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. The significant dislocation in the financial markets caused, among other things, credit spread widening, a sharp decrease in interest rates, higher unemployment levels, illiquidity in repurchase agreement financing, and declines in the fair value of many of our investments. In addition, as a result of stay-at-home or shelter-in-place orders issued by state and local governments throughout theU.S. , many businesses switched to remote work or canceled or reduced operations. Consumers responded by reducing or redirecting their spending. The confluence of these factors resulted in global andU.S. equity markets experiencing the steepest decline since the 2008 recession. Beginning inMay 2020 , volatility somewhat subsided andU.S. stocks delivered their best quarterly returns in more than 20 years during the second quarter of 2020 following the sharp sell-off during the latter half of the first quarter. The rebound in stocks was largely driven by increased liquidity attributable to actions taken by theFederal Reserve to stabilize markets and hopeful sentiment about "reopening" the economy. While global economic activity and consumer sentiment showed signs of significant advancement, consumer spending levels remain well below normal and some of the economic progress has stalled or may stall as COVID-19 case counts continue to rise in theU.S. Furthermore, due to the possibility that a number of states or theU.S. federal government may again impose greater restrictions on economic and social activity in light of rapidly rising COVID-19 daily case counts and heightened uncertainty relating to the duration and longer term impact of the pandemic and government actions in response thereto, we expect market volatility generally to remain elevated for the remainder of 2020. Similar to assets in the wider economy, pricing for assets within our investment portfolio rebounded during the second and third quarters of 2020 with credit spreads tightening across the board. Additionally, we continued to make significant progress with respect to our capital structure and how we finance our assets. In particular, 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 specifically, the unprecedented illiquidity in repurchase agreement financing, we procured and continue to procure financing, such as securitizations and term financings, 69 -------------------------------------------------------------------------------- that provides 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 more limited mark-to-market provisions allows 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. We continue to meet all margin calls and based on information currently available to us, we believe we will be able to satisfy all margin calls and servicing obligations for the remainder of 2020. In addition, we continue to hold an increased amount of unrestricted cash due to the uncertainty surrounding the reopening of the economy and the continued spread of COVID-19. 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
The following table summarizes the
Three Months Ended
June 30, March 31, December 31,
2020 2020 2019
(Percent change from the preceding quarter)
Real GDP (31.4) % (5.0) % 2.1 %
The following table summarizes he U.S. unemployment rate according to the U.S.
Department of Labor :
September 30, June 30, March 31, December 31,
2020 2020 2020 2019
Unemployment rate 7.90 % 11.10 % 4.40 % 3.50 %
The following table summarizes the latest data released by the S&P Dow Jones Indices for their S&P CoreLogic Case-Shiller Home Price Indices:
June 30, March 31, December 31,
2020 2020 2019
(Percent change from the preceding month)
Change in annual home price (3.60) % 3.50 % 2.50 %
The following table summarizes the 10-year Treasury rate and the 30-year fixed
mortgage rates:
September 30, June 30, March 31, December 31,
2020 2020 2020 2019
10-year U.S. Treasury rate 0.69 % 0.66 % 0.70 % 1.92 %
30-year fixed mortgage rate 2.89 % 3.16 % 3.45 % 3.72 %
We believe the estimates and assumptions underlying our consolidated financial
statements are reasonable and supportable based on the information available as
of September 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 of September 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
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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.
While the unemployment rate has generally been trending downward, forbearances
may continue to rise nominally due to economic uncertainty and the lack of a
definitive end date to forbearance and foreclosure moratoria. When a definitive
end date is announced, there could be an increase in forbearances and requests
for assistance, however, at this time, net forbearance activity has been
trending downward.
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.
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 and Ginnie Mae servicing guides, we do
not collect any servicing fees on delinquent loans underlying our GSE and Ginnie
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
OnSeptember 16, 2020 , the Company, as borrower, completed a private offering of$550.0 million aggregate principal amount of 6.250% senior unsecured notes due 2025 (the "2025 Senior Notes"). Interest on the 2025 Senior Notes accrue at the rate of 6.250% per annum with interest payable semi-annually in arrears on eachApril 15 andOctober 15 , commencing onApril 15, 2021 . The 2025 Senior Notes mature onOctober 15, 2025 and the Company may redeem some or all of the 2025 Senior Notes at the Company's option, at any time from time to time, on or afterOctober 15, 2022 at a price equal to the following fixed redemption prices (expressed as a percentage of principal amount of the 2025 Senior Notes to be redeemed): Year Price 2022 103.125% 2023 101.563% 2024 and thereafter 100.000% 71
-------------------------------------------------------------------------------- Prior toOctober 15, 2022 , the Company will be entitled at its option on one or more occasions to redeem the 2025 Senior Notes in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the 2025 Senior Notes originally issued prior to the applicable redemption date at a fixed redemption price of 106.250%. Net proceeds from the offering were approximately$544.5 million , after deducting the initial purchasers' discounts and commissions and estimated offering expenses payable by the Company. The Company used the net proceeds from the offering, together with cash on hand, to prepay and retire its then-existing 2020 Term Loan and to pay related fees and expenses. As a result, the Company recorded a$61.1 million loss on extinguishment of debt, representing a write-off of unamortized debt issuance costs and original issue discount related to the 2020 Term Loan. PROPOSED CHANGES TOLIBOR 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 ofSeptember 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). Servicing and Origination Residential Securities and Loans MSR Related Total Servicing Real Estate Residential Origination Servicing Investments Elimination(A) and Origination Securities Mortgage Loans Consumer Loans Corporate TotalSeptember 30, 2020 Investments$ 2,843,720 $ -$ 5,753,366 $ -$ 8,597,086
99,321 50,942 406,965 - 557,228 160,764 4,681 7,195 111,154 841,022
Restricted cash 3,929 32,369 102,166 - 138,464 12,723 - 29,367 - 180,554
Other assets 369,988 191,398 4,466,009 - 5,027,395 1,005,847 193,394 59,968 32,105 6,318,709
Goodwill 11,836 12,540 5,092 - 29,468 - - - - 29,468
Total assets $ 3,328,794 $ 287,249 $ 10,733,598 $ - $ 14,349,641 $ 12,009,401 $ 3,085,425 $ 818,638 $ 143,259 $ 30,406,364
Debt $ 2,612,817 $ 6,669 $ 5,980,900 $ - $ 8,600,386 $ 10,877,414 $ 2,241,607 $ 681,109 $ 541,758 $ 22,942,274
Other liabilities 165,022 63,657 1,661,193 - 1,889,872 9,633 45,696 5,425 84,833 2,035,459
Total liabilities 2,777,839 70,326 7,642,093 - 10,490,258 10,887,047 2,287,303 686,534 626,591 24,977,733
Total equity 550,955 216,923 3,091,505 - 3,859,383 1,122,354 798,122 132,104 (483,332) 5,428,631Noncontrolling interests in equity of consolidated subsidiaries 18,365 - 42,946 - 61,311 - - 38,126 - 99,437 Total New Residential stockholders' equity$ 532,590 $ 216,923 $ 3,048,559 $ -$ 3,798,072 $ 1,122,354 $ 798,122 $ 93,978 $ (483,332) $ 5,329,194 Investments in equity method investees $ - $ -$ 139,351 $ -$ 139,351 $ - $ - $ - $ -$ 139,351 Operating Investments Origination For the nine months endedSeptember 30, 2020 , NewRez's loan origination volume was$37.7 billion , up from$11.8 billion in the year prior. During the nine months endedSeptember 30, 2020 , the continued lower interest rate environment, increased 72 -------------------------------------------------------------------------------- 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 nine-month period endedSeptember 30, 2020 was 2.01%, 0.29% higher than 1.72% for the same period in 2019. 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. After pausing wholesale and correspondent channel originations to reduce our pipeline and minimize hedge and margin risk inMarch 2020 , we re-entered the wholesale and correspondent channels inMay 2020 and volumes from June throughSeptember 2020 have exceeded the pre-pause levels. 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. NewRez, through its strategic relationship with Salesforce, a global leader in Customer Relationship Management (CRM), is developing 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. The partnership is a key initiative that will further the organization's focus on growing recapture volume. 73 -------------------------------------------------------------------------------- The charts below provide selected operating statistics for our Origination segment: Unpaid Principal Balance for the Nine Months Ended September 30, 2020 September 30, 2019 Change
Production by Channel (in millions)
Retail / Shelter $ 2,789 $ 1,616$ 1,173 Direct to Consumer / Retention 8,571 2,509 6,062 Wholesale 4,893 3,487 1,406 Correspondent 21,494 4,145 17,349 Total Production by Channel $ 37,747 $ 11,757$ 25,990
Production by Product (in millions)
Agency $ 24,316 $ 6,149$ 18,167 Government 12,709 4,091 8,618 Non-QM 365 1,073 (708) Non-Agency 294 379 (85) Other 63 65 (2) Total Production by Product $ 37,747 $ 11,757$ 25,990 % Purchase 30 % 52 % (22) % % Refinance 70 % 48 % 22 % September 30, 2020 September 30, 2019 Change
Origination Revenue (in thousands)
Gain on loans originated and sold(A) $ 502,436 $ 55,120$ 447,316 Gain (loss) on settlement of mortgage loan derivative instruments(B) (290,660) (61,337) (229,323) MSRs retained on transfer of loans(C) 403,274 186,501 216,773 Other(D) 31,991 13,341 18,650 Realized gain on sale of originated mortgage loans, net $ 647,041
$ 193,625
Change in fair value of loans $ 95,367 $ 12,406$ 82,961 Change in fair value of interest rate lock commitments 206,073 13,911 192,162 Change in fair value of derivative instruments (62,751) 8,939 (71,690) Unrealized origination revenue $ 238,689 $ 35,256$ 203,433 Gain on originated mortgage loans, held-for-sale, net(E) (F) $ 885,730 $ 228,881$ 656,849 Pull through adjusted lock volume$ 44,044,241
Gain on originated mortgage loans, as a percentage of pull through adjusted lock volume 2.01 % 1.72 % 0.29 % (A)Includes loan origination fees of$953.1 million and$189.4 million for the nine months endedSeptember 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$99.1 million and$66.1 million of gain on originated mortgage loans, held-for-sale, net for the nine months endedSeptember 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). 74 --------------------------------------------------------------------------------
(F)Excludes mortgage servicing rights revenue on recaptured loan volume delivered back to NRM.
Total Gain on originated mortgage loans, held-for-sale, net, increased for the
nine months ended
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.
During the first nine months of 2020, approximately 208,400 homeowners serviced
by SMS indicated that they are or were impacted by COVID. Of this population,
176,800 homeowners were setup on a forbearance plan with the vast majority under
a CARES Act or COVID-19 related program. As of September 30, 2020 , 75,300 of the
forbearance plans remained active. 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 nine months ended September 30, 2020 , we boarded approximately
834,000 loans, completing the remaining Ditech acquisition transfers. Prior to
the impact of Covid-19, our cost to service declined as we achieved the benefits
of scale and created efficiencies. Since March 2020 our cost to service
increased in connection with supporting performing homeowners navigate
forbearance programs and due to a rise in delinquencies. However, annualized
direct cost to service per loan declined approximately 1% to $153 per loan in
the first nine months of 2020 from $155 per loan for the same time period in the
prior year. 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 September 30,
2020 and 2019.
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Unpaid Principal Balance
September 30, 2020 September 30, 2019 Change
Performing Servicing (in millions)
MSR Assets $ 185,273 $ 121,860 $ 63,413
Acquired Residential Whole Loans $ 2,975 $ 1,469 $ 1,506
Total Performing Servicing $ 188,248 $
123,329
Special Servicing (in millions) MSR Assets$ 14,566 $ 2,131$ 12,435 Acquired Residential Whole Loans$ 7,258 $ 4,176$ 3,082 Third Party$ 77,131 $ 54,709$ 22,422 Total Special Servicing$ 98,955 $ 61,016$ 37,939 Total Servicing Portfolio$ 287,203 $ 184,345$ 102,858 Agency Servicing (in millions) MSR Assets$ 143,555 $ 96,488$ 47,067 Acquired Residential Whole Loans $ - $ - $ - Third Party$ 19,216 $ 4,249$ 14,967 Total Agency Servicing$ 162,771 $ 100,737$ 62,034 Government Servicing (in millions) MSR Assets$ 55,894 $ 26,931$ 28,963 Acquired Residential Whole Loans $ - $ - $ - Third Party$ 1,342 $ 1,875$ (533) Total Government Servicing$ 57,236 $ 28,806$ 28,430 Non-Agency (Private Label) Servicing (in millions) MSR Assets $ 390 $ 572$ (182) Acquired Residential Whole Loans$ 10,233 $ 5,645$ 4,588 Third Party$ 56,573 $ 48,585$ 7,988 Total Non-Agency (Private Label) Servicing$ 67,196 $ 54,802$ 12,394 Total Servicing Portfolio$ 287,203 $ 184,345$ 102,858 Nine Months Ended September 30, 2020 September 30, 2019 Change Base Servicing Fees (in thousands): MSR Assets $ 120,398 $ 35,519$ 84,879 Acquired Residential Whole Loans 10,938 5,564 5,374 Third Party 83,468 51,669 31,799 Total Base Servicing Fees $ 214,804 $ 92,752$ 122,052 Other Fees (in thousands): Incentive fees $ 29,565 $ 27,159$ 2,406 Ancillary fees 30,623 20,996 9,627 Boarding fees 8,580 5,357 3,223 Other fees 11,475 466 11,009 Total Other Fees(A) $ 80,243 $ 53,978$ 26,265 Total Servicing Fees $ 295,047 $ 146,730$ 148,317
(A)Includes other fees earned from third parties of
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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 markets 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 capital markets 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 ofSeptember 30, 2020 , these subservicers includeLoanCare , PHH, Mr. Cooper, and Flagstar, which subservice 19.1%, 18.5%, 17.1%, and 0.7% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 44.6% 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. 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 "Results of Operations-Change in Fair Value of Investments in MSR Financing Receivables" below for further information regarding the impact of the economic uncertainties resulting from COVID-19 and the associated impacted on our MSR investments. 77 --------------------------------------------------------------------------------
The table below summarizes our investments in MSRs and MSR financing receivables
as of
Current UPB Weighted Average MSR Carrying Value
(millions) (bps) (millions)
MSRs
GSE $ 323,473.9 28 bps $ 3,012.6
Non-Agency 5,605.1 48 16.6
Ginnie Mae 57,290.6 45 622.6
MSR Financing Receivables
GSE 6,159.8 25 57.4
Non-Agency 69,090.0 48 1,072.4
Total $ 461,619.4 33 bps $ 4,781.6 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 Carrying Current Principal Average Loan Age Adjustable Rate Average Average Average Average
Amount Balance Number of Loans WA FICO Score(A) WA Coupon WA Maturity (months) (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
MSRs
GSE $ 3,012,602 $ 323,473,921 2,053,857 745 4.2 % 265 68 2.9 % 31.6 % 31.4 % 0.4 % 10.1 %
Non-Agency 16,598 5,605,074 122,960 666 7.1 % 188 170 3.7 % 29.1 % 25.9 % 4.0 % 2.1 %
Ginnie Mae 622,605 57,290,646 288,365 685 3.8 % 322 34 2.5 % 26.8 % 26.5 % 0.4 % 22.2 %
MSR Financing Receivables
GSE 57,410 6,159,819 30,895 748 4.0 % 271 46 - % 34.3 % 33.8 % 0.7 % 21.2 %
Non-Agency 1,072,409 69,089,988 511,425 642 4.2 % 303 176 13.9 % 10.2 % 8.5 % 1.7 % 2.5 %
Total $ 4,781,624 $ 461,619,448 3,007,502 721 4.2 % 277 81 4.4 % 27.8 % 27.3 % 0.6 % 10.5 %
Collateral Characteristics
Delinquency 30 Delinquency 60 Delinquency 90+ Real Estate
Days(F) Days(F) Days(F) Loans in Foreclosure Owned Loans in Bankruptcy
MSRs
GSE 1.5 % 0.6 % 4.0 % 0.3 % 0.1 % 0.3 %
Non-Agency 3.9 % 1.6 % 3.9 % 5.4 % 0.5 % 2.9 %
Ginnie Mae 3.4 % 1.7 % 8.1 % 0.9 % 0.1 % 1.0 %
MSR financing
receivables
GSE 0.9 % 0.5 % 4.3 % - % - % - %
Non-Agency 5.0 % 1.9 % 2.1 % 7.3 % 1.1 % 2.6 %
Total 2.3 % 1.0 % 4.2 % 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.
(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.
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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
Average
Current UPB Weighted Average Excess MSR Carrying Value
(billions) MSR (bps) (bps) Interest in Excess MSR(%) (millions)
Agency $ 37.4 30 bps 21 bps 32.5 % 66.7 % $ 173.5
Non-Agency(B) 40.0 35 15 33.3 % 100.0 % $ 155.1
Total/Weighted Average $ 77.4 33 bps 18 bps $ 328.6
(A)The MSR is a weighted average as of September 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 $27.5 billion UPB underlying
these Excess MSRs.
Summary of Excess MSR Investments Through Equity Method Investees as of
September 30, 2020
MSR Component(A)
Weighted
Average New Residential Investee New Residential
Current UPB Weighted Average Excess MSR Interest in Interest in Effective Ownership Investee Carrying
(billions) MSR (bps) (bps) Investee (%) Excess MSR (%) (%) Value (millions)
Agency $ 30.2 33 bps 22 bps 50.0 % 66.7 % 33.3 % $ 190.2
(A)The MSR is a weighted average as of September 30, 2020 , and the Excess MSR
represents the difference between the weighted average MSR and the basic fee
(which fee remains constant).
The following table summarizes the collateral characteristics of the loans
underlying our direct Excess MSR investments as of September 30, 2020 (dollars
in thousands):
Collateral Characteristics
Current Three Month Three Month Three Month Three Month
Carrying Current Principal Average Loan Age Adjustable Rate Average Average Average Average
Amount Balance Number of Loans WA FICO Score(A) WA Coupon WA Maturity (months) (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
Agency
Original Pools $ 120,510 $ 26,123,748 199,552 723 4.6 % 236 127 1.7 % 22.5 % 21.8 % 0.9 % 13.4 %
Recaptured Loans 53,039 11,232,552 69,070 725 4.2 % 270 48 - % 22.7 % 22.6 % 0.2 % 27.8 %
$ 173,549 $ 37,356,300 268,622 724 4.5 % 247 101 1.2 % 22.6 % 22.1 % 0.7 % 18.0 %
Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools $ 131,309 $ 36,250,695 208,113 669 4.4 % 272 174 9.3 % 13.8 % 11.5 % 2.6 % 8.3 %
Recaptured Loans 23,765 3,744,574 17,576 736 4.1 % 277 33 0.1 % 28.8 % 28.9 % - % 26.5 %
$ 155,074 $ 39,995,269 225,689 675 4.4 % 273 161 7.9 % 15.1 % 12.9 % 2.4 % 11.7 %
Total/Weighted Average(H)
494,311 698 4.4 % 261 133 4.3 % 18.7 % 17.3 % 1.6 % 15.5 %
79--------------------------------------------------------------------------------
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(G) 60 Days(G) 90+ Days(G) Foreclosure Owned Bankruptcy
Agency
Original Pools 2.2 % 1.1 % 5.8 % 0.4 % 0.1 % 0.1 %
Recaptured Loans 1.6 % 1.0 % 5.4 % 0.1 % - % - %
2.0 % 1.0 % 5.7 % 0.4 % 0.1 % 0.1 %Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools 11.3 % 5.5 % 6.1 % 5.2 % 0.7 % 1.6 %
Recaptured Loans 1.7 % 0.7 % 4.7 % 0.1 % - % - %
10.4 % 5.1 % 6.0 % 4.8 % 0.6 % 1.5 %
Total/Weighted Average(H) 6.5 % 3.2 % 5.8 % 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 $27.5 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
September 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
Current Current New Residential Three Month Three Month Three Month Three Month
Carrying Principal Effective Ownership Number Average Loan Adjustable Rate Average Average Average Average
Amount Balance (%) of Loans WA FICO Score(A) WA Coupon WA Maturity (months) Age (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
Agency
Original Pools $ 102,733 $ 17,315,113 33.3 % 178,600 704 5.2 % 227 147 1.3 % 21.3 % 18.3 % 3.6 % 15.8 %
Recaptured Loans 87,513 12,917,827 33.3 % 94,668 710 4.3 % 264 55 0.1 % 19.5 % 19.3 % 0.4 % 34.5 %
Total/Weighted Average(G) $ 190,246 $ 30,232,940 273,268 707 4.8 % 243 108 1.3 % 20.6 % 18.8 % 2.3 % 24.0 %
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(F) 60 Days(F) 90+ Days(F) Foreclosure Owned Bankruptcy
Agency
Original Pools 2.9 % 1.3 % 5.0 % 0.7 % 0.2 % 0.2 %
Recaptured Loans 2.2 % 1.1 % 5.2 % 0.2 % - % 0.1 %
Total/Weighted Average(G) 2.6 % 1.2 % 5.1 % 0.5 % 0.1 % 0.1 %
80-------------------------------------------------------------------------------- (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):
September 30, 2020
Servicer Advances to
UPB of Underlying UPB of Underlying
Amortized Cost Carrying Residential Outstanding Residential Mortgage
Basis Value(A) Mortgage Loans Servicer Advances Loans
Servicer advance investments
Mr. Cooper and SLS serviced
pools $ 510,995 $ 535,760 $ 27,484,426 $ 434,998 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 nine months ended,
Nine Months
Ended
September 30,
2020 Loan-to-Value ("LTV")(A) Cost of Funds(B)
Change in Fair Face Amount of
Weighted Average Weighted Average Life Value Recorded Secured Notes and
Discount Rate (Years)(C) in Other Income Bonds Payable Gross Net(D) Gross Net Servicer advance investments(E) 5.2 % 6.3$ 431 $ 412,538 88.0 % 87.0 % 2.3 % 1.5 % (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: September 30, 2020 Principal and interest advances $ 85,481 Escrow advances (taxes and insurance advances) 166,678 Foreclosure advances 182,839 Total $ 434,998
MSR Related Ancillary Business
81
--------------------------------------------------------------------------------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 Outstanding
Outstanding Face Amortized Cost Total Amortized Carrying Weighted Average Repurchase
Asset Type Amount Basis Cost Basis Gains Losses Value(A) Count Life (Years) 3-Month CPR(B) Agreements
Agency RMBS $ 9,035,433 $ 9,362,556 100.0 % $ 61,158 $ (2,891) $ 9,420,823 54 4.2 1.3 % $ 9,495,910
(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 2.25 %
Weighted Average Funding Cost 0.23 %
Net Interest Spread 2.02 %
(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. AtSeptember 30, 2020 andDecember 31, 2019 , the Company pledged Agency RMBS with a carrying value of approximately$10.4 billion and$15.9 billion , respectively, as collateral for borrowings under repurchase agreements. To the extent available on desirable terms, we expect to continue to finance our acquisitions of Agency RMBS with repurchase agreement financing. See Note 11 to our condensed consolidated financial statements for further information regarding financing of our Agency RMBS. Non-Agency RMBS Sincemid-March 2020 , markets for mortgage-backed securities and other credit-related assets have experienced significant volatility, widening credit spreads and sharp declines in liquidity, which has had a material impact on our investment portfolio. A significant portion of our Non-Agency RMBS portfolio was financed with repurchase agreements. Fluctuations in the value of our portfolio of Non-Agency RMBS, including as a result of changes in credit spreads, resulted in our being required to post additional collateral with our counterparties under these repurchase agreements. These fluctuations and requirements to post additional collateral were material. In an effort to mitigate the impact to our business from these developments and improve our liquidity, we sold a substantial portion of our Non-Agency RMBS portfolio inMarch 2020 , for which we recorded significant realized losses. Refer to Note 16 to our condensed consolidated financial statements for further information regarding Non-Agency RMBS sales with affiliates. 82 -------------------------------------------------------------------------------- The following table summarizes our Non-Agency RMBS portfolio as ofSeptember 30, 2020 (dollars in thousands): Gross Unrealized Outstanding Outstanding Face Amortized Cost Carrying Repurchase Asset Type Amount Basis Gains Losses Value(A) Agreements Non-Agency RMBS$ 21,276,175 $ 1,386,243 $ 92,192 $ (69,191) $ 1,409,244 $ 834,151
(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 of
Non-Agency RMBS Characteristics(A)
Percentage of Total
Average Minimum Outstanding Face Amortized Cost Amortized Cost Weighted Average Weighted Average
Vintage(B) Rating(C) Number of Securities Amount Basis Basis Carrying Value Principal Subordination(D) Excess Spread(E) Life (Years) Coupon(F) Pre-2006 NR 96$ 86,852 $ 16,816 1.2 %$ 16,483 - % - % 6.2 6.9 % 2006 N/A 15 91,603 - - % 1 - % - % - 0.1 % 2007 NR 16 175,107 3,286 0.2 % 5,083 - % - % 2.6 0.1 % 2008 and later BB- 465 20,908,266 1,355,079 98.6 % 1,376,099 16.8 % - % 6.0 3.0 % Total/weighted average BB- 592$ 21,261,828 $ 1,375,181 100.0 %$ 1,397,666 16.5 % - % 6.0 3.0 % Collateral Characteristics(A)(G) Cumulative Losses to Vintage(B) Average Loan Age (years) Collateral Factor(H) 3-Month CPR(I) Delinquency(J) Date Pre-2006 17.9 0.05 7.7 % 13.7 % 11.3 % 2006 14.1 0.13 10.8 % - % 96.3 % 2007 13.3 0.16 12.0 % 15.6 % 25.5 % 2008 and later 13.4 0.76 14.4 % 3.7 % 0.3 % Total/weighted average 13.4 0.75 14.3 % 3.9 % 0.5 % (A)Excludes$13.8 million face amount of bonds backed by consumer loans and$0.5 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 305 bonds with a carrying value of$647.1 million , which either have never been rated or for which rating information is no longer provided. We had no assets that were on negative watch for possible downgrade by at least one rating agency as ofSeptember 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 endedSeptember 30, 2020 . (F)Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of$26.5 million and$2.8 million , respectively, for which no coupon payment is expected. (G)The weighted average loan size of the underlying collateral is$273.0 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. 83 --------------------------------------------------------------------------------
The following table summarizes the net interest spread of our Non-Agency RMBS
portfolio as of
Net Interest Spread(A)
Weighted average asset yield 4.91 %
Weighted average funding cost 4.09 %
Net interest spread 0.82 %
(A)The Non-Agency RMBS portfolio consists of 36.6% floating rate securities and 63.4% 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. AtSeptember 30, 2020 andDecember 31, 2019 , the Company pledged Non-Agency RMBS with a carrying value of approximately$1.4 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$75.0 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.
84
--------------------------------------------------------------------------------
As of September 30, 2020 , we had approximately $5.9 billion outstanding face
amount of residential mortgage loans. These investments were financed with
secured financing agreements with an aggregate face amount of approximately $3.8
billion and secured notes and bonds payable with an aggregate face amount of
approximately $1.1 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 Face Carrying Loan Weighted Average Weighted Average Life
Amount Value Count Yield (Years)(A)
Total residential mortgage loans,
held-for-investment, at fair value $ 784,838 $ 718,802 12,587 6.7 % 4.2
Acquired reverse mortgage loans(E)(F)
28 7.8 % 3.9
Acquired performing loans(G)(I) 205,746 191,580 4,138 6.6 %
3.4
Acquired non-performing loans(H)(I) 502,003 380,925 3,363 7.5 %
3.3
Total residential mortgage loans, held-for-sale$ 719,533 $ 578,353 7,529 7.2 %
3.3
Acquired performing loans(G)(I)$ 1,205,668 $ 1,176,302 7,590 4.2 %
9.9
Acquired non-performing loans 436,936.0 338,451 3 8 % 3.3 Originated loans 2,705,121 2,843,720 9,947 2.9 % 22.1 Total residential mortgage loans, held-for-sale, at fair value$ 4,347,725 $ 4,358,473 20,537 3.7 % 16.8 (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 47% 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 ofSeptember 30, 2020 , we have placed all Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below. (I)Includes$490.9 million and$21.2 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. AtSeptember 30, 2020 andDecember 31, 2019 , the Company pledged mortgage loans with a carrying value of approximately$3.8 billion and$5.1 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements are subject to daily mark-to-market fluctuations and margin calls. A portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 11 to our condensed consolidated financial statements for further information regarding financing of our mortgage loans. 85 --------------------------------------------------------------------------------
Other
Consumer Loans
The table below summarizes the collateral characteristics of the consumer loans, including those held in the Consumer Loan Companies and those acquired from the Consumer Loan Seller, as ofSeptember 30, 2020 (dollars in thousands): Collateral Characteristics Weighted Average Personal Personal Homeowner Original FICO Weighted Adjustable Rate Loan Average Loan Age Average Expected Delinquency 30 Delinquency 60 Delinquency 90+ UPB Unsecured Loans % Loans % Number of Loans Score(A) Average Coupon % (months) Life (Years) Days(B) Days(B) Days(B) 12-Month CRR(C) 12-Month CDR(D) Consumer loans, held-for-investment$ 667,184 60.4 % 39.6 % 94,801 677 17.5 % 12.2 % 186 3.6 1.2 % 0.7 % 1.5 % 19.1 % 4.7 % (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 ofMay 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.
TAXES
We have elected to be treated as a REIT forU.S. federal income tax purposes. As a REIT we generally pay no federal or state and local income tax on assets that qualify under the REIT requirements if we distribute out at least 90% of the current taxable income generated from these assets. We hold certain assets, including Servicer Advance Investments and MSRs, in taxable REIT subsidiaries ("TRSs") that are subject to federal, state and local income tax because these assets either do not qualify under the REIT requirements or the status of these assets is uncertain. We also operate our securitization program, servicing, origination, and ancillary businesses through TRSs.
As our operating investments continue to grow and become a larger component of our total consolidated income, we anticipate income subject to tax will increase, along with a corresponding increase in tax expense and our consolidated effective tax rate.
AtSeptember 30, 2020 , our net deferred tax asset of$49.5 million was primarily comprised of net operating losses generated within our TRSs partially offset by deferred tax liabilities generated through the deferral of gains from loans sold by our origination business with servicing retained by the Company. For the three and nine months endedSeptember 30, 2020 , we recognized deferred tax expense (benefit) of$99.4 million and$(42.3) million , respectively, primarily reflecting deferred tax benefits resulting from changes in the fair value of loans and MSRs during the first quarter of 2020, partially offset by deferred tax expense generated from income in our servicing and origination business segments in the second and third quarters. The taxable income of the operating businesses is absorbed by our historical net operating losses, reducing current taxable income in our TRSs. 86 --------------------------------------------------------------------------------
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 ofSeptember 30, 2020 , which represent our accounting policies that are most affected by judgments, estimates and assumptions, included all of the critical accounting policies referred to in our annual report on Form 10-K for the year endedDecember 31, 2019 . We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as ofSeptember 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 ofSeptember 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.
87
--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table summarizes the changes in our results of operations for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 (dollars in thousands). Our results of operations are not necessarily indicative of future performance. Three Months Ended Increase Nine Months Ended Increase September 30, (Decrease) September 30, (Decrease) 2020 2019 Amount 2020 2019 Amount Revenues Interest income$ 233,848 $ 448,127 $ (214,279) $ 868,419 $ 1,303,041 $ (434,622) Servicing revenue, net of change in fair value of$(395,064) ,$(228,405) ,$(1,485,472) , and$(619,914) , respectively (43,929) 53,050 (96,979) (459,313) 133,366
(592,679)
Gain on originated mortgage loans,
held-for-sale, net 495,098 126,747 368,351 984,818 294,935 689,883
685,017 627,924 57,093 1,393,924 1,731,342 (337,418)
Expenses
Interest expense 130,528 245,902 (115,374) 463,786 686,738 (222,952)
General and administrative expenses 316,560 193,580 122,980 859,601 525,289 334,312
Management fee to affiliate 22,482 20,678 1,804 66,682 58,261
8,421
Incentive compensation to affiliate - 36,307 (36,307) - 49,265 (49,265)
469,570 496,467 (26,897) 1,390,069 1,319,553 70,516
Other Income (Loss)
Change in fair value of investments 89,092 2,212 86,880 (374,408) (55,534) (318,874)
Gain (loss) on settlement of investments, net (94,457) 133,670 (228,127) (968,995) 96,385 (1,065,380) Earnings from investments in consumer loans, equity method investees - (2,547) 2,547 - (890) 890 Other income (loss), net 5,385 (30,695)
36,080 (34,635) (27,234) (7,401)
20 102,640 (102,620) (1,378,038) 12,727 (1,390,765)
Impairment
Provision (reversal) for credit
losses on securities (3,849) 5,567 (9,416) 15,166 21,942 (6,776)
Valuation and credit loss provision
(reversal) on loans and real estate
owned (REO) 14,584 (10,690) 25,274 118,504 8,042 110,462
10,735 (5,123) 15,858 133,670 29,984 103,686
Income (Loss) Before Income Taxes 204,732 239,220 (34,488) (1,507,853) 394,532 (1,902,385)
Income tax expense (benefit) 100,812 (5,440) 106,252 (48,647) 18,980 (67,627) Net Income (Loss)$ 103,920 $ 244,660 $ (140,740) $ (1,459,206) $ 375,552 $ (1,834,758) Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries$ 11,640 $ 14,738 $ (3,098) $ 34,118 $ 31,979 $ 2,139 Dividends on Preferred Stock$ 14,359 $ 5,338 $ 9,021 $ 39,938 $ 5,338 $ 34,600 Net Income (Loss) Attributable to Common Stockholders$ 77,921 $ 224,584 $ (146,663) $ (1,533,262) $ 338,235 $ (1,871,497) Interest Income
Three months ended
The decrease in interest income during the third quarter of 2020 compared to the third quarter of 2019 was driven by a decrease in the size of our investment portfolio (as noted in the "Our Portfolio" section) and the transition of MSRs initially accounted for as investments in MSR financing receivables to investments in MSRs. Specifically, interest income decreased by$214.3 million , primarily driven by (i) a$123.9 million decrease attributable to a smaller bond portfolio, (ii) a$50.7 million decrease related to acquired residential mortgage loans and consumer loans, partially offset by (iii) an increase of$6.5 million on loans originated as a result of growth in our originations business. MSR related investments and servicing interest income decreased by$46.2 million primarily due to the transfer from investments in MSR financing receivables to investments in MSRs during 88 -------------------------------------------------------------------------------- the third quarter of 2020. The revenue associated with these transferred MSRs is reported as Servicing Revenue, Net in our condensed consolidated statements of income.
Nine months ended
The decrease in interest income was driven by a smaller investment portfolio (as noted in the "Our Portfolio" section) and the transition of MSRs initially accounted for as investments in MSR financing receivables to investments in MSRs. Specifically, interest income decreased by$434.6 million primarily driven by (i) a$279.2 million decrease attributable to a smaller bond portfolio as well as a decrease in the accelerated accretion recognized on called deals, (ii) a$94.3 million decrease from MSR related investments and servicing, primarily due to MSR financing receivables transferring to investments in MSRs during the third quarter of 2019 (the revenue associated with these transferred MSRs is reported as Servicing Revenue, Net in our condensed consolidated statements of income) and portfolio runoff, and (iii) a$78.5 million decrease in acquired residential mortgage loans and consumer loans due to lower unpaid principal balances, partially offset by (iv) an increase of$17.4 million on loans originated as a result of growth in our originations business.
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 Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (63,129) $ (149,413) $ 86,284 $ (577,911) $ (555,765) $ (22,146)
Changes in discount rates 71,797 57,896 13,901 (1,705) 127,314 (129,019)
Changes in other factors 73,305 29,659 43,646 43,462 153,080 (109,618)
Total $ 81,973 $ (61,858) $ 143,831 $ (536,154) $ (275,371) $ (260,783) Three months ended
Servicing revenue, net decreased$97.0 million primarily driven by (i) a$304.7 million increase in amortization as a result of MSR acquisitions subsequent toSeptember 30, 2019 and faster prepayments, and (ii) a$28.2 million decrease in ancillary and other fees attributable to lower interest rates, specifically lower interest earned on custodial accounts. The decrease was partially offset by (iii) a$97.9 million increase in servicing collections as a result of MSR acquisitions that closed subsequent toSeptember 30, 2019 , and (iv) an$82.0 million positive mark-to-market adjustments in 2020 compared to a$61.9 million negative mark-to-market adjustments in 2019. The positive mark-to-market adjustments during the three months endedSeptember 30, 2020 were primarily driven by a reduction in life-to-date unrealized losses due to paydowns and a decrease in discount rates resulting from changes in estimates regarding the economic outlook caused by COVID-19.
Nine months ended
Servicing revenue, net decreased$592.7 million primarily driven by (i) a$606.7 million increase in amortization as a result of MSR acquisitions subsequent toSeptember 30, 2019 and faster prepayments, (ii) a$260.8 million increase in negative mark-to-market adjustments, and (iii) a$70.4 million decrease in ancillary and other fees due to lower interest rates, specifically lower interest earned on custodial accounts. The negative mark-to-market adjustments during the nine months endedSeptember 30, 2020 were primarily driven by changes in interest rates resulting in lower custodial earnings, faster prepayment rates, and higher delinquency rates, due to changes in estimates regarding the economic outlook caused by COVID-19. The decrease was partially offset by (iv) a$343.3 million increase in servicing collections as a result of MSR acquisitions that closed subsequent toSeptember 30, 2019 .
Gain on Originated Mortgage Loans, Held-for-Sale, Net
Three months ended
Gain on originated mortgage loans, held-for-sale, net increased$368.4 million primarily driven by an increase in loan origination volume and higher gain on sales margins. As noted in the "Our Portfolio" section, during the third quarter of 2020, loan origination volume at NewRez was$18.1 billion , up from$5.7 billion in the year prior. During the three months endedSeptember 30, 2020 , the continued lower interest rate environment, increased refinance activity by borrowers, integration of 89 --------------------------------------------------------------------------------Ditech's platform, and increased market share helped drive growth in originations volume channels. Gain on sale margins in the three month period endedSeptember 30, 2020 was 2.04%, 0.34% higher than 1.70% for the same period in 2019.
Nine months ended
Gain on originated mortgage loans, held-for-sale, net increased$689.9 million primarily driven by an increase in loan origination volume and higher gain on sales margins. As noted in the "Our Portfolio" section, during the first nine months of 2020, loan origination volume at NewRez was$37.7 billion , up from$11.8 billion in the year prior. During the nine months endedSeptember 30, 2020 , the continued lower interest rate environment, increased refinance activity by borrowers, integration ofDitech's platform, and increased market share helped drive growth in originations volume channels. Gain on sale margins in the nine month period endedSeptember 30, 2020 was 2.01%, 0.29% higher than 1.72% for the same period in 2019.
Interest Expense
Three months ended
Interest expense decreased by$115.4 million primarily attributable to (i) a$107.4 million decrease related to the lower average size of the RMBS portfolio financed with repurchase agreements and (ii) a$28.0 million decrease related to the financing of acquired residential mortgage loans and consumer loans, partially offset by (iii) a$1.0 million increase in interest expense on MSR related investments, origination, and servicing due to increased financing of the portfolio offset by a decrease in rates, and (iv) a$19.0 million increase in interest expense as a result of the senior secured term loan facility agreement entered into onMay 19, 2020 , which was refinanced inSeptember 2020 with proceeds from the 2025 Senior Unsecured Notes. Refer to Note 11 to our condensed consolidated financial statements for further details.
Nine months ended
Interest expense decreased by$223.0 million primarily attributable to (i) a$189.7 million decrease related to the lower average size of the RMBS portfolio financed with repurchase agreements, (ii) a$61.4 million decrease related to residential mortgage loans and consumer loans, and (iii) a$5.7 million decrease in interest expense due to runoff of MSR related investments, offset by (iv) an increase in interest expense on originations of$6.1 million driven by an increase in our originations business, and (v) a$27.7 million increase in interest expense as a result of the senior secured term loan facility agreement entered into onMay 19, 2020 , which was refinanced inSeptember 2020 with proceeds from the 2025 Senior Notes. 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$123.0 million , primarily attributable to increases in NewRez origination and servicing volumes. As noted in the "Our Portfolio" section, during the third quarter of 2020, loan origination volume at NewRez was$18.1 billion , up from$5.7 billion in the year prior and loans serviced at NewRez was$287.2 billion , up from$184.3 billion in the year prior. The components of general and administrative expenses that increased as a result of these volumes were as follows: (i) a$92.4 million increase in compensation and benefits expense, (ii) a$12.1 million increase in loan origination expenses, (iii) a$4.2 million increase in occupancy expenses, (iv) a$5.8 million increase in legal and professional expenses, and (v) a$4.9 million increase in other expenses. In addition, subservicing expense increased (vi) a$2.5 million as a result of MSR acquisitions that closed subsequent toSeptember 30, 2019 within our servicer subsidiary, NRM (Note 5 to our condensed consolidated financial statements), and transfer from investments in MSR financing receivables to investments in MSRs during the three months endedSeptember 30, 2020 , partially offset by portfolio runoff.
Nine months ended
General and administrative expenses increased by$334.3 million , primarily attributable to increases in NewRez origination and servicing volumes. As noted in the "Our Portfolio" section, during the nine months endedSeptember 30, 2020 , loan origination volume was$37.7 billion , up from$11.8 billion in the year prior and loans serviced at NewRez was$287.2 billion , up from$184.3 billion in the year prior. The components of general and administrative expenses that increased as a result of these volumes were as follows: (i) a$212.2 million increase in compensation and benefits expense, (ii) a$17.4 million increase in legal and professional expenses, (iii) a$33.6 million increase in loan origination expenses, (iv) a$12.1 million increase in occupancy expenses, and (v) an$8.1 million increase related to technology and software enhancements. There was also (vi) a 90 --------------------------------------------------------------------------------$26.9 million increase in property maintenance and inspection expense resulting from the acquisition and operations of Guardian, (vii) an increase of$11.9 million as a result of MSR acquisitions that closed subsequent toSeptember 30, 2019 within our servicer subsidiary, NRM (Note 5 to our condensed consolidated financial statements), and the transfer from investments in MSR financing receivables to investments in MSRs during the nine months endedSeptember 30, 2020 , partially offset by portfolio runoff, and a decrease of$2.9 million in loan servicing expense primarily due to a decrease of loan servicing expense on consumer loans, held-for-investment attributable to lower unpaid principal balance. Other expenses increased$3.5 million related to increased trustee and custodian expenses,$3.3 million in amortization of intangible assets, and$8.2 million related to other general and administrative expenses.
Management Fee to Affiliate
Three months ended
Management fee to affiliate increased by
Nine months ended
Management fee to affiliate increased by
Incentive Compensation to Affiliate
Three months ended
Incentive compensation decreased
Nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . Incentive compensation decreased$49.3 million during the nine months endedSeptember 30,2020 . This decrease was due to the fact that the incentive calculation determined in accordance with the management agreement was in a cumulative net loss position.
Change in Fair Value of Investments
Change in fair value of investments is composed of the following:
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Excess mortgage servicing rights $ (664) $ 2,407 $ (3,071) $ (11,773) $ (1,421) $ (10,352)
Excess mortgage servicing rights,
equity method investees (393) 4,751 (5,144) (2,902) 4,087 (6,989)
Mortgage servicing rights financing receivables (20,275) (41,410) 21,135 (245,906) (133,200) (112,706) Servicer advance investments 3,143 6,641 (3,498) 431 15,932 (15,501) Real estate and other securities 27,663 (5,054) 32,717 (531) 9,010 (9,541) Residential mortgage loans 56,940 (6,512) 63,452 (108,306) 75,095 (183,401) Consumer loans held-for-investment (411) - (411) (9,634) - (9,634) Derivative instruments 23,089 41,389 (18,300) 4,213 (25,037) 29,250 Total$ 89,092 $ 2,212 $ 86,880 $ (374,408) $ (55,534) $ (318,874)
Change in Fair Value of Investments in Excess Mortgage Servicing Rights
91
--------------------------------------------------------------------------------
Changes in the fair value of investments in Excess MSRs related to the
following:
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (1,384) $ (2,566) $ 1,182 $ 1,650 $ (20,268) $ 21,918
Changes in discount rates 3,650 4,167 (517) (365) 13,446 (13,811)
Changes in other factors (2,930) 806
(3,736) (13,058) 5,401 (18,459)
Total $ (664) $ 2,407 $ (3,071) $ (11,773) $ (1,421) $ (10,352) Three months ended
The change in fair value of investments in excess mortgage servicing rights during the three months endedSeptember 30, 2020 was relatively flat; however, the mark-to-market adjustments were negative, mainly driven by increased prepayment rates and decreased recapture rates. In contrast, the mark-to-market adjustments during the three months endedSeptember 30, 2019 were positive, largely driven by decreases in the discount rate, increases in recapture rates, offset by increases in interest rates and prepayment rates.
Nine months ended
The negative mark-to-market adjustments during the nine months endedSeptember 30, 2020 were mainly driven by decreased recapture rates. In contrast, the negative mark-to-market adjustments during the nine months endedSeptember 30, 2019 were mainly driven by increased interest rates and prepayment rates, offset by decreased discount rates and increased recapture rates.
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 Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (404) $ (432) $ 28
661 768 (107) (82) 3,939 (4,021)
Changes in other factors (650) 4,415 (5,065) (2,768) 8,045 (10,813) Total$ (393) $ 4,751 $ (5,144) $ (2,902) $ 4,087 $ (6,989)
Three months ended
The change in fair value of investments in excess mortgage servicing rights, equity method investees during the three months endedSeptember 30, 2020 were mainly driven by increased prepayment rates and decreased recapture rates. In contrast, the positive mark-to-market adjustments during the three months endedSeptember 30, 2019 were largely driven by increased recapture rates and and decreased discount rates.
Nine months ended
The change in fair value of investments in excess mortgage servicing rights, equity method investees during the nine months endedSeptember 30, 2020 were mainly driven by decreased recapture rates. In contrast, the positive mark-to-market 92 -------------------------------------------------------------------------------- adjustments during the nine months endedSeptember 30, 2019 were mainly driven by increased recapture rates and decreased discount rates, partially offset by increased prepayment rates and interest rates.
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 the following:
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Amortization of servicing rights
12,206
15,859 9,349 6,510 (62,072) 1,437 (63,509)
(Gain) loss on sales - (2,419) 2,419 (1,749) (3,220) 1,471
Total $ (20,275) $ (41,410) $ 21,135 $ (245,906) $ (133,200) $ (112,706)
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 Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ (17,925) $ (44,152)
23,694 60,273 (36,579) 10,950 99,674 (88,724)
Changes in other factors 10,090 (6,772) 16,862 (99,140) 40,490 (139,630)
Total $ 15,859 $ 9,349 $ 6,510 $ (62,072) $ 1,437 $ (63,509) Three months ended
The change in fair value of investments in MSR financing receivables increased$21.1 million , of which (i)$12.2 million was attributable to a decrease in amortization expense and (ii)$6.5 million was attributable to changes in valuation inputs and assumptions, primarily driven by transfer from investments in MSR financing receivables to investments in MSRs during the three months endedSeptember 30, 2020 and decrease in discount rates, resulting from changes in estimates regarding the economic outlook caused by COVID-19. The change in fair value associated with these transferred MSRs is reported as Servicing Revenue, Net in our condensed consolidated statements of income.
Nine months ended
The change in fair value of investments in MSR financing receivables decreased$112.7 million , of which$63.5 million was attributable to changes in valuation inputs and assumptions. The change in fair value for the nine months endedSeptember 30, 2020 was primarily due to higher delinquency rates, partially offset by a decrease 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 nine months endedSeptember 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 in other factors. The remaining decrease was primarily due to$50.7 million 93 --------------------------------------------------------------------------------
increase in amortization expense as a result faster prepayments in 2020, partially offset by transfer from investments in MSR financing receivables to investments in MSRs during the third quarter of 2020.
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 Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2020 2019 Amount 2020 2019 Amount
Changes in interest rates and
prepayment rates $ 205 $ (675)
2,219 8,419 (6,200) 2,219 22,045 (19,826)
Changes in other factors 719 (1,103) 1,822 81 (3,734) 3,815
Total $ 3,143 $ 6,641 $ (3,498) $ 431 $ 15,932 $ (15,501) Three months ended
The positive mark-to-market adjustments during the three months endedSeptember 30, 2020 were mainly driven by a decrease in discount rates that caused the fair value to increase by$2.2 million . The mark-to-market adjustment during the three months endedSeptember 30, 2019 was also positive, mainly driven by a decrease in the discount rates that caused the fair value to increase by$8.4 million .
Nine months ended
The positive mark-to-market adjustments during the nine months endedSeptember 30, 2020 were mainly driven by a decrease in the discount rates that caused the fair value to increase by$2.2 million . The positive mark-to market adjustment during the nine months endedSeptember 30, 2019 was mainly driven by a larger decrease in the discount rates that caused the fair value to increase by$22.0 million . This was slightly offset by unfavorable changes in interest rates, prepayment rates, and other factors which caused the fair value to decrease by$6.1 million .
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
Nine 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$63.5 million during the quarter endedSeptember 30, 2020 due to$48.6 million increase in loss realized through securitization and$14.9 million increase related to changes in valuation inputs and assumptions.
Nine months ended
The change in fair value of investments in residential mortgage loans decreased$183.4 million primarily due to (i) a$324.3 million decrease related to changes in valuation inputs and assumptions resulted from changes in estimates regarding the 94 --------------------------------------------------------------------------------
economic outlook caused by COVID-19, partially 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 decreased
Nine months ended
Change in fair value of investments in consumer loans decreased$9.6 million due to changes in valuation inputs and assumptions resulted from changes in estimates regarding the economic outlook caused by COVID-19. Fair value option was elected as ofJanuary 1, 2020 .
Change in Fair Value of Derivative Instruments
Three months ended
Change in fair value of derivative instruments decreased$18.3 million due to a decreased favorable change from unrealized loss to unrealized gain on interest rate swaps, largely resulting from changes in the forward LIBOR curve atSeptember 30, 2020 , andSeptember 30, 2019 , respectively.
Nine months ended
Change in fair value of derivative instruments increased$29.3 million . The increase was primarily related to a decrease in unrealized loss on interest rate swaps largely resulting from changes in the forward LIBOR curve atSeptember 30, 2020 , andSeptember 30, 2019 , respectively.
Gain (Loss) on Settlement of Investments, Net
Three months ended
Gain (loss) on settlement of investments, net decreased$228.1 million during the three months endedSeptember 30, 2020 due to (i) an$87.3 million decrease in gain on sales of marketable securities, (ii) a$66.3 million loss on extinguishment of debt primarily attributable to the 2020 Term Loan, (iii) a decrease of$55.4 million in gains related to deal collapses, (iv) an increase of$18.0 million in losses on our MSR portfolio, and (v) a$12.9 million increase in losses on derivatives, partially offset by (vi) a$4.2 million increase in gain on REO sales, (vii) a$3.8 million decrease in losses on the mark-to-market adjustment on TBAs and (viii) a$3.4 million increase in gain on sales of loans.
Nine months ended
Gain (loss) on settlement of investments, net decreased$1,065.4 million during the nine months endedSeptember 30, 2020 due to (i) a$954.8 million loss on sales of non-agency mortgage-backed securities, (ii) a$56.3 million loss from extinguishment of the 2020 Term Loan, (iii) a$49.3 million increase in losses on loan sales, (iv) a$29.5 million increase in losses on derivatives, (v) a$19.9 million realized loss on our MSR portfolio, and (vi) a$15.9 million decrease in gains on deal collapses, partially 95 --------------------------------------------------------------------------------
offset by (vii) a
Earnings from Investments in Consumer Loans, Equity Method Investees
Three months ended
Earnings from investments in consumer loans, equity method investees increased$2.5 million as a result of a loss during the three months endedSeptember 30, 2019 . Investments in LoanCo and WarrantCo were fully distributed as ofDecember 31, 2019 .
Nine months ended
Earnings from investments in consumer loans, equity method investees increased$0.9 million as a result of a loss during the nine months endedSeptember 30, 2019 . Investments in LoanCo and WarrantCo were fully distributed as ofDecember 31, 2019 . Other Income (Loss), Net
Three months ended
Other income increased by$36.1 million , primarily due to (i) a$23.7 million increase largely related to the Guardian Asset Management andDitech recovery business acquisitions during 2019, (ii) a loss of$14.4 million on receivables related to our loan book during the third quarter of 2019, (iii) a$5.5 million unrealized gains on Ocwen stock, (iv) a$1.7 million gain on consumer loans recoveries, and (v) a$1.5 million decrease in REO expenses, partially offset by (vi) a$4.2 million unrealized loss on our equity method investments, (vii) an increase of$4.0 million in advance expenses, and (viii) a$3.8 million increase in provisions for servicing losses.
Nine months ended
Other income decreased by$7.4 million , primarily due to (i) a$51.8 million loss on our equity method investments, (ii) an$18.9 million provision for servicing losses, (iii) a decrease to the change in fair value of our retained MSR assets of$5.0 million , (iv) a$4.2 million decrease in change in fair value of warrants, (v) a$2.9 million decrease in unrealized gains on Ocwen stock, (vi) a$2.8 million decrease in gains on transfer of loans to REO, and (vii) a$2.1 million decrease in change in fair value of advance servicing assets, partially offset by (viii) a$63.3 million increase in ancillary income largely related to the Guardian Asset Management andDitech recovery business acquisitions during 2019, (ix) an$8.3 million loss on receivables related to our loan book during 2019, (x) a$5.5 million unrealized gain on notes and bonds payable, (xi) a$5.2 million gain on recoveries of consumer loan chargeoffs.
Provision (Reversal) for Credit Losses on Securities
Three months ended
The provision for credit losses on securities decreased by$9.4 million million primarily resulting from a reversal of credit losses on securities during the third quarter of 2020, driven by improving market conditions. 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 forecastsbetween January 1 and March 31, 2020 due to the economic disruption caused by the COVID-19 pandemic. The negative effect of these market conditions was lessened during the second and third quarters, 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.
Nine months ended
The provision for credit losses on securities decreased by$6.8 million primarily resulting from a lesser decrease in fair values of Non-Agency RMBS due to credit losses, as compared to the impairment taken during the nine months endedSeptember 30, 2019 on Non-Agency RMBS purchased with existing credit impairment. Impairment resulted from fair value falling below amortized cost basis for the securities held as ofSeptember 30, 2019 . EffectiveJanuary 1, 2020 , these securities are accounted 96 -------------------------------------------------------------------------------- for 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 nine months endedSeptember 30, 2020 was impacted by the significant deterioration in macroeconomic forecastsbetween January 1 and March 31, 2020 due to the economic disruption caused by the COVID-19 pandemic. The negative effect of these market conditions was lessened during the second and third quarters, leading to the reversal of credit losses on securities. 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$25.3 million increase in the valuation and loss provision (reversal) on loans and real estate owned resulted from (i) a$34.3 million increase in impairment on residential mortgage loans related to impact of the COVID-19 outbreak on the overall economy, partially offset by (ii) a$3.1 million decrease in impairment on certain REOs with a increase in home prices, and (iii) a$5.9 million decrease in provision due to electing fair value option on consumer loans.
Nine months ended
The$110.5 million increase in the valuation and loss provision (reversal) on loans and real estate owned resulted from (i) a$138.4 million increase in impairment on residential mortgage loans related to changes in interest rates and low performance, partially offset by (ii) a$3.3 million decrease in impairment on certain REOs with a increase in home prices, and (iii) a$24.6 million decrease in provision due to electing fair value option on consumer loans.
Income Tax Expense (Benefit)
For the three and nine months endedSeptember 30, 2020 , we recognized deferred tax expense (benefit) of$99.4 million and$(42.3) million , respectively, primarily reflecting deferred tax benefits resulting from changes in the fair value of loans and MSRs during the first quarter of 2020, partially offset by deferred tax expense generated from income in our servicing and origination business segments in the second and third quarters. The taxable income of the operating businesses is absorbed by our historical net operating losses, reducing current taxable income in our TRSs.
Three months ended
Income tax expense (benefit) changed by
Nine 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 decreased by$3.1 million primarily due to (i) a$6.4 million decrease in noncontrolling interest income related to the consumer loan companies, partially offset by (ii) a$0.9 million increase in other's interest in the net income of the Buyer as a result of higher interest income, and (iii) a$2.4 million increase from the Shelter JVs, driven by higher earnings from originations during the three months endedSeptember 30, 2020 .
Nine months ended
Noncontrolling interests in income of consolidated subsidiaries increased by$2.1 million primarily due to (i) a$6.1 million increase in noncontrolling interests at the Shelter JVs, driven by higher earnings from originations, and (ii) a$0.5 million increase in noncontrolling interests related to the consumer loan companies, partially offset by (iii) a$4.5 million decrease in 97 --------------------------------------------------------------------------------
other's interest in the net income of the Buyer as a result of lower fair value
adjustments during the nine months ended
Dividends on Preferred Stock
Three months ended
The dividends on preferred stock is related to our 7.500% Preferred Series A, 7.125% Preferred Series B, and 6.375% Preferred Series C preferred stock. There was an increase of$9.0 million on our preferred stock during the three months endedSeptember 30, 2020 , due to the Preferred Series B preferred stock being issued duringAugust 2019 and the Preferred Series C preferred stock not being issued until after the three months endedSeptember 30, 2019 .
Nine months ended
The dividends on preferred stock is related to our 7.500% Preferred Series A, 7.125% Preferred Series B, and 6.375% Preferred Series C preferred stock. There was an increase of$34.6 million on our preferred stock during the nine months endedSeptember 30, 2020 , due to the Preferred Series B preferred stock being issued duringAugust 2019 , and the Preferred Series C preferred stock not being issued until after the nine months endedSeptember 30, 2019 .
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 . InSeptember 2020 , the Company used the net proceeds from a private debt offering, together with cash on hand, to fully retire all of the outstanding principal balance on the 2020 Term Loan. The Company's total cash and cash equivalents atSeptember 30, 2020 was$841.0 million . 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 ofSeptember 30, 2020 , approximately$555.4 million of our cash and cash equivalents were held at NRM and NewRez, of which$377.1 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 secured financing agreements and secured notes and bonds payable, 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 ofSeptember 30, 2020 , we had outstanding secured financing agreements with an aggregate face amount of approximately$14.7 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 secured financing 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 98 -------------------------------------------------------------------------------- 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 3% - 12% for Agency RMBS, 12% - 75% for Non-Agency RMBS, and 1% - 62% for residential mortgage loans. During the term of the secured financing 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,$3.1 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 secured financing agreements, credit facilities and other financing arrangements. Because secured financing 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 since the second quarter of 2020, 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 secured financing 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 secured financing 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 99 -------------------------------------------------------------------------------- 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 secured financing agreements and other financings, proceeds from equity offerings and the liquidation or refinancing of our assets. 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. 100 --------------------------------------------------------------------------------
Debt Obligations
The following table presents certain information regarding our debt obligations
(dollars in thousands):
September 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)
Secured Financing Agreements(C)
Repurchase Agreements:
Warehouse Credit Facilities-Residential
Mortgage Loans(F) $ 3,759,627 $ 3,754,803 Oct-20 to Jul-22 2.45 % 1.0 $ 4,156,437 $ 4,250,005 $ 4,215,066 17.1
Agency RMBS(D) $ 9,958,246 $ 9,958,246 Oct-20 to Dec-20 0.23 % 0.2 $ 9,930,973 $ 10,285,282 $ 10,361,950 3.8
Non-Agency RMBS(E) 952,323 950,836 Oct-20 to Dec-20 4.09 % 0.1 18,999,108 1,730,072 1,734,798 6.0
Real Estate Owned(G)(H) 2,983 2,983 Oct-20 to Jul-22 3.94 % 1.3 N/A N/A 3,796,000 N/A
Total Secured Financing Agreements 14,673,179 14,666,868 1.05 % 0.4
Secured Notes and Bonds Payable
Excess MSRs(I) 264,980 264,980 Nov-20 to Aug-24 3.91 % 1.1 107,584,509 333,874 421,907 6.0
MSRs(J) 2,794,108 2,786,144 Jan-21 to Jul-25 4.57 % 2.3 444,177,336 4,645,075 4,675,648 5.8
Servicer Advance Investments(K) 412,538 412,538 Apr-21 to Aug-21 2.27 % 0.6 434,998 510,995 535,760 6.3
Servicer Advances(K) 2,502,158 2,492,239 Apr-21 to Sep-23 2.84 % 1.9 2,747,433 2,857,040 2,857,040 0.7
Residential Mortgage Loans(L) 1,103,847 1,096,638 Apr-21 to Aug-60 4.26 % 30.1 1,656,351 1,588,739 1,413,258 4.1
Consumer Loans(M) 678,951 681,109 September-37 2.03 % 3.0 663,047 718,287 718,287 3.6
Total Secured Notes and Bonds Payable 7,756,582 7,733,648 3.60 % 6.1
Total/ Weighted Average $ 22,429,761 $ 22,400,516 1.93 % 2.3
(A)Net of deferred financing costs.
(B)All debt obligations with a stated maturity through October 31, 2020 were
refinanced, extended or repaid.
(C)These secured financing agreements had approximately $19.5 million of
associated accrued interest payable as of September 30, 2020 .
(D)All Agency RMBS repurchase agreements have a fixed rate.
(E)All Non-Agency RMBS secured financing agreements have LIBOR-based floating
interest rates. This also includes repurchase agreements and related collateral
of $30.4 million and $37.3 million , respectively, on retained bonds
collateralized by Agency MSRs.
(F)Includes $270.7 million of repurchase agreements which bear interest at a
fixed rate of 4.4%. All remaining repurchase agreements have LIBOR-based
floating interest rates.
(G)All 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 New
Residential has made or intends to make a claim on the FHA guarantee.
(I)Includes $70.2 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
2.50% and $194.7 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
3.50%. The outstanding face amount of the collateral represents the UPB of the
residential mortgage loans underlying the interests in MSRs that secure these
notes.
(J)Includes $933.0 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 of 4.50%;
$37.4 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%; $326.1
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 4.50%; and $1,497.6 million
of capital markets notes with fixed interest rates ranging 3.55% to 5.44%. 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.
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(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 1.38% to 1.85%. 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 $989.1 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) $75.1 million face amount of SAFT 2013-1
mortgage-backed securities issued with fixed interest rate of 3.72% (see Note 12
for fair value details), (iii) $165.5 million of MDST Trusts asset-backed notes
held by third parties which bear interest equal to 6.63% (see Note 12 for fair
value details), and (iv) $989.1 million of bonds held by third parties which
bear a fixed interest rate ranging from 3.23% to 5.00%.
(M)Includes the SpringCastle debt, which is primarily composed of the following
classes of asset-backed notes held by third parties: $610.0 million UPB of Class
A notes with a coupon of 1.97% and a stated maturity date in September 2037 and
$53.0 million UPB of Class B notes with a coupon of 2.66% and a stated maturity
date in September 2037 .
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$14.7 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.
The following table provides additional information regarding our short-term borrowings (dollars in thousands):
Nine Months Ended
Outstanding
Balance at Average Daily
September 30, Amount Maximum Amount Weighted Average
2020 Outstanding(A) Outstanding Daily Interest Rate
Secured Financing Agreements
Agency RMBS $ 9,958,246 $ 7,806,947 $ 31,770,128 1.22 %
Non-Agency RMBS 952,323 3,584,772 8,235,316 3.15 %
Residential mortgage loans 3,330,045 3,687,279 6,224,250 2.35 %
Real estate owned 1,165 51,542 110,442 2.74 %
Secured Notes and Bonds Payable
Excess MSRs - 50,000 50,000 4.16 %
MSRs 453,306 1,514,064 2,059,551 3.77 %
Servicer advances 932,733 666,014 583,915 2.92 %
Residential mortgage loans 5,212 104,385 210,366 3.65 %
Total/weighted average $ 15,633,030 $ 17,465,003 $ 49,243,968 1.75 %
(A)Represents the average for the period the debt was outstanding.
Average Daily Amount Outstanding(A)
Three Months Ended
September 30,
December 31, 2019 March 31, 2020 June 30, 2020 2020
Secured Financing
Agreements
Agency RMBS $ 14,939,907 $ 15,250,971 $ 1,175,803 $ 1,176,922
Non-Agency RMBS 7,403,488 7,216,191 2,092,963 2,095,213
Residential mortgage loans 2,644,559 4,869,240 3,180,499 3,112,376
Real estate owned 66,317 75,173 76,763 3,222
(A)Represents the average for the period the debt was outstanding.
On
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In August 2020 , the Company made a $51.0 million prepayment on the 2020 Term
Loan. As a result, The Company recorded a $5.7 million loss on extinguishment of
debt, representing a write-off of unamortized debt issuance costs and original
issue discount.
In September 2020 , the Company used the net proceeds from a private debt
offering, together with cash on hand, to fully retire all of the outstanding
principal balance on the 2020 Term Loan. As a result, the Company recorded a
$61.1 million loss on extinguishment of debt, primarily representing a write-off
of unamortized debt issuance costs and original issue discount.
On September 16, 2020 , the Company, as borrower, completed a private offering of
$550.0 million aggregate principal amount of 6.250%. Interest on the 2025 Senior
Notes accrue at the rate of 6.250% per annum with interest payable semi-annually
in arrears on each April 15 and October 15 , commencing on April 15, 2021 .
The 2025 Senior Notes mature on October 15, 2025 and the Company may redeem some
or all of the 2025 Senior Notes at the Company's option, at any time from time
to time, on or after October 15, 2022 at a price equal to the following fixed
redemption prices (expressed as a percentage of principal amount of the 2025
Senior Notes to be redeemed):
Year Price
2022 103.125%
2023 101.563%
2024 and thereafter 100.000%
Prior to October 15, 2022 , the Company will be entitled at its option on one or
more occasions to redeem the 2025 Senior Notes in an aggregate principal amount
not to exceed 40% of the aggregate principal amount of the 2025 Senior Notes
originally issued prior to the applicable redemption date at a fixed redemption
price of 106.250%.
Net proceeds from the offering were approximately $544.5 million , after
deducting the initial purchasers' discounts and commissions and estimated
offering expenses payable by the Company. The Company used the net proceeds from
the offering, together with cash on hand, to prepay and retire its then-existing
2020 Term Loan and to pay related fees and expenses. As a result, the Company
recorded a $61.1 million loss on extinguishment of debt, representing a
write-off of unamortized debt issuance costs and original issue discount.
For additional information on our debt activities, see Note 11 to our condensed consolidated financial statements.
Maturities
Our debt obligations as ofSeptember 30, 2020 , as summarized in Note 11 to our condensed consolidated financial statements, had contractual maturities as follows (in thousands): Year Ending Nonrecourse(A) Recourse(B)
Total
$ 11,671,841 2021 1,632,734 3,097,533 4,730,267 2022 119,403 1,691,631 1,811,034 2023 1,200,000 321,685 1,521,685 2024 - 522,589 522,589 2025 and thereafter 919,583 1,802,761 2,722,344$ 3,873,016 $ 19,106,744 $ 22,979,760 (A)Includes secured financing agreements and secured notes and bonds payable of$1.3 million and$3.9 billion , respectively. (B)Includes secured financing agreements and secured notes and bonds payable of$14.7 billion and$4.4 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 3.9% and 54.1%, respectively, and for residential mortgage loans and REO were 10.8% and 21.4%, respectively, during the nine months endedSeptember 30, 2020 . 103 --------------------------------------------------------------------------------
Borrowing Capacity
The following table represents our borrowing capacity as of
Borrowing Balance Available
Debt Obligations/ Collateral Capacity Outstanding Financing(A)
Secured Financing Agreements
Residential mortgage loans and REO $ 5,011,258 $ 995,151 $ 4,016,107
New loan origination 5,283,000 2,767,458 2,515,542
Secured Notes and Bonds Payable
Excess MSRs 311,237 264,980 46,257
MSRs 1,750,000 1,296,506 453,494
Servicer advances 4,645,000 2,914,696 1,730,304
Residential mortgage loans 650,000 - 650,000
$ 17,650,495 $ 8,238,791 $ 9,411,704 (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 ofSeptember 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
The table below summarizes Preferred stock:
Dividends Declared per Share
Nine Months
Ended
Liquidation Issuance Three Months Ended September 30,
Series Number of Shares Preference Discount Carrying Value September 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 $ 1.41
Preferred Series B, 7.125% issued
August 2019 11,300 282,500 3.15 % 273,418 $ 0.45 $ 1.34
Preferred Series C, 6.375% issued
February 2020 16,100 402,500 3.15 % 389,548 $ 0.40 $ 1.20
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
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$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. As ofSeptember 30, 2020 , our outstanding options had a weighted average exercise price of$16.30 . Our outstanding options as ofSeptember 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 nine months endedSeptember 30, 2020 , our accumulated other comprehensive income (loss) changed due to the following factors (in thousands): Total Accumulated Other Comprehensive Income Accumulated other comprehensive income, December 31, 2019 $ 682,151 Net unrealized gain (loss) on securities 108,308
Reclassification of net realized (gain) loss on securities into earnings
(738,385)
Accumulated other comprehensive income, September 30, 2020 $ 52,074
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 nine months
ended September 30, 2020 , we recorded net unrealized losses on our real estate
securities due to widening credit spreads, changes in
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collateral performance, and other factors related specifically to certain
investments. We recorded credit impairment charges of $15.2 million with respect
to real estate securities and realized losses of $753.6 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 secured financing 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. During the third quarter of 2020, our board of directors increased the quarterly cash dividend on our shares of common stock to$0.15 per share from$0.10 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 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 September 30, 2020 October 2020 $ 0.15 Cash Flow Operating Activities Net cash flows provided by operating activities increased approximately$4.2 billion for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 . Operating cash flows for the nine months endedSeptember 30, 2020 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of$40.1 billion , servicing fees received of$1.1 billion , net recoveries of servicer advances receivable of$470.2 million , 106 -------------------------------------------------------------------------------- and net interest income received of$618.1 million . Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of$2.4 billion , originations of$36.8 billion , incentive compensation and management fees paid to the Manager of$158.2 million , income taxes paid of$0.1 million , subservicing fees paid of$458.3 million and other outflows of approximately$857.0 million including general and administrative costs and loan servicing fees. The$0.9 billion net proceeds on residential mortgage loans, held for sale, were primarily used to pay down debt facilities classified in financing activities below.
Investing Activities
Cash flows provided by (used in) investing activities were$11.0 billion for the nine months endedSeptember 30, 2020 . Investing activities consisted primarily of the acquisition of MSRs, real estate securities, and the funding of servicer advances, net of proceeds from the sale of real estate securities, principal repayments from Servicer Advance Investments, MSRs, real estate securities and loans as well as proceeds from the sale of real estate securities, loan, REOs, and derivative cash flows. Financing Activities Cash flows provided by (used in) financing activities were approximately$(12.5) billion during the nine months endedSeptember 30, 2020 . Financing activities consisted primarily of borrowings net of repayments under debt obligations, margin deposits net returns of margin under secured financing 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$1.5 billion . As ofSeptember 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 ofSeptember 30, 2020 . We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or 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 of
In addition, we executed the following material contractual obligations during
the nine 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 toSeptember 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 107 -------------------------------------------------------------------------------- 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$264.2 million of unfunded and available revolving credit privileges as ofSeptember 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. BeginningJanuary 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. 108 -------------------------------------------------------------------------------- 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, originates 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 howShellpoint operates its business and its impact on our operating performance, core earnings includesShellpoint'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 endedSeptember 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 of operations. The Gain on Remeasurement ofConsumer Loans Investment was treated as an unrealized gain for the purposes of calculating incentive compensation and was therefore excluded from such calculation. 109 -------------------------------------------------------------------------------- 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net (loss) income attributable to common stockholders$ 77,921
10,735 (5,123) 133,670 29,984
Change in fair value of investments (203,652) (571) 724,364 153,700
(Gain) loss on settlement of investments, net 94,068 (133,141) 986,921 (94,614)
Other (income) loss 20,646 35,219 111,597 60,256
Other income and impairment attributable to
non-controlling interests (4,360) 1,463 (7,307) (6,595)
Non-capitalized transaction-related expenses 17,795 8,472 48,892 24,622
Incentive compensation to affiliate - 36,307 - 49,265
Preferred stock management fee to affiliate 3,048 1,055 8,391 1,055
Deferred taxes 99,374 (6,652) (42,266) 18,080
Interest income on residential mortgage loans,
held-for-sale 9,579 18,852 30,146 45,041
Limit on RMBS discount accretion related to called deals
- (34) - (19,590)
Adjust consumer loans to level yield 363 1,922 (1,147) 4,884
Core earnings of equity method investees:
Excess mortgage servicing rights (Note 4) 6,120 3,987 10,210 6,102
Core Earnings $ 131,637 Net Income Per Diluted Share$ 0.19
$ 0.31
Weighted Average Number of Shares of Common Stock Outstanding, Diluted 420,968,626 415,588,238 415,665,441 406,671,972
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