimination(A) and Origination Securities Mortgage Loans Consumer Loans Corporate TotalJune 30, 2020 Investments$ 1,750,568 $ -$ 6,039,020 $ -$ 7,789,588 $
6,144,236
159,242 83,066 362,659 - 604,967 111,571 19,210 7,477 269,983 1,013,208
Restricted cash 3,224 5,209 87,199 - 95,632 11,259 - 32,041 - 138,932
Other assets 231,088 197,243 3,166,414 - 3,594,745 217,354 1,356,432 60,095 27,315 5,255,941
Goodwill 11,836 12,540 5,092 - 29,468 - - - - 29,468
Total assets $ 2,155,958 $ 298,058 $ 9,660,384 $ - $ 12,114,400 $ 6,484,420 $ 3,989,956 $ 866,075 $ 297,298 $ 23,752,149
Debt $ 1,607,829 $ 6,669 $ 6,383,566 $ - $ 7,998,064 $
5,314,581
201,530 55,774 209,335 - 466,639 119,506 1,119,831 3,916 68,942 1,778,834
Total liabilities 1,809,359 62,443 6,592,901 - 8,464,703 5,434,087 3,135,307 726,755 602,325 18,363,177
Total equity 346,599 235,615 3,067,483 - 3,649,697 1,050,333 854,649 139,320 (305,027) 5,388,972Noncontrolling interests in equity of consolidated subsidiaries 15,186 - 40,333 - 55,519 - - 41,162 - 96,681 Total New Residential stockholders' equity$ 331,413 $ 235,615 $ 3,027,150 $ -$ 3,594,178 $ 1,050,333 $ 854,649 $ 98,158 $ (305,027) $ 5,292,291 Investments in equity method investees $ - $ -$ 147,017 $ -$ 147,017 $ - $ - $ - $ -$ 147,017 Operating Investments Origination 69
-------------------------------------------------------------------------------- For the six months endedJune 30, 2020 , NewRez's loan origination volume was$19.7 billion , up from$6.0 billion in the year prior. During the six months endedJune 30, 2020 , the continued lower interest rate environment, increased refinance activity by borrowers, integration ofDitech's origination platform, and increased market share helped drive growth across all channels. Gain on sale margins in the three- and six-month periods endedJune 30, 2020 , were 2.87% and 1.98% as compared to 1.56% and 1.73% in 2019. In response to market disruption caused by the COVID-19 pandemic, and consistent with our actions to de-risk our balance sheet and preserve liquidity, inMarch 2020 , NewRez shifted its focus to higher quality GSE and government loans, ceased non-qualified mortgage loan ("Non-QM") production due to securitization market illiquidity, and paused wholesale and correspondent channel originations to reduce our pipeline and minimize hedge and margin risk. We re-entered the wholesale and correspondent channels inMay 2020 . While we expect gain on sale margins to revert to historical levels over time, we believe demand will continue to exceed supply for the balance of 2020, resulting in favorable market conditions for the rest of the year. Included in our Origination segment are the financial results of two affiliated businesses,E Street Appraisal Management LLC ("E Street") andAvenue 365 Lender Services, LLC ("Avenue 365"). E Street offers appraisal valuation services and Avenue 365 provides title insurance and settlement services to NewRez. OnJuly 13, 2020 , NewRez announced a strategic relationship with Salesforce, a global leader in Customer Relationship Management (CRM), focused on creating a more integrated experience for customers across our origination and servicing operations. NewRez will also serve as an industry design advisor to Salesforce for its mortgage solutions platform. 70 -------------------------------------------------------------------------------- The charts below provide selected operating statistics for our Origination segment: Unpaid Principal Balance for the Six Months Ended June 30, 2020 June 30, 2019 Change
Production by Channel (in millions)
Retail / Shelter $ 1,597
Direct to Consumer / Retention 5,162 1,343 3,819 Wholesale 2,916 1,885 1,031 Correspondent 10,009 1,889 8,120 Total Production by Channel $ 19,684
Production by Product (in millions)
Agency $ 11,901$ 2,942 $ 8,959 Government 7,133 2,176 4,957 Non-QM 365 638 (273) Non-Agency 248 223 25 Other 37 44 (7) Total Production by Product $ 19,684$ 6,023 $ 13,661 % Purchase 27 % 58 % (31) % % Refinance 73 % 42 % 31 % June 30, 2020 June 30, 2019 Change
Origination Revenue (in thousands)
Gain on loans originated and sold(A)$ 264,231 $
25,118
Gain (loss) on settlement of mortgage loan derivative instruments(B) (221,881) (29,278) (192,603) MSRs retained on transfer of loans(C) 256,058 91,289 164,769 Other(D) 16,026 7,721 8,305 Realized gain on sale of originated mortgage loans, net$ 314,434 $
94,850
Change in fair value of loans$ 33,510 $
24,153
Change in fair value of interest rate lock commitments 124,057 10,909 113,148 Change in fair value of derivative instruments (31,849) (5,157) (26,692) Unrealized origination revenue$ 125,718 $
29,905
Gain on originated mortgage loans, held-for-sale, net(E) (F)$ 440,152 $ 124,755 $ 315,397 Pull through adjusted lock volume$ 22,202,594 $
7,195,314
Revenue as a percentage of pull through adjusted lock volume 1.98 % 1.73 % 0.25 % (A)Includes loan origination fees of$386.8 million and$85.9 million for the six months endedJune 30, 2020 and 2019, respectively. (B)Represents settlement of forward securities delivery commitments utilized as an economic hedge for mortgage loans not included within forward loan sale commitments. (C)Represents the initial fair value of the capitalized mortgage servicing rights upon loan sales with servicing retained. (D)Includes fees for services associated with the loan origination process, and the provision for repurchase reserves, net of release. (E)Excludes$49.6 million and$43.4 million of gain on originated mortgage loans, held-for-sale, net for the six months endedJune 30, 2020 and 2019, respectively, related to the MSR Related Investments, Servicing, and Residential Mortgage Loans segments, as well as intercompany eliminations (Note 8 to the Condensed Consolidated Financial Statements). (F)Excludes mortgage servicing rights revenue on recaptured loan volume delivered back to NRM. 71 -------------------------------------------------------------------------------- Total Gain on originated mortgage loans, held-for-sale, net, increased for the six months endedJune 30, 2020 compared to the same period in 2019 primarily driven by the higher volume from all our Channels.
Servicing
Our servicing business operates through a performing loan servicing division,
NewRez Servicing and a special servicing division, Shellpoint Mortgage Servicing
("SMS"). NewRez Servicing services performing Agency and government-insured
loans. SMS services delinquent Agency loans and Non-Agency loans on behalf of
the owners of the underlying mortgage loans.
We completed more than 187,000 forbearances in the first half of 2020, 99% of
which were CARES Act or COVID-19 related programs. SMS is generally entitled to
receive incentive fees, including fees paid in connection with the completion of
a repayment plan or payment deferral plan. Incentives are expected to range from
$500 to a maximum of $1,000 per loan, subject to certain conditions, based upon
the final form of the forbearance resolution.
During the six months ended June 30, 2020 , we boarded approximately 610,000
loans, completing the remaining Ditech acquisition transfers. Prior to March
2020 , our cost to service continues to decline as we achieve the benefits of
scale and create efficiencies. Annualized direct cost to service per loan has
declined 37% to $136 per loan in the first half of 2020 from $195 per loan in
the prior year. Our cost to service has increased since March 2020 in connection
with supporting performing homeowners navigate forbearance programs and a rise
in delinquencies. Higher costs are expected to be offset by incentive and
performance fees in the future as delinquencies are resolved. Direct cost to
service is comprised of costs associated with administering loans and does not
include corporate overhead allocations.
The table below provides the mix of our serviced assets portfolio between
subserviced performing servicing on behalf of New Residential, NRM or NewRez
(labeled as "Performing Servicing") and subserviced non-performing, or special
servicing (labeled as "Special Servicing") for third parties and delinquent
loans subserviced for other New Residential subsidiaries as of June 30, 2020 and
2019.
Unpaid Principal Balance
June 30, 2020 June 30, 2019 Change
Performing Servicing (in millions)
MSR Assets $ 173,619 $ 100,912 $ 72,707
Acquired Residential Whole Loans $ 1,965 $ 1,239 $ 726
Total Performing Servicing $ 175,584 $
102,151
Special Servicing (in millions) MSR Assets$ 12,127 $ 2,074 $ 10,053 Acquired Residential Whole Loans$ 7,185 $ 4,559 $ 2,626 Third Party$ 82,688 $ 50,442 $ 32,246 Total Special Servicing$ 102,000 $ 57,075 $ 44,925 Total Servicing Portfolio$ 277,584 $ 159,226 $ 118,358 Agency Servicing (in millions) MSR Assets$ 128,714 $ 75,331 $ 53,383 Acquired Residential Whole Loans $ - $ - $ - Third Party$ 20,069 $ 3,837 $ 16,232 Total Agency Servicing$ 148,783 $ 79,168 $ 69,615 Government Servicing (in millions) MSR Assets$ 56,585 $ 27,054 $ 29,531 Acquired Residential Whole Loans $ - $ - $ - Third Party$ 1,569 $ 1,980 $ (411) Total Government Servicing$ 58,154 $ 29,034 $ 29,120 Non-Agency (Private Label) Servicing (in millions) MSR Assets $ 447 $ 601$ (154) Acquired Residential Whole Loans$ 9,150 $ 5,798 $ 3,352 Third Party$ 61,050 $ 44,625 $ 16,425 Total Non-Agency (Private Label) Servicing$ 70,647 $ 51,024 $ 19,623 Total Servicing Portfolio$ 277,584 $ 159,226 $ 118,358 72
--------------------------------------------------------------------------------
Six Months Ended
June 30, 2020 June 30, 2019 Change
Base Servicing Fees (in thousands): MSR Assets$ 68,671 $ 20,532 $ 48,139 Acquired Residential Whole Loans 6,209 3,211 2,998 Third Party 59,610 34,646 24,964 Total Base Servicing Fees$ 134,490 $ 58,389 $ 76,101 Other Fees (in thousands): Incentive fees$ 16,193 $ 16,985 $ (792) Ancillary fees 20,153 13,774 6,379 Boarding fees 6,078 2,463 3,615 Other fees 6,713 472 6,241 Total Other Fees(A)$ 49,137 $ 33,694 $ 15,443 Total Servicing Fees$ 183,627 $ 92,083 $ 91,544
(A)Includes other fees earned from third parties of
MSR Related Investments
MSRs and MSR Financing Receivables
As of
We finance our investments in MSRs and MSR financing receivables with short- and medium-term bank and public capital market notes. These borrowings are primarily recourse debt and bear both fixed and variable interest rates offered by the counterparty for the term of the notes of a specified margin over LIBOR. The public notes are typically issued with a collateral coverage percentage, which is a quotient expressed as a percentage equal to the aggregate note amount divided by the market value of the underlying collateral. The market value of the underlying collateral is generally updated on a quarterly basis and if the collateral coverage percentage becomes greater than or equal to a collateral trigger, generally 90%, we may be required to add funds, pay down principal on the notes, or add additional collateral to bring the collateral coverage percentage below 90%. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday."
See Note 11 to our Condensed Consolidated Financial Statements for further information regarding financing of our MSRs and MSR financing receivables.
We have contracted with certain subservicers and, in relation to certain MSR purchases, interim subservicers, to perform the related servicing duties on the residential mortgage loans underlying our MSRs. As ofJune 30, 2020 , these subservicers include PHH,LoanCare , Mr. Cooper, and Flagstar, which subservice 22.2%, 20.8%, 17.7%, and 0.8% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 38.5% of the underlying UPB of the related mortgages is subserviced by NewRez (Note 1 to our Condensed Consolidated Financial Statements). We have entered into agreements with certain subservicers pursuant to which we are entitled to receive the MSR on any refinancing by the subservicer or by NewRez of a loan in the related original portfolio. We are generally obligated to fund all future servicer advances related to the underlying pools of mortgage loans on our MSRs and MSR financing receivables. Generally, we will advance funds when the borrower fails to meet, including forbearances, contractual payments (e.g. principal, interest, property taxes, insurance). We will also advance funds to maintain and report foreclosed real estate properties on behalf of investors. Advances are recovered through claims to the related investor and subservicers. Pursuant to our servicing agreements, we are obligated to make certain advances on mortgage loans to be in compliance with applicable requirements. In certain instances, the subservicer is required to reimburse us for any advances that were deemed nonrecoverable or advances that were not made in accordance with the related servicing contract. 73 -------------------------------------------------------------------------------- We finance our investments in servicer advances with short- and medium-term collateralized borrowings. These borrowings are non-recourse committed facilities that are not subject to margin calls and bear both fixed and variable interest rates offered by the counterparty for the term of the notes, generally less than one year, of a specified margin over LIBOR. See Note 11 to our Condensed Consolidated Financial Statements for further information regarding financing of our servicer advances.
See Note 5 to our Condensed Consolidated Financial Statements for further information regarding our investments in MSR financing receivables. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations-Change in Fair Value of Investments in MSR Financing Receivables" for further information regarding the impact of the economic uncertainties resulting from COVID-19 and the associated impacted on our MSR investments.
The table below summarizes our investments in MSRs and MSR financing receivables as ofJune 30, 2020 . Current UPB Weighted Average MSR Carrying Value (millions) (bps) (millions) MSRs GSE$ 315,552.9 28 bps$ 2,927.1 Non-Agency 6,065.8 45 18.4 Ginnie Mae 57,779.1 44 605.7 MSR Financing Receivables GSE 43,073.3 27 382.1 Non-Agency 71,380.2 48 1,087.8 Total$ 493,851.3 33 bps$ 5,021.1
The following table summarizes the collateral characteristics of the loans
underlying our investments in MSRs and MSR financing receivables as of
Collateral Characteristics
Three Month Three Month Three Month Three Month
Current Current Principal WA FICO WA Maturity Average Loan Adjustable Rate Average Average Average Average
Carrying Amount Balance Number of Loans Score(A) WA Coupon (months) Age (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
MSRs
GSE $ 2,927,046 $ 315,552,886 2,019,853 746 4.2 % 267 69 3.2 % 23.9 % 23.7 % 0.1 % 12.6 %
Non-Agency 18,400 6,065,805 130,637 668 7.1 % 306 165 3.7 % 28.4 % 26.6 % 2.3 % 3.4 %
Ginnie Mae 605,713 57,779,101 290,806 686 3.9 % 322 34 2.8 % 21.2 % 21.0 % 0.2 % 22.3 %
MSR Financing Receivables
GSE 382,078 43,073,285 192,591 746 4.3 % 291 37 1.0 % 40.8 % 40.7 % 0.1 % 5.6 %
Non-Agency 1,087,849 71,380,202 525,460 643 4.3 % 304 173 14.5 % 9.1 % 7.0 % 2.3 % 3.5 %
Total $ 5,021,086 $ 493,851,279 3,159,347 723 4.2 % 281 78 4.6 % 23.0 % 22.5 % 0.5 % 11.7 %
Collateral Characteristics
Delinquency 30 Delinquency 60 Delinquency 90+ Loans in Real Estate Loans in
Days(F) Days(F) Days(F) Foreclosure Owned Bankruptcy
MSRs
GSE 1.9 % 1.7 % 3.1 % 0.4 % - % 0.3 %
Non-Agency 3.6 % 2.1 % 14.0 % 3.7 % 0.6 % 2.9 %
Ginnie Mae 4.2 % 3.2 % 6.1 % 1.1 % 0.1 % 1.0 %
MSR Financing
Receivables
GSE 1.8 % 2.2 % 3.6 % - % - % 0.1 %
Non-Agency 6.0 % 2.2 % 2.5 % 7.9 % 1.4 % 2.7 %
Total 2.8 % 2.0 % 3.6 % 1.5 % 0.2 % 0.7 %
(A)The WA FICO score is based on the weighted average of information provided by
the loan servicer on a monthly basis. The loan servicer generally updates the
FICO score when loans are refinanced or become delinquent.
(B)Adjustable Rate Mortgage % represents the percentage of the total principal
balance of the pool that corresponds to adjustable rate mortgages.
74
--------------------------------------------------------------------------------
(C)Three Month Average CPR, or the constant prepayment rate, represents the
annualized rate of the prepayments during the quarter as a percentage of the
total principal balance of the pool.
(D)Three Month Average CRR, or the voluntary prepayment rate, represents the
annualized rate of the voluntary prepayments during the quarter as a percentage
of the total principal balance of the pool.
(E)Three Month Average CDR, or the involuntary prepayment rate, represents the
annualized rate of the involuntary prepayments (defaults) during the quarter as
a percentage of the total principal balance of the pool.
(F)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent
the percentage of the total principal balance of the pool that corresponds to
loans that are delinquent by 30-59 days, 60-89 days or 90 or more days,
respectively.
Excess MSRs
The tables below summarize the terms of our investments in Excess MSRs completed
as of
Summary of Direct Excess MSR Investments as of
MSR Component(A) Excess MSR
Weighted
Current UPB Weighted Average Average Excess Interest in Carrying Value
(billions) MSR (bps) MSR (bps) Excess MSR (%) (millions)
Agency $ 39.8 29 bps 21 bps 32.5% - 66.7% $ 186.9
Non-Agency(B) 41.8 35 15 33.3% - 100.0% $ 159.5
Total/Weighted Average $ 81.6 32 bps 18 bps $ 346.4
(A)The MSR is a weighted average as of June 30, 2020 , and the Excess MSR
represents the difference between the weighted average MSR and the basic fee
(which fee remains constant).
(B)Serviced by Mr. Cooper and SLS, we also invested in related Servicer Advance
Investments, including the basic fee component of the related MSR (Note 6 to our
Condensed Consolidated Financial Statements) on $28.8 billion UPB underlying
these Excess MSRs.
Summary of Excess MSR Investments Through Equity Method Investees as of June 30,
2020
MSR Component(A)
Weighted New Residential Investee New Residential
Current UPB Weighted Average Average Excess Interest in Interest in Effective Investee Carrying
(billions) MSR (bps) MSR (bps) Investee (%) Excess MSR (%) Ownership (%) Value (millions)
Agency $ 31.9 33 bps
22 bps 50.0 % 66.7 % 33.3 % $ 200.7 (A)The MSR is a weighted average as of
The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as ofJune 30, 2020 (dollars in thousands): Collateral Characteristics Current Current Three Month Three Month Three Month Three Month Carrying PrincipalWA FICO WA Maturity Average Loan Adjustable Rate Average Average Average Average Amount Balance Number of Loans Score(A) WA Coupon (months)
Age (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
Agency
Original Pools $ 133,517 $ 28,268,374 211,521 724 4.6 % 238 123 1.7 % 16.1 % 15.7 % 0.5 % 14.8 %
Recaptured Loans 53,411 11,565,289 70,561 725 4.3 % 272 47 0.1 % 16.7 % 16.6 % 0.2 % 36.4 %
$ 186,928 $ 39,833,663 282,082 725 4.5 % 249 99 1.2 % 16.3 % 15.9 % 0.4 % 21.7 %
Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools $ 135,615 $ 37,960,130 217,004 671 4.6 % 274 171 9.4 % 11.8 % 10.3 % 1.7 % 10.0 %
Recaptured Loans 23,907 3,872,832 17,961 737 4.2 % 280 32 0.1 % 23.4 % 23.5 % - % 36.0 %
$ 159,522 $ 41,832,962 234,965 676 4.5 % 274 159 8.0 % 12.7 % 11.4 % 1.6 % 14.4 %
Total/Weighted Average(H) $ 346,450 $ 81,666,625 517,047 699 4.5 % 262 131 4.4 % 14.4 % 13.5 % 1.0 % 18.4 %
75--------------------------------------------------------------------------------
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(G) 60 Days(G) 90+ Days(G) Foreclosure Owned Bankruptcy
Agency
Original Pools 3.5 % 3.8 % 1.3 % 0.5 % 0.2 % 0.1 %
Recaptured Loans 3.1 % 3.7 % 0.8 % 0.2 % - % - %
3.4 % 3.8 % 1.2 % 0.4 % 0.1 % 0.1 %
Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools 11.6 % 9.7 % 5.3 % 5.2 % 0.8 % 1.7 %
Recaptured Loans 2.7 % 3.0 % 0.5 % 0.1 % - % - %
10.8 % 9.1 % 4.9 % 4.7 % 0.7 % 1.5 %
Total/Weighted Average(H) 7.3 % 6.6 % 3.1 % 2.7 % 0.4 % 0.8 %
(A)The WA FICO score is based on the weighted average of information provided by
the loan servicer on a monthly basis. The loan servicer generally updates the
FICO score when loans are refinanced or become delinquent.
(B)Adjustable Rate Mortgage % represents the percentage of the total principal
balance of the pool that corresponds to adjustable rate mortgages.
(C)Three-Month Average CPR, or the constant prepayment rate, represents the
annualized rate of the prepayments during the quarter as a percentage of the
total principal balance of the pool.
(D)Three-Month Average CRR, or the voluntary prepayment rate, represents the
annualized rate of the voluntary prepayments during the quarter as a percentage
of the total principal balance of the pool.
(E)Three-Month Average CDR, or the involuntary prepayment rate, represents the
annualized rate of the involuntary prepayments (defaults) during the quarter as
a percentage of the total principal balance of the pool.
(F)We also invested in related Servicer Advance Investments, including the basic
fee component of the related MSR (Note 6 to our Condensed Consolidated Financial
Statements) on $28.8 billion UPB underlying these Excess MSRs.
(G)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent
the percentage of the total principal balance of the pool that corresponds to
loans that are delinquent by 30-59 days, 60-89 days or 90 or more days,
respectively.
(H)Weighted averages exclude collateral information for which collateral data
was not available as of the report date.
The following table summarizes the collateral characteristics as of June 30,
2020 of the loans underlying Excess MSR investments made through joint ventures
accounted for as equity method investees (dollars in thousands). For each of
these pools, we own a 50% interest in an entity that invested in a 66.7%
interest in the Excess MSRs.
Collateral Characteristics
New Residential
Current Current Effective Three Month Three Month Three Month Three Month
Carrying Principal Ownership Number WA FICO WA Maturity Average Loan Adjustable Rate Average Average Average Average
Amount Balance (%) of Loans Score(A) WA Coupon (months) Age (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
Agency
Original Pools $ 112,739 $ 18,582,487 33.3 % 188,755 705 5.2 % 229 143 1.4 % 15.3 % 14.2 % 1.3 % 18.3 %
Recaptured Loans 87,911 13,341,450 33.3 % 96,872 710 4.3 % 266 54 0.1 % 15.9 % 15.7 % 0.4 % 41.0 %
Total/Weighted Average(G) $ 200,650 $ 31,923,937 285,627 707 4.8 % 245 106 1.4 % 15.6 % 14.8 % 0.9 % 28.3 %
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(F) 60 Days(F) 90+ Days(F) Foreclosure Owned Bankruptcy
Agency
Original Pools 4.2 % 3.7 % 1.5 % 0.7 % 0.2 % 0.2 %
Recaptured Loans 3.5 % 3.4 % 0.9 % 0.2 % - % 0.1 %
Total/Weighted Average(G) 3.9 % 3.6 % 1.2 % 0.5 % 0.2 % 0.1 %
76-------------------------------------------------------------------------------- (A)TheWA FICO score is based on the weighted average of information provided by the loan servicer on a monthly basis. The loan servicer generally updates the FICO score on a monthly basis. (B)Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages. (C)Three-Month Average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool. (D)Three-Month Average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool. (E)Three-Month Average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool. (F)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively. (G)Weighted averages exclude collateral information for which collateral data was not available as of the report date.
Servicer Advance Investments
The following is a summary of our Servicer Advance Investments, including the
right to the basic fee component of the related MSRs (dollars in thousands):
June 30, 2020
Servicer Advances to
UPB of Underlying Outstanding UPB of Underlying
Amortized Cost Carrying Residential Mortgage Servicer Residential Mortgage
Basis Value(A) Loans Advances Loans
Servicer Advance Investments
Mr. Cooper and SLS serviced
pools $ 537,388 $ 559,011 $ 28,834,119 $ 467,339 1.6 %
(A)Carrying value represents the fair value of the Servicer Advance Investments, including the basic fee component of the related MSRs.
The following is additional information regarding our Servicer Advance Investments, and related financing, as of and for the six months ended,June 30, 2020 (dollars in thousands): Six Months EndedJune 30, 2020 Loan-to-Value ("LTV")(A) Cost of Funds(B) Change in Fair Value Face Amount of Weighted Average Weighted Average Life Recorded in Other Notes and Bonds Discount Rate (Years)(C) Income Payable Gross Net(D) Gross Net Servicer Advance Investments(E) 5.3 % 6.3 $ (2,712)$ 442,002 88.9 % 87.9 % 2.9 % 2.9 % (A)Based on outstanding servicer advances, excluding purchased but unsettled servicer advances. (B)Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees.Net Cost of Funds excludes facility fees. (C)Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment. (D)Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve. (E)The following types of advances are included in Servicer Advance Investments: June 30, 2020 Principal and interest advances$ 113,039 Escrow advances (taxes and insurance advances) 167,167 Foreclosure advances 187,133 Total$ 467,339
A discussion of the sensitivity of these incentive fees to changes in LIBOR is included below under "Quantitative and Qualitative Disclosures About Market Risk."
77
--------------------------------------------------------------------------------MSR Related Ancillary Business
Our MSR related investments segment also includes the activity from several wholly-owned subsidiaries or minority investments in companies that perform various services in the mortgage and real estate industries. Our subsidiary Guardian is a national provider of field services and property management services. We also made a strategic minority investment in Covius, a provider of various technology-enabled services to the mortgage and real estate industries.
Agency RMBS
The following table summarizes our Agency RMBS portfolio as of
Gross Unrealized
Percentage of Weighted Outstanding
Outstanding Amortized Cost Total Amortized Carrying Average Life Repurchase
Asset Type Face Amount Basis Cost Basis Gains Losses Value(A) Count (Years) 3-Month CPR(B) Agreements
Agency RMBS $ 4,023,936 $ 4,161,318 100.0 % $ 43,942 $ - $ 4,205,260 33 6.0 0.3 % $ 3,897,468
(A)Fair value, which is equal to carrying value for all securities.
(B)Three month average constant prepayment rate, represents the annualized rate
of the prepayments during the quarter as a percentage of the total amortized
cost basis.
The following table summarizes the net interest spread of our Agency RMBS
portfolio as of
Net Interest Spread(A)
Weighted Average Asset Yield 1.86 %
Weighted Average Funding Cost 0.25 %
Net Interest Spread 1.61 %
(A)The Agency RMBS portfolio consists of 100.0% fixed rate securities (based on amortized cost basis). See table above for details on rate resets of the floating rate securities.
We finance our investments in Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. AtJune 30, 2020 andDecember 31, 2019 , the Company pledged Agency RMBS with a carrying value of approximately$4.1 billion and$15.9 billion , respectively, as collateral for borrowings under repurchase agreements. To the extent available on desirable terms, we expect to continue to finance our acquisitions of Agency RMBS with repurchase agreement financing. See Note 11 to our Condensed Consolidated Financial Statements for further information regarding financing of our Agency RMBS. Non-Agency RMBS Sincemid-March 2020 , markets for mortgage-backed securities and other credit-related assets have experienced significant volatility, widening credit spreads and sharp declines in liquidity, which has had a material impact on our investment portfolio. A significant portion of our Non-Agency RMBS portfolio was financed with repurchase agreements. Fluctuations in the value of our portfolio of Non-Agency RMBS, including as a result of changes in credit spreads, resulted in our being required to post additional collateral with our counterparties under these repurchase agreements. These fluctuations and requirements to post additional collateral were material. In an effort to mitigate the impact to our business from these developments and improve our liquidity, we sold a substantial portion of our Non-Agency RMBS portfolio inMarch 2020 , for which we recorded significant realized losses. Refer to Note 16 for details regarding Non-Agency RMBS sales with affiliates. 78 --------------------------------------------------------------------------------
The following table summarizes our Non-Agency RMBS portfolio as of
Gross Unrealized
Outstanding
Outstanding Face Amortized Cost Carrying Repurchase
Asset Type Amount Basis Gains Losses Value(A) Agreements
Non-Agency RMBS $ 23,019,974 $ 1,965,450 $ 85,061 $ (111,535) $ 1,938,976 $ 1,332,178 (A)Fair value, which is equal to carrying value for all securities.
The following tables summarize the characteristics of our Non-Agency RMBS portfolio and of the collateral underlying our Non-Agency RMBS as ofJune 30, 2020 (dollars in thousands): Non-Agency RMBS Characteristics(A) Percentage of Average Minimum Number of Outstanding Face Amortized Cost Total Amortized Weighted Average Weighted Average Vintage(B) Rating(C) Securities Amount Basis Cost Basis Carrying Value Principal Subordination(D) Excess Spread(E) Life (Years) Coupon(F) Pre 2006 D 103$ 192,563 $ 63,649 3.3 %$ 63,150 0.1 % 0.9 % 6.2 5.5 % 2006 N/A 15 91,603 - - % - - % - % - 0.1 % 2007 BBB 21 404,416 159,631 8.2 % 164,546 - % 0.4 % 2.5 0.6 % 2008 and later B- 467 22,304,712 1,720,749 88.5 % 1,689,961 14.6 % - % 8.4 3.2 % Total/Weighted Average B 606$ 22,993,294 $ 1,944,029 100.0 %$ 1,917,657 12.7 % 0.1 % 7.8 3.1 % Collateral Characteristics(A)(G) Collateral Cumulative Losses Vintage(B) Average Loan Age (years) Factor(H) 3-Month CPR(I) Delinquency(J) to Date Pre 2006 17.6 0.05 6.8 % 12.1 % 17.7 % 2006 13.8 0.08 10.7 % - % 101.1 % 2007 13.1 0.47 12.4 % 1.4 % 15.0 % 2008 and later 13.2 0.82 10.2 % 3.5 % 0.1 % Total/Weighted Average 13.3 0.77 10.3 % 3.6 % 1.9 % (A)Excludes$16.4 million face amount of bonds backed by consumer loans and$10.3 million face amount of bonds backed by corporate debt. (B)The year in which the securities were issued. (C)Ratings provided above were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current. This excludes the ratings of the collateral underlying 374 bonds with a carrying value of$992.0 million , which either have never been rated or for which rating information is no longer provided. We had no assets that were on negative watch for possible downgrade by at least one rating agency as ofJune 30, 2020 . (D)The percentage of amortized cost basis of securities and residual interests that is subordinate to our investments. This excludes interest-only bonds. (E)The current amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance for the quarter endedJune 30, 2020 . (F)Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of$26.8 million and$4.3 million , respectively, for which no coupon payment is expected. (G)The weighted average loan size of the underlying collateral is$253.0 thousand . (H)The ratio of original UPB of loans still outstanding. (I)Three month average constant prepayment rate and default rates. (J)The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered REO. 79 --------------------------------------------------------------------------------
The following table summarizes the net interest spread of our Non-Agency RMBS
portfolio as of
Net Interest Spread(A)
Weighted Average Asset Yield 5.37 %
Weighted Average Funding Cost 4.28 %
Net Interest Spread 1.09 %
(A)The Non-Agency RMBS portfolio consists of 51.0% floating rate securities and 49.0% fixed rate securities (based on amortized cost basis).
We finance our investments in Non-Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. AtJune 30, 2020 andDecember 31, 2019 , the Company pledged Non-Agency RMBS with a carrying value of approximately$1.9 billion and$8.0 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls. In addition, a portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 11 to our Condensed Consolidated Financial Statements for further information regarding financing of our Non-Agency RMBS.
Call Rights
We hold a limited right to cleanup call options with respect to certain securitization trusts serviced or master serviced by Mr. Cooper whereby, when the UPB of the underlying residential mortgage loans falls below a pre-determined threshold, we can effectively purchase the underlying residential mortgage loans at par, plus unreimbursed servicer advances, resulting in the repayment of all of the outstanding securitization financing at par, in exchange for a fee of 0.75% of UPB paid to Mr. Cooper at the time of exercise. We similarly hold a limited right to cleanup call options with respect to certain securitization trusts master serviced by SLS for no fee, and also with respect to certain securitization trusts serviced or master serviced by Ocwen subject to a fee of 0.5% of UPB on loans that are current or thirty (30) days or less delinquent, paid to Ocwen at the time of exercise. The aggregate UPB of the underlying residential mortgage loans within these various securitization trusts is approximately$77.0 billion . We continue to evaluate the call rights we acquired from each of our servicers, and our ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. See "Risk Factors-Risks Related to Our Business-Our ability to exercise our cleanup call rights may be limited or delayed if a third party also possessing such cleanup call rights exercises such rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings." The actual UPB of the residential mortgage loans on which we can successfully exercise call rights and realize the benefits therefrom may differ materially from our initial assumptions. We have exercised our 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, we sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, we received par on the securities issued by the called trusts which we owned prior to such trusts' termination. Refer to Note 8 and 16 in our Condensed Consolidated Financial Statements for further details on these transactions.
On
Refer to Note 16 for additional discussion regarding call rights and transactions with affiliates.
Residential Mortgage Loans
In March of 2020, we began selling assets to manage and generate liquidity and
de-risk our balance sheet. To realign our balance sheet in reaction to increased
market risk and raise liquidity, we reduced our exposure to loan pools financed
using repurchase agreements. Furthermore, while typically more expensive, to the
extent possible, the Company has been opportunistically seeking long-term
financing arrangements rather than short-term repurchase agreements to reduce
volatility risk associated with assets valuations and margin calls.
80
--------------------------------------------------------------------------------
As of June 30, 2020 , we had approximately $4.6 billion outstanding face amount
of residential mortgage loans. These investments were financed with repurchase
agreements with an aggregate face amount of approximately $3.3 billion and notes
and bonds payable with an aggregate face amount of approximately $0.3 billion .
We acquired these loans through open market purchases, as well as through the
exercise of call rights and acquisitions.
The following table presents the total residential mortgage loans outstanding by
loan type at
Outstanding Carrying Loan Weighted Average Weighted Average Life
Face Amount Value Count Yield (Years)(A)
Total Residential Mortgage Loans,
held-for-investment, at fair value $ 830,117 $ 750,332 13,168 7.2 % 6.4
Acquired Reverse Mortgage Loans(E) (F)
29 7.9 % 3.9
Acquired Performing Loans(G) (I) 224,268 198,150 4,680 6.0 %
4.1
Acquired Non-Performing Loans(H) (I) 617,062 490,222 4,703 7.3 %
3.3
Total Residential Mortgage Loans, held-for-sale$ 853,934 $ 694,830 9,412 7.0 %
3.5
Acquired Performing Loans(G) (I)$ 1,245,660 $ 1,075,996 9,258 4.8 % 8.0 Originated Loans 1,675,955 1,748,913 6,111 3.3 % 27.2 Total Residential Mortgage Loans, held-for-sale, at fair value$ 2,921,615 $ 2,824,909 15,369 3.9 % 19.0 (A)The weighted average life is based on the expected timing of the receipt of cash flows. (B)LTV refers to the ratio comparing the loan's unpaid principal balance to the value of the collateral property. (C)Represents the percentage of the total principal balance that is 60+ days delinquent. (D)The weighted average FICO score is based on the weighted average of information updated and provided by the loan servicer on a monthly basis. (E)Represents a 70% participation interest we hold in a portfolio of reverse mortgage loans. The average loan balance outstanding based on total UPB was$0.6 million . Approximately 51% of these loans outstanding have reached a termination event. As a result of the termination event, each such loan has matured and the borrower can no longer make draws on these loans. (F)FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan. (G)Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due. (H)As ofJune 30, 2020 , we have placed all Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below. (I)Includes$30.0 million and$26.1 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively, on accrual status as contractual cash flows are guaranteed by the FHA.
We consider the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as our credit quality indicators.
We finance a significant portion of our investments in residential mortgage loans with borrowings under repurchase agreements. These recourse borrowings bear variable interest rates offered by the counterparty for the term of the proposed repurchase transaction, generally less than one year, of a specified margin over the one-month LIBOR. AtJune 30, 2020 andDecember 31, 2019 , the Company pledged mortgage loans with a carrying value of approximately$3.8 billion and$5.1 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements are subject to daily mark-to-market fluctuations and margin calls. A portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 11 to our Condensed Consolidated Financial Statements for further information regarding financing of our mortgage loans.
See Note 11 to our Condensed Consolidated Financial Statements for further information regarding financing of our residential mortgage loans.
81
--------------------------------------------------------------------------------Other Consumer Loans The table below summarizes the collateral characteristics of the consumer loans, including those held in the Consumer Loan Companies and those acquired from the Consumer Loan Seller, as ofJune 30, 2020 (dollars in thousands): Collateral Characteristics Weighted Personal Average Average Unsecured Loans Personal Number of Original FICO Weighted Adjustable Rate Average Loan Expected Life Delinquency 30 Delinquency 60 Delinquency 90+ 12-Month 12-Month UPB %
Homeowner Loans % Loans Score(A) Average Coupon Loan % Age (months) (Years) Days(B) Days(B) Days(B) CRR(C) CDR(D)
Consumer loans, held-for-investment $ 718,385 61.3 % 38.7 % 99,959 677 17.7 % 12.2 % 182 3.7 1.8 % 1.1 % 1.6 % 18.1 % 4.6 %
(A)Weighted average original FICO score represents the FICO score at the time
the loan was originated.
(B)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent
the percentage of the total principal balance of the pool that corresponds to
loans that are delinquent by 30-59 days, 60-89 days or 90 or more days,
respectively.
(C)12-Month CRR, or the voluntary prepayment rate, represents the annualized
rate of the voluntary prepayments during the three months as a percentage of the
total principal balance of the pool.
(D)12-Month CDR, or the involuntary prepayment rate, represents the annualized
rate of the involuntary prepayments (defaults) during the three months as a
percentage of the total principal balance of the pool.
We have financed our investments in consumer loans with securitized non-recourse
long-term notes with a stated maturity date of May 2036 . Furthermore, the notes
are non-mark-to-market and not subject to margin calls. See Note 11 to our
Condensed Consolidated Financial Statements for further information regarding
financing of our consumer loans.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ from these estimates. We believe that the estimates and assumptions utilized in the preparation of the Condensed Consolidated Financial Statements are prudent and reasonable. Actual results historically have generally been in line with our estimates and judgments used in applying each of the accounting policies described below, as modified periodically to reflect current market conditions.
Our critical accounting policies as of
We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as ofJune 30, 2020 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as ofJune 30, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may materially differ from those estimates.
Recent Accounting Pronouncements
See Note 1 to our Condensed Consolidated Financial Statements.
82
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table summarizes the changes in our results of operations for the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 (dollars in thousands). Our results of operations are not necessarily indicative of future performance. Three Months Ended Increase Six Months Ended June 30, (Decrease) June 30, Increase (Decrease) 2020 2019 Amount 2020 2019 Amount Revenues Interest Income$ 232,198 $ 416,047 $ (183,849) $ 634,571 $ 854,914 $ (220,343) Servicing revenue, net of change in fair value of$(441,033) ,$(334,599) ,$(1,090,408) , and$(391,509) , respectively (90,459) (85,537) (4,922) (379,574) 80,316
(459,890)
Gain on originated mortgage loans,
held-for-sale, net 310,022 101,018 209,004 489,720 168,188 321,532
451,761 431,528 20,233 744,717 1,103,418 (358,701)
Expenses
Interest expense 116,403 228,004 (111,601) 333,258 440,836 (107,578)
General and administrative expenses 217,373 118,906 98,467 423,736 217,846 205,890
Management fee to affiliate 22,479 19,623 2,856 44,200 37,583
6,617
Incentive compensation to affiliate - - - - 12,958
(12,958)
Loan servicing expense 7,149 9,372 (2,223) 15,002 18,975
(3,973)
Subservicing expense 73,132 53,962 19,170 140,113 94,888 45,225
436,536 429,867 6,669 956,309 823,086 133,223
Other Income (Loss)
Change in fair value of investments 102,776 (26,642) 129,418 (463,500) (57,746) (405,754)
Gain (loss) on settlement of investments, net (74,966) 5,576 (80,542) (874,538) (37,285)
(837,253)
Earnings from investments in consumer
loans, equity method investees - (2,654) 2,654 - 1,657 (1,657)
Other income (loss), net (3,207) (2,227) (980) (40,020) 3,461 (43,481)
24,603 (25,947) 50,550 (1,378,058) (89,913) (1,288,145)
Impairment
Provision (reversal) for credit losses on securities (25,134) 8,859 (33,993) 19,015 16,375
2,640
Valuation and credit loss provision
(reversal) on loans and real estate
owned (REO) 3,424 13,452 (10,028) 103,920 18,732 85,188
(21,710) 22,311 (44,021) 122,935 35,107 87,828
Income (Loss) Before Income Taxes 61,538 (46,597) 108,135 (1,712,585) 155,312 (1,867,897)
Income tax expense (benefit) 17,409 (21,577) 38,986 (149,459) 24,420 (173,879) Net Income (Loss)$ 44,129 $ (25,020) $ 69,149 $ (1,563,126) $ 130,892 $ (1,694,018) Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries$ 38,640 $ 6,923
$ 14,357 $ -$ 14,357 $ 25,579 $ -$ 25,579 Net Income (Loss) Attributable to Common Stockholders$ (8,868) $ (31,943) $ 23,075 $ (1,611,183) $ 113,651 $ (1,724,834) Interest Income
Three months ended
During the second quarter of 2020, we continued to reduce the overall size of our asset portfolio, including interest-earnings assets. As a result, interest income decreased by$183.8 million , primarily attributable to (i) a$134.8 million decrease due to a significantly smaller portfolio of bonds owned compared to the three months endedJune 30, 2019 and less accelerated accretion recognized on called deals, (ii) a$30.3 million decrease related to MSRs, (iii) a$20.1 million decrease from Residential 83 --------------------------------------------------------------------------------
Mortgage Loans and Consumer Loans due to lower unpaid principal balance, offset
by (iv) a
Six months ended
During the first quarter and continuing into the second quarter of 2020, we reduced the overall size of our asset portfolio, including interest-earnings assets. As a result, interest income decreased by$220.3 million , primarily attributable to (i) a$155.3 million decrease due to a significantly smaller portfolio of bonds owned compared to the six months endedJune 30, 2019 and less accelerated accretion recognized on called deals, (ii) a$35.1 million decrease related to MSRs, (iii) a$27.8 million decrease from Residential Mortgage Loans and Consumer Loans due to lower unpaid principal balance, and (iv) a$2.1 million decrease in other interest-earning assets.
Servicing Revenue, Net
The component of servicing revenue, net related to changes in valuation inputs and assumptions related to the following:
Three Months Ended Increase Six Months Ended
June 30, (Decrease) June 30, Increase (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (191,083) $ (221,890)
- (4,918) 4,918 (73,502) 69,418 (142,920)
Changes in other factors 36,667 (2,470) 39,137 (29,843) 123,421 (153,264)
Total $ (154,416) $ (229,278) $ 74,862 $ (618,127) $ (213,513) $ (404,614) Three months ended
Servicing revenue, net decreased$4.9 million primarily driven by (i) a$183.3 million increase in amortization as a result of MSR acquisitions subsequent toJune 30, 2019 and faster prepayments, and (ii) a$34.6 million decrease in ancillary and other fees due to lower interest rates. The decrease was partially offset by (iii) a$136.1 million increase in servicing collections as a result of MSR acquisitions that closed subsequent toJune 30, 2019 , and (iv) a$74.9 million less negative mark-to-market adjustments. The negative mark-to-market adjustments during the three months endedJune 30, 2020 were primarily driven by changes in interest rates resulting in lower custodial earnings and faster prepayment rates, resulting from changes in estimates regarding the economic outlook caused by COVID-19.
Six months ended
Servicing revenue, net decreased$459.9 million primarily driven by (i) a$404.6 million increase in negative mark-to-market adjustments, (ii) a$301.9 million increase in amortization as a result of MSR acquisitions subsequent toJune 30, 2019 and faster prepayments, and (iii) a$42.4 million decrease in ancillary and other fees due to lower interest rates. The negative mark-to-market adjustments during the six months endedJune 30, 2020 were primarily driven by changes in interest rates resulting in lower custodial earnings, an increase in discount rates, and higher delinquency rates, resulting from changes in estimates regarding the economic outlook caused by COVID-19. The decrease was partially offset by (iv) a$281.2 million increase in servicing collections as a result of MSR acquisitions that closed subsequent toJune 30, 2019 .
Gain on Originated Mortgage Loans, Held-for-Sale, Net
Three months ended
Gain on originated mortgage loans, held-for-sale, net increased$209.0 million primarily driven by (i)$217.7 million increase in gains on loans originated and sold partially offset by$157.2 million increase in loss on settlement of mortgage loan origination derivative instruments, (ii)$14.3 million higher value of MSRs retained on transfer of loans, and (iii)$134.3 million increase in change in fair value of originated loans, interest rate lock commitments and derivative instruments.
Six months ended
Gain on originated mortgage loans, held-for-sale, net increased$321.5 million primarily driven by (i)$238.8 million increase in gains on loans originated and sold partially offset by$192.1 million increase in loss on settlement of mortgage loan origination 84 -------------------------------------------------------------------------------- derivative instruments, (ii)$173.7 million higher value of MSRs retained on transfer of loans, and (iii)$101.1 million increase in change in fair value of originated loans, interest rate lock commitments and derivative instruments.
Interest Expense
Three months ended
Interest expense decreased by$111.6 million primarily attributable to (i) a$89 million decrease related to lower average RMBS portfolio investments financed with repurchase agreements, (ii) a$23.1 million decrease related to residential mortgage loans due to a decrease in the underlying principal balance of the portfolio financed with repurchase agreements, (iii) a$5.6 million net decrease of interest expense from reductions in financing obtained in the origination and servicing business, and (iv) a$2.6 million decrease in interest expense on the Consumer Loan securitization notes due to a decrease in the principal balance outstanding. The decrease was partially offset by (v) a$8.7 million increases in interest expense as a result of the senior secured term loan facility agreement entered into onMay 19, 2020 . Refer to Note 11 to our Condensed Consolidated Financial Statements for further details.
Six months ended
Interest expense decreased by$107.6 million primarily attributable to (i) a$82.3 million decrease related to lower average RMBS portfolio investments financed with repurchase agreements, (ii) a$28.3 million decrease related to residential mortgage loans due to a decrease in the underlying principal balance of the portfolio financed with repurchase agreements, (iii) a$5.1 million decrease in interest expense on the Consumer Loan securitization notes due to a decrease in the principal balance outstanding, and (iv) a$0.6 million net decrease of interest expense from reductions in financing obtained in the origination and servicing business. The decrease was partially offset by (v) a$8.7 million increases in interest expense as a result of the senior secured term loan facility agreement entered into onMay 19, 2020 . Refer to Note 11 to our Condensed Consolidated Financial Statements for further details.
General and Administrative Expenses
Three months ended
General and administrative expenses increased by$98.5 million primarily attributable to increases in NewRez volumes. As noted in the "Our Portfolio" section, during the second quarter of 2020, loan origination volume at NewRez was$8.3 billion , up from$3.8 billion in the year prior and loans serviced at NewRez was$277.6 billion , up from$159.2 billion in the prior year. The components of general and administrative expenses that increased as a result of these volumes were as follows: (i) a$63.8 million increase in compensation and benefits expense, (ii) a$9.4 million increase in loan origination expenses, (iii) a$3.9 million increase in occupancy expenses, (iv) a$3.5 million increase related to technology and software enhancements, (v) a$9.6 million increase relates to an increase in property maintenance and inspection expense resulting from the acquisition and operations of Guardian, and (vi) a$9.4 million increase relates to other general and administrative expenses. These increases were partially offset by (vii) a$1.1 million decrease in legal and professional expenses.
Six months ended
General and administrative expenses increased by$205.9 million primarily attributable to increases in NewRez volumes. As noted in the "Our Portfolio" section, during the six months endedJune 30, 2020 , loan origination volume at NewRez was$19.7 billion , up from$6.0 billion in the year prior and loans serviced at NewRez was$277.6 billion , up from$159.2 billion in the prior year. The components of general and administrative expenses that increased as a result of these volumes were as follows: (i) a$119.8 million increase in compensation and benefits expense, (ii) a$11.7 million increase in legal and professional expenses, (iii) a$21.6 million increase in loan origination expenses, (iv) a$7.9 million increase in occupancy expenses, (v) a$6.4 million increase related to technology and software enhancements, (vi) a$17.1 million increase related to an increase in 85 -------------------------------------------------------------------------------- property maintenance and inspection expense resulting from the acquisition and operations of Guardian, and (vii) a$21.4 million increase in other general and administrative expenses. Management Fee to Affiliate
Three months ended
Management fee to affiliate increased by
Six months ended
Management fee to affiliate increased by
Incentive Compensation to Affiliate
Three months ended
Due to net loss incurred, excluding any unrealized gains or losses from market-to-market valuation changes on investments and debt, during the three months endedJune 30, 2020 , there was no incentive compensation due to our affiliates. Six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 . Due to net loss incurred, excluding any unrealized gains or losses from market-to-market valuation changes on investments and debt, during the six months endedJune 30, 2020 , there was no incentive compensation due to our affiliates.
Loan Servicing Expense
Three months ended
Loan servicing expense decreased by$2.2 million primarily due to a decrease of loan servicing expense on Consumer Loans, held-for-investment, attributable to lower unpaid principal balance.
Six months ended
Loan servicing expense decreased by$3.9 million primarily due to a decrease of loan servicing expense on Consumer Loans, held-for-investment, attributable to lower unpaid principal balance.
Subservicing Expense
Three months ended
Subservicing expense increased
86
--------------------------------------------------------------------------------
Six months ended
Subservicing expense increased
Change in Fair Value of Investments
Change in fair value of investments is comprised of the following:
Three Months Ended Increase Six Months Ended
June 30, (Decrease) June 30, Increase (Decrease)
2020 2019 Amount 2020 2019 Amount
Change in fair value of investments in excess
mortgage servicing rights $ (85) $ (8,455) $ 8,370 $ (11,109) $ (3,828) $ (7,281)
Change in fair value of investments in excess
mortgage servicing rights, equity method
investees (2,052) (3,276) 1,224 (2,509) (664) (1,845)
Change in fair value of investments in mortgage servicing rights financing receivables (121,520) (55,411) (66,109) (225,631) (91,790)
(133,841)
Change in fair value of servicer advance investments 16,037 1,388 14,649 (2,712) 9,291
(12,003)
Change in fair value of real estate and other securities 58,598 7,385 51,213 (28,194) 14,064
(42,258)
Change in fair value of residential mortgage loans 99,998 72,393 27,605 (165,246) 81,607
(246,853)
Change in fair value of investments in consumer loans held-for-investment 30,694 - 30,694 (9,223) -
(9,223)
Change in fair value of derivative instruments 21,106 (40,666) 61,772 (18,876) (66,426) 47,550 Total$ 102,776 $ (26,642) $ 129,418 $ (463,500) $ (57,746) $ (405,754)
Change in Fair Value of Investments in Excess Mortgage Servicing Rights
Changes in the fair value of investments in Excess MSRs related to the
following:
Three Months Ended Increase Six Months Ended
June 30, (Decrease) June 30, Increase (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (1,192) $ (7,950) $ 6,758 $ 3,034 $ (17,702) $ 20,736
Changes in discount rates - - - (4,015) 9,279 (13,294)
Changes in other factors 1,107 (505) 1,612 (10,128) 4,595 (14,723)
Total $ (85) $ (8,455) $ 8,370 $ (11,109) $ (3,828) $ (7,281) Three months ended
The change in fair value of investments in excess mortgage servicing rights during the three months endedJune 30, 2020 was relatively flat, with changes in prepayment rates offset by changes in various other factors. In contrast, the three months endedJune 30, 2019 resulted in a negative mark-to-market adjustment largely driven by changes in interest rates and prepayment rates.
Six months ended
The change in fair value of investments in excess mortgage servicing rights during the six months endedJune 30, 2020 was negative, mainly driven by an increase in discount rates and changes in various other factors. In contrast, the negative change in fair value during the six months endedJune 30, 2019 was mainly driven by changes in interest rates and prepayment rates, offset by a decrease in discount rates and improvements in other factors. 87 --------------------------------------------------------------------------------
Change in Fair Value of Investments in Excess Mortgage Servicing Rights, Equity Method Investees
Changes in the fair value of investments in Excess MSRs, equity method investees
related to the following:
Three Months Ended Increase Six Months Ended
June 30, (Decrease) June 30, Increase (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (334) $ (2,505) $ 2,171 $ 352 $ (7,465) $ 7,817
Changes in discount rates - - - (743) 3,171 (3,914)
Changes in other factors (1,718) (771) (947) (2,118) 3,630 (5,748)
Total $ (2,052) $ (3,276) $ 1,224 $ (2,509) $ (664) $ (1,845) Three months ended
The change in fair value of investments in excess mortgage servicing rights, equity method investees during the three months endedJune 30, 2020 was negative, mainly driven by changes in prepayment rates and recapture rates. The change in fair value during the three months endedJune 30, 2019 was also negative, largely driven by changes in interest rates and prepayment rates.
Six months ended
The change in fair value of investments in excess mortgage servicing rights, equity method investees during the six months endedJune 30, 2020 was negative, mainly driven by changes in various factors. In contrast, the change in fair value during the six months endedJune 30, 2019 was relatively flat, with changes in interest and prepayment rates offset by a decrease in discount rates and improvements in other factors.
Change in Fair Value of Investments in MSR Financing Receivables
The component of changes in the fair value of investments in MSR financing
receivables related to changes in valuation inputs and assumptions related to
the following:
Three Months Ended Increase Six Months Ended
June 30, (Decrease) June 30, Increase (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (37,765) $ (43,221)
- 5,470 (5,470) (12,744) 39,401 (52,145)
Changes in other factors (6,556) 22,901 (29,457) (109,230) 47,262 (156,492)
Total $ (44,321) $ (14,850) $ (29,471) $ (77,931) $ (7,912) $ (70,019) Three months ended
The change in fair value of investments in MSR financing receivables decreased$66.1 million during the three months endedJune 30, 2020 compared to the three months endedJune 30, 2019 . The decrease in the three months endedJune 30, 2020 was primarily driven by changes in interest rates and prepayment rates, while the decrease in the three months endedJune 30, 2019 was also due to changes in rates but partially offset by an increase in recapture rates and a decrease in discount rates. These changes resulted from changes in estimates regarding the economic outlook caused by COVID-19. The remaining decrease was primarily due to$37.0 million increase in amortization expense as a result of MSR acquisitions that closed subsequent toJune 30, 2019 .
Six months ended
The change in fair value of investments in MSR financing receivables decreased$133.8 million during the six months endedJune 30, 2020 compared to the six months endedJune 30, 2019 .$70.0 million of the decrease was related to changes in valuation inputs and assumptions. The change in fair value for the six months endedJune 30, 2020 was primarily due to higher delinquency rates, as well as an increase in discount rates. These changes resulted from changes in estimates regarding the economic outlook caused by COVID-19. The change in fair value for the six months endedJune 30, 2019 was relatively flat in comparison, with changes in interest rates and prepayment rates being offset by a decrease in discount rates and improvements 88 --------------------------------------------------------------------------------
in other factors. The remaining decrease was primarily due to
Change in Fair Value of Servicer Advance Investments
Changes in the fair value of Servicer Advance Investments related to the
following:
Three Months Ended Increase Six Months Ended
June 30, (Decrease) June 30, Increase (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (200) $ (706) $ 506 $ (2,074) $ (1,704) $ (370)
Changes in discount rates 12,744 3,944 8,800 - 13,626 (13,626)
Changes in other factors 3,493 (1,850) 5,343 (638) (2,631) 1,993
Total $ 16,037 $ 1,388 $ 14,649 $ (2,712) $ 9,291 $ (12,003) Three months ended
The change in fair value of servicer advance investments during the three months endedJune 30, 2020 was positive, largely driven by a decrease in discount rates and improvements in other factors. The change in fair value was also positive during the three months endedJune 30, 2019 , mainly driven by a decrease in the discount rates, partially offset by changes in interest rates, prepayment rates and other factors.
Six months ended
The change in fair value of servicer advance investments during the six months endedJune 30, 2020 was negative, mainly driven by changes in interest and prepayment rates. The change in fair value during the six months endedJune 30, 2019 was positive, mainly driven by a decrease in the discount rate, partially offset by changes in interest rates, prepayment rates and other factors.
Change in Fair Value of Real Estate and
Three months ended
The change in fair value of investments in real estate and other securities increased$51.2 million , primarily due to the partial reversal of unrealized losses that were recognized during the first quarter of 2020. This reversal can be attributable to an improved economic outlook as the broad market saw spreads tighten significantly relative to the levels present during the initial onset of COVID-19.
Six months ended
The change in fair value of investments in real estate and other securities
decreased
Change in Fair Value of Residential Mortgage Loans
Three months ended
The change in fair value of investments in Residential Mortgage Loans increased$27.6 million primarily due to (i) a$78.2 million increase due to less realization of gain through securitizations and (ii) a$22.6 million increase in unrealized gain on loan originations, offset by (iii) a$73.4 million decrease related to changes in valuation inputs and assumptions primarily resulted from changes in estimates regarding the economic outlook caused by COVID-19.
Six months ended
The change in fair value of investments in Residential Mortgage Loans decreased$246.9 million primarily due to (i) a$379.3 million decrease related to changes in valuation inputs and assumptions primarily resulted from changes in estimates regarding 89 --------------------------------------------------------------------------------
the economic outlook caused by COVID-19, offset by (ii) a
Change in Fair Value of Investments in Consumer Loans Held-for-Investment
Three months ended
Change in fair value of investments in consumer loans held-for-investment
increased
Six months ended
Change in fair value of investments in consumer loans held-for-investment
decreased
Change in Fair Value of Derivative Instruments
Three months ended
Change in fair value of derivative instruments increased$61.8 million . The increase was primarily related to a$61.8 million change from unrealized loss to unrealized gain on Interest Rate Swaps largely resulting from a favorable change in the forward LIBOR curve atJune 30, 2020 .
Six months ended
Change in fair value of derivative instruments increased$47.6 million . The increase was primarily related to (i) a$50.3 million decrease in unrealized loss on Interest Rate Swaps largely resulting from a favorable change in the forward LIBOR curve atJune 30, 2020 . The increase was partially offset by (ii) a$2.7 million decrease in unrealized gain on TBAs.
Gain (Loss) on Settlement of Investments, Net
Three months ended
Gain (loss) on settlement of investments, net decreased by$80.5 million , primarily related to (i) a$47.7 million change from gain to loss realized upon sale of Agency and Non-Agency real estate securities, (ii) a$53.9 million change from realized gain to loss realized upon the sale of residential mortgage loans, (iii) a$15.6 million change from gain to loss on collapse and (iv) a$0.7 million decrease in realized on gain on mortgage servicing rights. The decrease was partially offset by, (v) a$20.0 million decrease in the loss on settlement of derivatives, (vi) a$3.9 million increase in realized gain on liquidated residential mortgage loans, held-for-investment, (vii) a$8.5 million increase in the gain on extinguishment of debt and (viii) a$5.0 million change from loss to gain on sale of REO.
Six months ended
Gain (loss) on settlement of investments, net decreased by$837.3 million , primarily related to (i) an$867.4 million change from gain to loss realized upon sale of Agency and Non-Agency real estate securities driven by sales during the first quarter of 2020 as we managed our way through the bond market's reaction to the COVID-19 outbreak. The decrease was furthered by (ii) a$21.8 million decrease in gain on sale of residential mortgage loans, net and (iii) a$0.7 million decrease in realized gain on collapse. The decrease was offset by, (iv) a$28.3 million decrease in loss on settlement of derivatives, (v) a$7.9 million change from loss to gain on sale of REO, (vi) a$5.5 million increase in realized gain on liquidated residential mortgage loans, 90 --------------------------------------------------------------------------------
held-for-investment, (vii) a
Earnings from Investments in Consumer Loans, Equity Method Investees
Three months ended
Earnings from investments in Consumer Loans, Equity Method Investees increased$2.7 million as the investments were fully distributed as ofDecember 31, 2019 , therefore no longer earning income during fiscal year 2020. There was a loss during the three months endedJune 30, 2019 .
Six months ended
Earnings from investments in Consumer Loans, Equity Method Investees decreased$1.7 million as the investments were fully distributed as ofDecember 31, 2019 , therefore no longer earning income during fiscal year 2020. The investments earned$1.7 million during the six months endedJune 30, 2019 .
Other Income (Loss), Net
Three months ended
Other income (loss), net decreased by$1 million , primarily attributable to (i) a$11 million increase in provision for servicing losses, (ii) a$9.4 million increase in loss on notes and bonds payable, (iii) a$2.6 million increase in unrealized loss on equity investments primarily due to fair value write down of the TSX commercial project investment driven by changes in estimates regarding the economic outlook caused by COVID-19, and (iv) a$0.5 million decrease in gain on Ocwen common stock. The decrease was partially offset by (v) a$20 million increase in rental and ancillary revenue related to our growing rental portfolio and the Guardian acquisition in the third quarter of 2019, (vi) a$2.5 million change from other loss to other income, and (vii) a$0.4 million decrease in loss on contingent consideration.
Six months ended
Other income (loss), net decreased by$43.5 million , primarily attributable to (i) a$47.5 million increase in unrealized loss on equity investments primarily due to fair value write down of the TSX commercial project investment driven by changes in estimates regarding the economic outlook caused by COVID-19, (ii) a$19.5 million change from other income to other loss, (iii) a$15.1 million increase in provision for servicing losses, (iv) a$8.4 million change from gain to loss on Ocwen common stock, and (v) a$2.3 million decrease in gain on transfer of loans to REO. The decrease was partially offset by (vi) a$39.7 million increase in rental and ancillary revenue related to our growing rental portfolio and the Guardian acquisition in the third quarter of 2019, (vii) an$8.7 million change from unrealized loss to unrealized gain on notes and bonds payable, and (viii) a$0.9 million decrease in unrealized losses on contingent consideration.
Provision (Reversal) for Credit Losses on Securities
Three months ended
The provision (reversal) for credit losses on securities decreased by$34 million primarily resulting from a reversal of credit losses on securities during the three months endedJune 30, 2020 . EffectiveJanuary 1, 2020 , these securities are accounted for in accordance with the new credit loss accounting standard CECL (Notes 1 and 7 to our Condensed Consolidated Financial Statements). The CECL provision in the first quarter of 2020 was impacted by the significant deterioration in macroeconomic forecasts between theJanuary 1 and theMarch 31 quarter end due to the economic disruption caused by the COVID-19 pandemic. The negative effect of these market conditions was lessened during the three months endedJune 30, 2020 leading to the reversal of credit losses on securities. Our provision is inherently based on assumptions and estimates, and adjustments to such assumptions may affect our future results. Consequently, forecasts that indicate improving economic conditions may result in a reversal in previously recognized provision for credit losses.
Six months ended
The provision (reversal) for credit losses on securities increased by$2.6 million primarily resulting from a decline in fair values on Non-Agency RMBS purchased with existing credit impairment. The impairment is a result of the fair value falling below their amortized cost basis for these securities as ofJune 30, 2020 . EffectiveJanuary 1, 2020 , these securities are accounted for 91 -------------------------------------------------------------------------------- in accordance with the new credit loss accounting standard CECL (Notes 1 and 7 to our Condensed Consolidated Financial Statements). The CECL provision for the six months endedJune 30, 2020 was impacted by the significant deterioration in macroeconomic forecasts between theJanuary 1 and theMarch 31 due to the economic disruption caused by the COVID-19 pandemic. Our provision is inherently based on assumptions and estimates, and adjustments to such assumptions may negatively affect our future results. Consequently, forecasts that indicate weak or deteriorating economic conditions may result in a higher provision for credit losses.
Valuation and Credit Loss Provision (Reversal) on Loans and Real Estate Owned
Three months ended
The$10.0 million decrease in the valuation and loss provision (reversal) on loans and real estate owned resulted from (i) a$1.2 million decrease in impairment on residential mortgage loans related to changes in interest rates and improved performance, (ii) a$1.2million decrease in impairment on certain REOs with an increase in home prices, (iii) a$7.6 million decrease in provision due to electing fair value option on consumer loans.
Six months ended
The$85.2 million increase in the valuation and loss provision (reversal) on loans and real estate owned resulted from (i) a$104.1 million increase in impairment on residential mortgage loans related to changes in interest rates and low performance; offset by (ii) a$0.1million decrease in impairment on certain REOs with an increase in home prices, (iii) a$18.7 million decrease in provision due to electing fair value option on consumer loans.
Income Tax Expense (Benefit)
Three months ended
Income tax expense (benefit) changed by
Six months ended
Income tax expense (benefit) changed by
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Three months ended
Noncontrolling interests in income of consolidated subsidiaries increased by$31.7 million primarily due to (i) a$20.6 million increase in Consumer loan Companies, which are 46.5% owned by third parties, due to positive mark-to-market adjustments, (ii) a$8.3 million increase in other's interest in the net income of the Buyer as a result of positive mark-to-market adjustments in the fair value of the Buyer's assets and higher interest income, and (iii) a$2.8 million increase from the Shelter JVs, driven by higher earnings from originations during the three months endedJune 30, 2020 .
Six months ended
Noncontrolling interests in income of consolidated subsidiaries increased by$5.3 million primarily due to (i) a$6.9 million increase in Consumer loan Companies, which are 46.5% owned by third parties, due to positive mark-to-market adjustments in fair value, (ii) a$3.8 million increase from the Shelter JVs, driven by higher earnings from originations during the six months 92 --------------------------------------------------------------------------------
ended
Dividends on Preferred Stock
Three months ended
Dividend expense of
Six months ended
Dividend expense of
Other Comprehensive Income. See "-Accumulated Other Comprehensive Income (Loss)" below.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, and other general business needs. Additionally, to maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income. We note that a portion of this requirement may be able to be met in future years through stock dividends, rather than cash, subject to limitations based on the value of our stock. Our primary sources of funds are cash provided by operating activities (primarily income from servicing and originations), sales of and repayments from our investments, potential debt financing sources, including securitizations, and the issuance of equity securities, when feasible and appropriate. Our primary uses of funds are the payment of interest, management fees, incentive compensation, servicing and subservicing expenses, outstanding commitments (including margins and mortgage loan originations), other operating expenses, repayment of borrowings and hedge obligations, dividends and funding of future servicer advances, which are expected to increase in the near term due to COVID-19. The ongoing economic impact of the COVID-19 pandemic has resulted in an increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. InApril 2020 , we expanded our committed advance facilities capacity by$1.3 billion , which we believe will be adequate for our needs. We also plan to finance GNMA advances with existing MSR lines and corporate cash flow, and may utilizeGinnie Mae's Pass-Through Assistance Program . In addition, onMay 19, 2020 , the Company entered into a three-year senior secured term loan facility agreement in the principal amount of$600.0 million , increasing the Company's total cash and cash equivalents atJune 30, 2020 to$1.0 billion . Our ability to utilize funds generated by the MSRs held in our servicer subsidiaries, NRM and NewRez, is subject to and limited by certain regulatory requirements, including maintaining excess capital and related tangible net worth. As ofJune 30, 2020 , approximately$581.1 million of our cash and cash equivalents were held at NRM and NewRez, of which$392.0 million were in excess of regulatory liquidity requirements. NRM and NewRez are expected to maintain compliance with applicable net worth requirements throughout the year. Use of a government-sponsored advance facility, such asGinnie Mae's Pass-Through Assistance Program could further limit our ability to utilize funds generated by NRM and NewRez. Currently, our primary sources of financing are notes and bonds payable and repurchase agreements, although we have in the past and may in the future also pursue one or more other sources of financing such as securitizations and other secured and unsecured forms of borrowing. As ofJune 30, 2020 , we had outstanding repurchase agreements with an aggregate face amount of approximately$9.2 billion to finance our investments. The financing of our entire RMBS portfolio, which generally has 30- to 90-day terms, is subject to margin calls. Under repurchase agreements, we sell a security to a counterparty and concurrently agree to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or "haircut," which can range broadly, for example from 4% - 12% for Agency RMBS, 10% - 80% for Non-Agency RMBS, and 5% - 62% for residential mortgage loans. During 93 -------------------------------------------------------------------------------- the term of the repurchase agreement, the counterparty holds the security as collateral. If the agreement is subject to margin calls, the counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral (or "margin") in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we may, from time to time, be a party to derivative agreements or financing arrangements that may be subject to margin calls based on the value of such instruments. In addition,$3.0 billion face amount of our MSR and Excess MSR financing is subject to mandatory monthly repayment to the extent that the outstanding balance exceeds the market value (as defined in the related agreement) of the financed asset multiplied by the contractual maximum loan-to-value ratio. We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls or related requirements resulting from decreases in value related to a reasonably possible (in our opinion) change in interest rates. Our ability to obtain borrowings and to raise future equity capital is dependent on our ability to access borrowings and the capital markets on attractive terms. We continually monitor market conditions for financing opportunities and at any given time may be entering or pursuing one or more of the transactions described above. Our Manager's senior management team has extensive long-term relationships with investment banks, brokerage firms and commercial banks, which we believe enhance our ability to source and finance asset acquisitions on attractive terms and access borrowings and the capital markets at attractive levels. Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our repurchase agreements, credit facilities and other financing arrangements. Because repurchase agreements and credit facilities are short-term commitments of capital, lender responses to market conditions may make it more difficult for us to renew or replace, on a continuous basis, our maturing short-term borrowings and have imposed, and may continue to impose, more onerous conditions when rolling such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and/or dispose of assets. Issues related to financing are exacerbated in times of significant dislocation in the financial markets, such as those experienced during the first quarter and continuing into the second quarter of 2020 due to the COVID-19 pandemic. While market volatility has subsided in recent weeks, it is possible that volatility may increase again, and our lenders may become unwilling or unable to provide us with financing and we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also have revised and may continue to revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, including haircuts and requiring additional collateral in the form of cash, based on, among other factors, the regulatory environment and their management of actual and perceived risk. Moreover, the amount of financing we receive under our repurchase agreements will be directly related to our lenders' valuation of our target assets that cover the outstanding borrowings. During the first quarter and continuing into the second quarter of 2020, consistent with current conditions in the mortgage REIT industry, we have observed (i) an increase in "haircuts," which represent the difference in percentage terms between the fair value of the collateral and the amount the counterparty will lend and (ii) a mark-down of our mortgage assets held as collateral by our financing counterparties, which resulted in us having to provide additional cash or securities to satisfy higher than historical levels of margin calls (although these conditions have moderately stabilized in recent weeks). We used our cash on hand, a portion of the approximately$389.5 million proceeds from our underwritten public offering of 6.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock inFebruary 2020 and the proceeds from asset sales to meet margin calls. While we have met our margin calls to date, further significant margin calls could have a material adverse effect on our results of operations, financial condition, business, liquidity and ability to make distributions to our stockholders, and could cause the value of our common stock to decline. With respect to the next 12 months, we expect that our cash on hand combined with our cash flow provided by operations and our ability to roll our repurchase agreements and servicer advance financings will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential margin calls, mortgage loan origination and operating expenses. Our ability to roll over short-term borrowings is critical to our liquidity outlook. We have a significant amount of near-term maturities, which we expect to be able to refinance. If we cannot repay or refinance our debt on favorable terms, we will need to seek out other sources of liquidity. While it is inherently more difficult to forecast beyond the next 12 months, we currently expect to meet our long-term liquidity requirements through our cash on hand and, if needed, additional borrowings, proceeds received from repurchase agreements and other financings, proceeds from equity offerings and the liquidation or refinancing of our assets. 94 -------------------------------------------------------------------------------- These short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions, including those described under "-Market Considerations" as well as "Risk Factors." If our assumptions about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and such a shortfall may occur rapidly and with little or no notice, which could limit our ability to address the shortfall on a timely basis and could have a material adverse effect on our business. Our cash flow provided by operations differs from our net income due to these primary factors: (i) the difference between (a) accretion and amortization and unrealized gains and losses recorded with respect to our investments and (b) cash received therefrom, (ii) unrealized gains and losses on our derivatives, and recorded impairments, if any, (iii) deferred taxes, and (iv) principal cash flows related to held-for-sale loans, which are characterized as operating cash flows under GAAP. In addition to the information referenced above, the following factors could affect our liquidity, access to capital resources and our capital obligations. As such, if their outcomes do not fall within our expectations, changes in these factors could negatively affect our liquidity. •Access to Financing from Counterparties - Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit arrangements, industry and market trends, the availability of capital and our investors', counterparties' and lenders' policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities. Our business strategy is dependent upon our ability to finance certain of our investments at rates that provide a positive net spread. •Impact of Expected Repayment or Forecasted Sale on Cash Flows - The timing of and proceeds from the repayment or sale of certain investments may be different than expected or may not occur as expected. Proceeds from sales of assets are unpredictable and may vary materially from their estimated fair value and their carrying value. Further, the availability of investments that provide similar returns to those repaid or sold investments is unpredictable and returns on new investments may vary materially from those on existing investments.
Debt Obligations
The following table presents certain information regarding our debt obligations
(dollars in thousands):
June 30, 2020
Collateral
Outstanding Face Weighted Average Weighted Average Amortized Cost Weighted Average
Debt Obligations/Collateral Amount Carrying Value(A) Final Stated Maturity(B) Funding Cost Life (Years) Outstanding Face Basis Carrying Value Life (Years)
Repurchase Agreements(C)
Agency RMBS(D) $ 3,897,468 $ 3,897,468 Jul-20 to Sep-20 0.25 % 0.1 $ 3,922,189 $ 4,055,565 $ 4,099,159 6.0
Non-Agency RMBS(E) 1,934,744 1,932,624 Jul-20 to Sep-20 4.28 % 0.2 19,636,467 1,919,715 1,890,120 7.9
Residential Mortgage Loans(F) 3,283,186 3,277,727 Jul-20 to Jun-22 2.95 % 0.6 4,080,121 4,402,356 3,779,405 14.7
Real Estate Owned(G)(H) 63,679 63,679 Jul-20 to Jun-22 2.37 % 0.6 N/A N/A 81,887 N/A
Total Repurchase Agreements 9,179,077 9,171,498 2.08 % 0.3
Notes and Bonds Payable
Excess MSRs(I) 294,802 294,802 Feb-22 to Jul-22 4.30 % 1.9 90,541,438 49,457 54,126 5.6
MSRs(J) 2,700,527 2,691,107 Dec-20 to Jul-24 3.66 % 1.3 399,336,160 4,254,897 4,189,180 5.7
Servicer Advance Investments(K) 442,002 442,002 Aug-20 to Apr-21 2.92 % 0.8 467,339 537,388 559,011 6.3
Servicer Advances(K) 2,460,854 2,452,931 Jul-20 to Aug-23 3.59 % 1.7 2,806,803 2,947,678 2,947,678 0.7
Residential Mortgage Loans(L) 285,588 281,898 Jul-20 to Dec-45 5.40 % 17.7 462,589 493,636 444,438 4.3
Consumer Loans(M) 713,594 716,722 May-36 3.26 % 3.6 712,877 717,877 761,456 3.7
Total Notes and Bonds Payable 6,897,367 6,879,462 3.65 % 2.4
Total/ Weighted Average $ 16,076,444 $ 16,050,960 2.75 % 1.2
(A)Net of deferred financing costs.
95
--------------------------------------------------------------------------------
(B)All debt obligations with a stated maturity through July 31, 2020 were
refinanced, extended or repaid.
(C)These repurchase agreements had approximately $30.3 million of associated
accrued interest payable as of June 30, 2020 .
(D)All of the Agency RMBS repurchase agreements have a fixed rate.
(E)All Non-Agency RMBS repurchase agreements have LIBOR-based floating interest
rates. This also includes repurchase agreements and related collateral of $6.1
million and $10.0 million , respectively, on retained consumer loan bonds and of
$508.1 million and $650.3 million , respectively, on retained bonds
collateralized by Agency MSRs.
(F)Includes $283.0 million of repurchase agreements which bear interest at a
fixed rate of 5.53%. All remaining repurchase agreements have LIBOR-based
floating interest rates.
(G)All of these repurchase agreements have LIBOR-based floating interest rates.
(H)Includes financing collateralized by receivables including claims from FHA on
Ginnie Mae EBO loans for which foreclosure has been completed and for which we
have made or intend to make a claim on the FHA guarantee.
(I)Includes $83.6 million of corporate loans which bear interest equal to the
sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of
2.50% and $211.2 million of corporate loans which bear interest equal to the sum
of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of
2.75%. The outstanding face amount of the collateral represents the UPB of our
residential mortgage loans underlying our interests in MSRs that secure these
notes.
(J)Includes: $1,474.0 million of MSR notes which bear interest equal to the sum
of (i) a floating rate index equal to one-month LIBOR and (ii) a margin ranging
from 2.25% to 8.00%; $46.1 million of MSR notes which bear interest equal to the
sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of
2.50%; and $1,180.4 million of public notes with fixed interest rates ranging
from 3.55% to 4.62%. The outstanding face amount of the collateral represents
the UPB of the residential mortgage loans underlying the MSRs and MSR financing
receivables that secure these notes.
(K)$1.9 billion face amount of the notes have a fixed rate while the remaining
notes bear interest equal to the sum of (i) a floating rate index equal to
one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin
ranging from 1.85% to 2.75%. Collateral includes Servicer Advance Investments,
as well as servicer advances receivable related to the mortgage servicing rights
and MSR financing receivables owned by NRM.
(L)Represents: (i) a $5.1 million note payable to Mr. Cooper which includes a
$1.4 million receivable from government agency and bears interest equal to
one-month LIBOR plus 2.88%, (ii) $92.0 million fair value of SAFT 2013-1
mortgage-backed securities issued with fixed interest rate of 3.76% (see Note 12
for fair value details), (iii) $170.5 million of MDST Trusts asset-backed notes
held by third parties which bear interest equal to 6.61% (see Note 12 for fair
value details), and (iv) $18.0 million of asset-backed notes held by third
parties which include $0.9 million of REO and bear interest equal to the sum of
(i) a floating rate index equal to one-month LIBOR and (ii) a margin of 1.25%.
(M)Includes the SpringCastle debt, which is composed of the following classes of
asset-backed notes held by third parties: $634.5 million UPB of Class A notes
with a coupon of 3.20% and a stated maturity date in May 2036 , $70.4 million UPB
of Class B notes with a coupon of 3.58% and a stated maturity date in May 2036 ,
and $8.7 million UPB of Class C notes with a coupon of 5.06% and a stated
maturity date in May 2036 .
Certain of the debt obligations included above are obligations of our consolidated subsidiaries, which own the related collateral. In some cases, such collateral is not available to other creditors of ours.
We have margin exposure on$9.2 billion of repurchase agreements. To the extent that the value of the collateral underlying these repurchase agreements declines, we may be required to post margin, which could significantly impact our liquidity. 96 --------------------------------------------------------------------------------
The following table provides additional information regarding our short-term borrowings (dollars in thousands):
Six Months Ended June 30, 2020
Outstanding Average Daily
Balance at Amount Maximum Amount Weighted Average
June 30, 2020 Outstanding(A) Outstanding Daily Interest Rate
Repurchase Agreements
Agency RMBS $ 3,897,468 $ 8,213,387 $ 31,770,128 1.64 %
Non-Agency RMBS 1,934,744 4,655,652 8,235,316 2.99 %
Residential mortgage loans 3,001,073 3,986,488 5,843,853 2.63 %
Real estate owned 59,682 75,968 110,442 2.74 %
Notes and Bonds Payable
Excess MSRs - 50,000 50,000 4.16 %
MSRs 1,963,359 1,680,554 2,059,551 3.82 %
Servicer advances 1,002,856 537,496 583,915 3.00 %
Residential mortgage loans 23,092 152,725 210,366 2.63 %
Total/Weighted Average $ 11,882,274 $ 19,352,270 2.59 %
(A)Represents the average for the period the debt was outstanding.
Average Daily Amount Outstanding(A)
Three Months Ended
September 30, 2019 December 31, 2019 March 31, 2020 June 30, 2020
Repurchase Agreements
Agency RMBS $ 10,544,720 $ 14,939,907 $ 15,250,971 $ 1,175,803
Non-Agency RMBS 7,986,868 7,403,488 7,216,191 2,092,963
Residential mortgage loans 3,432,062 2,644,559 4,869,240 3,180,499
Real estate owned 58,390 66,317 75,173 76,763
(A)Represents the average for the period the debt was outstanding.
OnMay 19, 2020 , the Company entered into a three-year senior secured term loan facility agreement (the "2020 Term Loan") in the principal amount of$600.0 million . The 2020 Term Loan is guaranteed by certain subsidiaries of the Company and secured by pledges of certain equity interests held by the Company and its subsidiaries. Borrowings under the 2020 Term Loan bear interest at a fixed annual rate of 11.0% and are repayable in quarterly installments of 0.25% of the outstanding principal amount beginning onMarch 31, 2021 . The Company can prepay the 2020 Term Loan in whole or in part prior to maturity without an early termination penalty. The 2020 Term Loan was issued with an original issue discount of 1.0%, or$6.0 million of the principal amount. Fees incurred of approximately$9.0 million were capitalized as debt financing cost. June 30, 2020 December 31, 2019 Principal outstanding$ 600,000 $ - Less: Unamortized debt discount and issuance costs (66,617) - Net carrying value$ 533,383 $ -
For additional information on our debt activities, see Note 11 to our Condensed Consolidated Financial Statements.
97
--------------------------------------------------------------------------------Maturities
Our debt obligations as of
Nonrecourse(A) Recourse(B) Total
$ 9,418,370 2021 1,579,934 1,587,088 3,167,022 2022 846,144 577,789 1,423,933 2023 400,000 942,225 1,342,225 2024 - 348,804 348,804 2025 and thereafter 976,090 - 976,090$ 3,926,427 $ 12,750,017 $ 16,676,444 (A)Includes repurchase agreements and notes and bonds payable of$1.3 million and$3.9 billion , respectively. (B)Includes repurchase agreements and notes and bonds payable of$9.2 billion and$3.6 billion , respectively. The weighted average differences between the fair value of the assets and the face amount of available financing for the Agency RMBS repurchase agreements (including amounts related to Trades Receivable) and Non-Agency RMBS repurchase agreements were 4.9% and (2.4)%, respectively, and for Residential Mortgage Loans and Real Estate Owned were 13.1% and 22.2%, respectively, during the six months endedJune 30, 2020 . Borrowing Capacity The following table represents our borrowing capacity as ofJune 30, 2020 (in thousands): Balance Available Debt Obligations/ Collateral Borrowing Capacity Outstanding Financing(A) Repurchase Agreements Residential mortgage loans and REO$ 5,698,258 $ 1,658,270 $ 4,039,988 New Loan Origination 4,035,000 1,688,596 2,346,404 Notes and Bonds Payable Excess MSRs 100,000 83,565 16,435 MSRs 1,608,000 1,520,089 87,911 Servicer advances 5,120,000 2,902,857 2,217,143 Residential Mortgage Loans 650,000 17,967 632,033$ 17,211,258 $ 7,871,344 $ 9,339,914
(A)Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions as set forth in the applicable agreements, including any applicable advance rate.
Covenants
Certain of the debt obligations are subject to customary loan covenants and event of default provisions, including event of default provisions triggered by certain specified declines in our equity or failure to maintain a specified tangible net worth, liquidity, or indebtedness to tangible net worth ratio. We were in compliance with all of our debt covenants as ofJune 30, 2020 .
Stockholders' Equity
Preferred Stock
Pursuant to our certificate of incorporation, we are authorized to designate and
issue up to 100.0 million shares of preferred stock, par value of
98
--------------------------------------------------------------------------------The table below summarizes Preferred Shares:
Dividends Declared per Share
Six Months
Three Months Ended
Number of Liquidation Issuance Ended June 30,
Series Shares Preference Discount Carrying Value June 30, 2020 2020
Fixed-to-floating rate cumulative
redeemable preferred:
Preferred Series A, 7.50% Issued
July 2019 6,210 $ 155,250 3.15 % $ 150,026 $ 0.47 $ 0.94
Preferred Series B, 7.125% Issued
August 2019 11,300 282,500 3.15 % 273,418 $ 0.45 $ 0.89
Preferred Series C, 6.375% Issued
February 2020 16,100 402,500 3.15 % 389,548 $ 0.40 $ 0.80
Total 33,610 $ 840,250 $ 812,992
Our Preferred Series A, Preferred Series B, and Preferred Series C rank senior
to all classes or series of our common stock and to all other equity securities
issued by us that expressly indicate are subordinated to the Preferred Series A,
Preferred Series B, and Preferred Series C with respect to rights to the payment
of dividends and the distribution of assets upon our liquidation, dissolution or
winding up. Our Preferred Series A, Preferred Series B, and Preferred Series C
have no stated maturity, are not subject to any sinking fund or mandatory
redemption and rank on parity with each other. Under certain circumstances upon
a change of control, our Preferred Series A, Preferred Series B, and Preferred
Series C are convertible to shares of our common stock.
From and including, July 2, 2019 , August 15, 2019 , and February 14, 2020 but
excluding, August 15, 2024 and February 15, 2025 , holders of shares of our
Preferred Series A, Preferred Series B, and Preferred Series C are entitled to
receive cumulative cash dividends at a rate of 7.50%, 7.125%, and 6.375% per
annum of the $25.00 liquidation preference per share (equivalent to $1.875 ,
$1.781 , and $1.600 per annum per share), respectively, and from and including
August 15, 2024 and February 15, 2025 , at a floating rate per annum equal to the
three-month LIBOR plus a spread of 5.802%, 5.640%, and 4.969% per annum,
respectively. Dividends are payable quarterly in arrears on or about the 15th
day of each February, May, August and November.
The Preferred Series A and Preferred Series B will not be redeemable before
August 15, 2024 and the Preferred Series C will not be redeemable before
February 15, 2025 , except under certain limited circumstances intended to
preserve our qualification as a REIT for U.S. federal income tax purposes and
except upon the occurrence of a Change of Control (as defined in the Certificate
of Designations). On or after August 15, 2024 for the Preferred Series A and
Preferred Series B and February 15, 2025 for the Preferred Series C, we may, at
our option, upon not less than 30 nor more than 60 days' written notice, redeem
the Preferred Series A, Preferred Series B, and Preferred Series C, in whole or
in part, at any time or from time to time, for cash at a redemption price of
$25.00 per share, plus any accumulated and unpaid dividends thereon (whether or
not authorized or declared) to, but excluding, the redemption date, without
interest.
Common Stock
Approximately 2.4 million shares of our common stock were held by Fortress,
through its affiliates, and its principals as of
InFebruary 2019 , we issued 46.0 million shares of our common stock in a public offering at a price to the public of$16.50 per share for net proceeds of approximately$751.7 million . To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 4.6 million shares of our common stock at the public offering price, which had a fair value of approximately$3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.40% risk-free rate, a 9.30% dividend yield, 19.26% volatility and a 10-year term. OnAugust 20, 2019 , we announced that our board of directors had authorized the repurchase of up to$200.0 million of our common stock throughDecember 31, 2020 . Repurchases may be made at any time and from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of our shares, trading volume, capital availability, our performance and general economic and market conditions. The share repurchase program may be suspended or discontinued at any time. No share repurchases have been made as of the filing of this report. Repurchases may impact our financial results, including fees paid to our Manager. 99 -------------------------------------------------------------------------------- As ofJune 30, 2020 , our outstanding options had a weighted average exercise price of$16.31 . Our outstanding options as ofJune 30, 2020 were summarized as follows: Held by the Manager
10,860,706
Issued to the Manager and subsequently assigned to certain of the Manager's employees
3,560,949
Issued to the independent directors 7,000 Total 14,428,655
Accumulated Other Comprehensive Income (Loss)
During the six months ended
Total Accumulated Other
Comprehensive Income
Accumulated other comprehensive income, December 31, 2019 $ 682,151
Net unrealized gain (loss) on securities 90,773
Reclassification of net realized (gain) loss on securities into earnings
(742,194)
Accumulated other comprehensive income, June 30, 2020 $ 30,730 Our GAAP equity changes as our real estate securities portfolio is marked to market each quarter, among other factors. The primary causes of mark-to-market changes are changes in interest rates and credit spreads. During the six months endedJune 30, 2020 , we recorded net unrealized losses on our real estate securities due to widening credit spreads, changes in collateral performance, and other factors related specifically to certain investments. We recorded credit impairment charges of$19.0 million with respect to real estate securities and realized losses of$761.2 million on sales of real estate securities.
See "-Market Considerations" above for a further discussion of recent trends and events affecting our unrealized gains and losses, as well as our liquidity.
Common Dividends
We are organized and intend to conduct our operations to qualify as a REIT forU.S. federal income tax purposes. We intend to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly distributions of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or raise capital to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We make distributions based on a number of factors, including an estimate of taxable earnings per common share. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, other differences in method of accounting, non-deductible general and administrative expenses, taxable income arising from certain modifications of debt instruments and investments held in TRSs. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Consistent with our intention to enhance our liquidity and strengthen our cash position to take advantage of opportunities when market conditions stabilize, and in light of our expectations with respect to our anticipated future performance, including as a result of our current asset mix and leverage profile, during the first quarter of 2020, our board of directors adjusted the quarterly cash dividend on our shares of common stock to$0.05 per share from$0.50 per share. During the second quarter of 2020, our board of directors adjusted the quarterly cash dividend on our shares of common stock to$0.10 per share from$0.05 per share.
We will continue to monitor market conditions and the potential impact the ongoing volatility and uncertainty may have on our business. Our board of directors will continue to evaluate the payment of dividends as market conditions evolve, and no
100
--------------------------------------------------------------------------------
definitive determination has been made at this time. While the terms and timing
of the approval and declaration of cash dividends, if any, on shares of our
capital stock is at the sole discretion of our board of directors and we cannot
predict how market conditions may evolve, we intend to distribute to our
stockholders an amount equal to at least 90% of our REIT taxable income
determined before applying the deduction for dividends paid and by excluding net
capital gains consistent with our intention to maintain our qualification as a
REIT under the Code.
Common Dividends Declared for the Period Ended Paid/Payable Amount Per Share
September 30, 2019 October 2019 $ 0.50
December 31, 2019 January 2020 $ 0.50
March 31, 2020 April 2020 $ 0.05
June 30, 2020 July 2020 $ 0.10
Cash Flow
Operating Activities
Net cash flows provided by operating activities increased approximately $3.1
billion for the six months ended June 30, 2020 as compared to the six months
ended June 30, 2019 . Operating cash flows for the six months ended June 30, 2020
primarily consisted of proceeds from sales and principal repayments of purchased
residential mortgage loans, held-for-sale of $22.2 billion , servicing fees
received of $749.8 million , net recoveries of servicer advances receivable of
$365.1 million , and net interest income received of $464.4 million . Operating
cash outflows primarily consisted of purchases of residential mortgage loans,
held-for-sale of $1.1 billion , originations of $19.0 billion , incentive
compensation and management fees paid to the Manager of $337.7 million , income
taxes paid of $0.1 million , subservicing fees paid of $245.8 million and other
outflows of approximately $445.5 million including general and administrative
costs and loan servicing fees.
Investing Activities
Cash flows provided by (used in) investing activities were$16.4 billion for the six months endedJune 30, 2020 . Investing activities consisted primarily of the acquisition of MSRs, real estate securities, and the funding of servicer advances, net of proceeds from the sale of real estate securities, principal repayments from Servicer Advance Investments, MSRs, real estate securities and loans as well as proceeds from the sale of real estate securities, loan, REOs, and derivative cash flows. Financing Activities Cash flows provided by (used in) financing activities were approximately$(18.7) billion during the six months endedJune 30, 2020 . Financing activities consisted primarily of borrowings net of repayments under debt obligations, margin deposits net returns of margin under repurchase agreements and derivatives, equity offerings, capital contributions net of distributions from noncontrolling interests in the equity of consolidated subsidiaries, and payment of dividends.
INTEREST RATE, CREDIT AND SPREAD RISK
We are subject to interest rate, credit and spread risk with respect to our investments. These risks are further described in "Quantitative and Qualitative Disclosures About Market Risk."
OFF-BALANCE SHEET ARRANGEMENTS
We have material off-balance sheet arrangements related to our non-consolidated securitizations of residential mortgage loans treated as sales in which we retained certain interests. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered and represented the most common market-accepted method for financing such assets. Our exposure to credit losses related to these non-recourse, off-balance sheet financings is limited to$1.7 billion . As ofJune 30, 2020 , there was$14.8 billion in total outstanding unpaid principal balance of residential mortgage loans underlying such securitization trusts that represent off-balance sheet financings.
We did not have any other off-balance sheet arrangements as of
101
--------------------------------------------------------------------------------limited purposes, other than the entities described above. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment and do not intend to provide additional funding to any such entities.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as ofJune 30, 2020 included all of the material contractual obligations referred to in our annual report on Form 10-K for the year endedDecember 31, 2019 , excluding debt that was repaid as described in "-Liquidity and Capital Resources-Debt Obligations."
In addition, we executed the following material contractual obligations during
the six months ended
•Derivatives - as described in Note 10 to our Condensed Consolidated Financial Statements, we have altered the composition of our economic hedges during the period. •Debt obligations - as described in Note 11 to our Condensed Consolidated Financial Statements, we borrowed additional amounts. See Notes 15 and 17 to our Condensed Consolidated Financial Statements included in this report for information regarding commitments and material contracts entered into subsequent toJune 30, 2020 , if any. As described in Note 15, we have committed to purchase certain future servicer advances. The actual amount of future advances is subject to significant uncertainty. However, we currently expect that net recoveries of servicer advances will exceed net fundings for the foreseeable future. This expectation is based on judgments, estimates and assumptions, all of which are subject to significant uncertainty, as further described in "-Application of Critical Accounting Policies-Servicer Advance Investments." In addition, the Consumer Loan Companies have invested in loans with an aggregate of$266.0 million of unfunded and available revolving credit privileges as ofJune 30, 2020 . However, under the terms of these loans, requests for draws may be denied and unfunded availability may be terminated at management's discretion. INFLATION Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based our taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. See "Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk."
CORE EARNINGS
We have five primary variables that impact our operating performance: (i) the
current yield earned on our investments, (ii) the interest expense under the
debt incurred to finance our investments, (iii) our operating expenses and
taxes, (iv) our realized and unrealized gains or losses on our investments,
including any impairment or reserve for expected credit losses and (v) income
from our origination and servicing businesses. "Core earnings" is a non-GAAP
measure of our operating performance, excluding the fourth variable above and
adjusts the earnings from the consumer loan investment to a level yield basis.
Core earnings is used by management to evaluate our performance without taking
into account: (i) realized and unrealized gains and losses, which although they
represent a part of our recurring operations, are subject to significant
variability and are generally limited to a potential indicator of future
economic performance; (ii) incentive compensation paid to our Manager;
(iii) non-capitalized transaction-related expenses; and (iv) deferred taxes,
which are not representative of current operations.
Our definition of core earnings includes accretion on held-for-sale loans as if
they continued to be held-for-investment. Although we intend to sell such loans,
there is no guarantee that such loans will be sold or that they will be sold
within any expected timeframe. During the period prior to sale, we continue to
receive cash flows from such loans and believe that it is appropriate to record
a yield thereon. In addition, our definition of core earnings excludes all
deferred taxes, rather than just deferred taxes related to unrealized gains or
losses, because we believe deferred taxes are not representative of current
operations. Our definition of core earnings also limits accreted interest income
on RMBS where we receive par upon the exercise of associated call rights based
on the estimated value of the underlying collateral, net of related costs
including advances. We created this limit in order to be able to accrete to the
lower of par or the net value of the underlying collateral, in instances where
the net value of the underlying collateral is lower than par. We believe this
amount represents the amount of accretion we would have expected to earn on such
bonds had the call rights not been exercised.
102
--------------------------------------------------------------------------------
Beginning January 1, 2020 , our investments in consumer loans are accounted for
under the fair value option. Core Earnings adjusts earnings on the consumer
loans to a level yield to present income recognition across the consumer loan
portfolio in the manner in which it is economically earned, to avoid potential
delays in loss recognition, and align it with our overall portfolio of
mortgage-related assets which generally record income on a level yield basis.
With respect to consumer loans classified as held-for-sale, the level yield is
computed through the expected sale date. With respect to the gains recorded
under GAAP in 2014 and 2016 as a result of a refinancing of, and the
consolidation of, the Consumer Loan Companies, respectively, we continue to
record a level yield on those assets based on their original purchase price.
While incentive compensation paid to our Manager may be a material operating
expense, we exclude it from core earnings because (i) from time to time, a
component of the computation of this expense will relate to items (such as gains
or losses) that are excluded from core earnings, and (ii) it is impractical to
determine the portion of the expense related to core earnings and non-core
earnings, and the type of earnings (loss) that created an excess (deficit) above
or below, as applicable, the incentive compensation threshold. To illustrate why
it is impractical to determine the portion of incentive compensation expense
that should be allocated to core earnings, we note that, as an example, in a
given period, we may have core earnings in excess of the incentive compensation
threshold but incur losses (which are excluded from core earnings) that reduce
total earnings below the incentive compensation threshold. In such case, we
would either need to (a) allocate zero incentive compensation expense to core
earnings, even though core earnings exceeded the incentive compensation
threshold, or (b) assign a "pro forma" amount of incentive compensation expense
to core earnings, even though no incentive compensation was actually incurred.
We believe that neither of these allocation methodologies achieves a logical
result. Accordingly, the exclusion of incentive compensation facilitates
comparability between periods and avoids the distortion to our non-GAAP
operating measure that would result from the inclusion of incentive compensation
that relates to non-core earnings.
With regard to non-capitalized transaction-related expenses, management does not
view these costs as part of our core operations, as they are considered by
management to be similar to realized losses incurred at acquisition.
Non-capitalized transaction-related expenses are generally legal and valuation
service costs, as well as other professional service fees, incurred when we
acquire certain investments, as well as costs associated with the acquisition
and integration of acquired businesses.
Since the third quarter of 2018, as a result of the Shellpoint Acquisition, we,
through our wholly owned subsidiary, NewRez, originate conventional,
government-insured and nonconforming residential mortgage loans for sale and
securitization. In connection with the transfer of loans to the GSEs or mortgage
investors, we report realized gains or losses on the sale of originated
residential mortgage loans and retention of mortgage servicing rights, which we
believe is an indicator of performance for the Servicing and Origination
segments and therefore included in core earnings. Realized gains or losses on
the sale of originated residential mortgage loans had no impact on core earnings
in any prior period, but may impact core earnings in future periods.
Beginning with the third quarter of 2019, as a result of the continued
evaluation of how Shellpoint operates its business and its impact on our
operating performance, core earnings includes Shellpoint's GAAP net income with
the exception of the unrealized gains or losses due to changes in valuation
inputs and assumptions on MSRs owned by NewRez, and non-capitalized
transaction-related expenses. This change was not material to core earnings for
the quarter ended September 30, 2019 .
Management believes that the adjustments to compute "core earnings" specified
above allow investors and analysts to readily identify and track the operating
performance of the assets that form the core of our activity, assist in
comparing the core operating results between periods, and enable investors to
evaluate our current core performance using the same measure that management
uses to operate the business. Management also utilizes core earnings as a
measure in its decision-making process relating to improvements to the
underlying fundamental operations of our investments, as well as the allocation
of resources between those investments, and management also relies on core
earnings as an indicator of the results of such decisions. Core earnings
excludes certain recurring items, such as gains and losses (including impairment
and reserves, as well as derivative activities) and non-capitalized
transaction-related expenses, because they are not considered by management to
be part of our core operations for the reasons described herein. As such, core
earnings is not intended to reflect all of our activity and should be considered
as only one of the factors used by management in assessing our performance,
along with GAAP net income which is inclusive of all of our activities.
The primary differences between core earnings and the measure we use to
calculate incentive compensation relate to (i) realized gains and losses
(including impairments and reserves for expected credit losses),
(ii) non-capitalized transaction-related expenses and (iii) deferred taxes
(other than those related to unrealized gains and losses). Each are excluded
from core earnings and included in our incentive compensation measure (either
immediately or through amortization). In addition, our incentive compensation
measure does not include accretion on held-for-sale loans and the timing of
recognition of income from consumer loans is different. Unlike core earnings,
our incentive compensation measure is intended to reflect all realized results
103
--------------------------------------------------------------------------------
of operations. The Gain on Remeasurement of
Core earnings does not represent and should not be considered as a substitute for, or superior to, net income or as a substitute for, or superior to, cash flows from operating activities, each as determined in accordance withU.S. GAAP, and our calculation of this measure may not be comparable to similarly entitled measures reported by other companies. For a further description of the difference between cash flows provided by operations and net income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" above. Set forth below is a reconciliation of core earnings to the most directly comparable GAAP financial measure (dollars in thousands, except share and per share data): Three Months Ended Six Months Ended June 30, June 30, 2020 2019 2020 2019 Net (loss) income attributable to common stockholders$ (8,868)
(21,710) 22,311 122,935 35,107
Change in fair value of investments (27,516) 189,150 928,016 154,271
(Gain) loss on settlement of investments, net 81,382 (4,640) 892,853 38,527
Other (income) loss 47,366 31,031 90,950 25,037
Other Income and Impairment attributable to
non-controlling interests 19,332 (5,626) (2,947) (8,058)
Non-capitalized transaction-related expenses 14,195 9,284 31,097 16,150
Incentive compensation to affiliate - - - 12,958
Preferred stock management fee to affiliate 3,048 - 5,343 -
Deferred taxes 25,277 (21,599) (141,640) 24,732
Interest income on residential mortgage loans,
held-for-sale 8,424 23,888 20,567 26,189
Limit on RMBS discount accretion related to called deals
- - - (19,556)
Adjust consumer loans to level yield (995) 7,815 (1,510) 2,962
Core earnings of equity method investees:
Excess mortgage servicing rights (Note 4) 265 87 4,090 2,115
Core Earnings $ 140,200 Net Income Per Diluted Share$ (0.02)
$ 0.34
Weighted Average Number of Shares of Common Stock Outstanding, Diluted 415,661,782 415,463,757 415,625,468 402,239,438
© Edgar Online, source
