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 Consolidated Financial Statements and notes thereto, and with "Risk Factors."
Management's discussion and analysis of financial condition and results of operations is intended to allow readers to view our business from management's perspective by (i) providing material information relevant to an assessment of our financial condition and results of operations, including an evaluation of the amount and certainty of cash flows from operations and from outside sources, (ii) focusing the discussion on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition, including descriptions and amounts of matters that are reasonably likely, based on management's assessment, to have a material impact on future operations, and (iii) discussing the financial statements and other statistical data management believes will enhance the reader's understanding of our financial condition, changes in financial condition, cash flows and results of operations. As permitted by SEC Final Rule Release No. 33-10890, Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, this section discusses our results of operations for the current quarter endedJune 30, 2021 compared to the immediately preceding prior quarter endedMarch 31, 2021 .
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, 2020 .
As of
We have elected to be treated as a REIT for
OUR MANAGER
We are externally managed by an affiliate of
CAPITAL ACTIVITIES
OnApril 14, 2021 , the Company priced its underwritten public offering of 45,000,000 shares of its common stock at a public offering price of$10.10 per share. The offering closed onApril 19, 2021 . In connection with the offering, the Company granted the underwriters an option for a period of 30 days to purchase up to an additional 6,750,000 shares of common stock at a price of$10.10 per share. OnApril 16, 2021 , the underwriters exercised their option, in part, to purchase an additional 6,725,000 shares of common stock. To compensate the Manager for its successful efforts in raising capital for New Residential, the Company granted options to the Manager relating to 5.2 million shares of New Residential's common stock at$10.10 per share. The Company intends to use the net proceeds of$512.1 million from the offering, along with cash on hand and other sources of liquidity, to finance the acquisition of Caliber. In the event that the Caliber acquisition does not occur, the Company intends to use the net proceeds from the offering for general corporate purposes. MARKET CONSIDERATIONS The overallUnited States financial condition and the path to economic recovery remained on track in the second quarter of 2021 despite the continued uncertainty and impact of the COVID-19 pandemic. Further reductions in social distancing and 65 -------------------------------------------------------------------------------- favorable financial conditions continued to spur growth. With fiscal and monetary policy likely to remain accommodative, and progress on COVID-19 vaccinations in theU.S. , indicators of economic activity strengthened. TheU.S. real gross domestic product ("GDP") expanded and grew at a faster annualized pace in the second quarter of 2021 compared to the first quarter of the year. Labor market conditions continued to improve with the total unemployment rate edging down to 5.9% atJune 30, 2021 from 6.0% atMarch 31, 2021 . The consumer price inflation-as measured by the 12-month percentage change in the personal consumption expenditures ("PCE") price index-increased notably in second quarter of 2021, largely driven by a surge in demand as the economy continued to reopen. Inflation may continue to rise above theFederal Reserve's inflation target in the near term, though in the longer-term inflation is expected to ease as the effect of transitory factors dissipate. Consumer spending increased notably and further gains in spending are expected to contribute significantly to the economic recovery. The release of pent-up consumer demand, progress on widespread vaccination, the ongoing reduction of social-distancing measures, and fiscal stimulus were important factors supporting spending. Housing demand continued to be robust, with construction of single-family homes and home sales remaining well above their pre-pandemic levels, and house prices rising further. The data for this sector indicates that residential investment spending was temporarily held back in the second quarter of 2021 by shortages in materials and limited stock of homes for sale. In the residential mortgage market, financing conditions were little changed during the second quarter of 2021 and remained accommodative for credit-worthy borrowers who met standard conforming loan criteria. Credit continued to appear tight for borrowers with lower credit scores. Overall non-QM activity for the broader industry saw notable signs of growth quarter over quarter. Mortgage rates for most borrowers were little changed, on net, and remained near historical lows. Home purchase and refinance mortgage activity continued at a strong pace throughJune 2021 , and the share of mortgages in forbearance declined during the quarter.
On balance, while the economic indicators discussed above appear favorable and support a strengthening economy, the path of the recovery is unprecedented and still largely dependent on the course of COVID-19. Uncertainty surrounding the economic outlook remains elevated as adverse alternative courses of the pandemic-including the possibility of the global spread of more-contagious, more-vaccine-resistant COVID-19 variants, such as the "Delta" variant-become more likely, although the increasingly widespread vaccinations in theU.S. and abroad, along with ongoing policy support, may diminish some of these uncertainties. Additionally, continued supply chain disruptions and labor shortages may rise if elevated inflation readings persist and it is possible that the value of our assets and our net income could decline in a rising interest rate environment to the extent that our assets are financed with floating rate debt and there is no accompanying increase in asset yields.
The market conditions discussed above 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, June 30,
2021 2021 December 31, 2020 September 30, 2020 2020
Real GDP 6.5 % 6.4 % 4.3 % 33.4 % (31.4) %
The following table summarizes the
66
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June 30 , March 31 ,
2021 2021 December 31, 2020 2020 2020
Unemployment rate 5.9 % 6.0 % 6.7 % 7.9 % 11.1 %
The following table summarizes the 10-year Treasury rate and the 30-year fixed
mortgage rates:
June 30, March 31, December 31, September 30, June 30,
2021 2021 2020 2020 2020
10-year U.S. Treasury rate 1.5 % 1.7 % 0.9 % 0.7 % 0.7 %
30-year fixed mortgage rate 3.0 % 3.1 % 2.7 % 2.9 % 3.2 %
We believe the estimates and assumptions underlying our Consolidated Financial
Statements are reasonable and supportable based on the information available as
of June 30, 2021 ; 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 June 30, 2021 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.
PROPOSED CHANGES TO LIBOR
The London Interbank Offered Rate ("LIBOR") is used extensively in the U.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. In addition, on March 5, 2021 , the ICE Benchmark
Administration confirmed its intention to ease publication of (i) one week and
two month USD LIBOR settings after December 31, 2021 and (ii) the remaining USD
LIBOR settings after June 30, 2023 . The U.S. and other countries are currently
working to replace LIBOR with alternative reference rates. In the U.S. , the
Alternative Reference Rates Committee ("ARRC"), has identified the Secured
Overnight Financing Rate ("SOFR"), as its preferred alternative rate for U.S.
dollar-based LIBOR. SOFR is a measure of the cost of borrowing cash overnight,
collateralized by U.S. Treasury securities, and is based on directly observable
U.S. Treasury -backed repurchase transactions. Some market participants may
continue to explore whether other U.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.
In preparation for the phase-out of LIBOR, we adopted and implemented the SOFR
index for our Freddie Mac and Fannie Mae adjustable-rate mortgages ("ARMs"). For
debt facilities that do not mature prior to the phase-out of LIBOR, we have
implemented amending terms to transition to an alternative benchmark. We
continue to evaluate the transitional impact to serviced ARMs.
67
--------------------------------------------------------------------------------OUR PORTFOLIO
Our portfolio, as of
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 Total
June 30, 2021
Investments $ 4,599,186 $ - $ 5,671,450 $ - $ 10,270,636 $ 14,956,889 $ 3,376,192 $ 592,126 $ - $ 29,195,843
Cash and cash equivalents 157,495 71,241 455,441 - 684,177 218,813 11,552 9,141 32,559 956,242
Restricted cash 17,673 52,466 120,784 - 190,923 20,033 913 26,632 - 238,501
Other assets 733,794 206,855 3,610,420 - 4,551,069 1,999,153 174,444 60,031 45,646 6,830,343
Goodwill 11,836 12,540 5,092 - 29,468 - - - - 29,468
Total assets $ 5,519,984 $ 343,102 $ 9,863,187 $ - $ 15,726,273 $ 17,194,888 $ 3,563,101 $ 687,930 $ 78,205 $ 37,250,397
Debt $ 4,309,548 $ - $ 5,580,897 $ - $ 9,890,445 $ 15,611,309 $ 2,552,050 $ 541,064 $ 542,405 $ 29,137,273
Other liabilities 349,274 58,794 1,225,843 - 1,633,911 13,092 169,441 770 129,759 1,946,973
Total liabilities 4,658,822 58,794 6,806,740 - 11,524,356 15,624,401 2,721,491 541,834 672,164 31,084,246
Total equity 861,162 284,308 3,056,447 - 4,201,917 1,570,487 841,610 146,096 (593,959) 6,166,151
Noncontrolling interests in
equity of consolidated
subsidiaries 16,593 - 35,066 - 51,659 - - 42,441 - 94,100
Total New Residential
stockholders' equity $ 844,569 $ 284,308 $ 3,021,381 $ - $ 4,150,258 $ 1,570,487 $ 841,610 $ 103,655 $ (593,959) $ 6,072,051
Investments in equity method
investees $ - $ - $ 107,251 $ - $ 107,251 $ - $ - $ - $ - $ 107,251
Operating Investments
Origination
For the three months ended June 30, 2021 , Newrez's loan origination volume was
$23.5 billion , down from $27.2 billion in the quarter prior. Funded volumes by
channel represented roughly 27%, 4%, 10% and 58% of total volume for Direct to
Consumer, Joint Venture, Wholesale and Correspondent, respectively, as compared
to 21%, 4%, 10% and 65% for the three months ended March 31, 2021 . The decreased
in funded volumes quarter over quarter was primarily driven by a decrease in
Correspondent volumes as overall industry-wide volumes in that channel also
declined. Direct to Consumer funded volumes increased for the 14th consecutive
quarter, rising to $6.4 billion , the highest quarterly funded volume in Newrez's
history, driven by an improvement in Newrez's recapture rates. Pull-through
adjusted lock volume was $20.5 billion , compared to $26.9 billion in the prior
quarter. During the three months ended June 30, 2021 , refinance activity
represented 64% of overall funded volumes and purchase activity represented 36%
of overall funded volumes. This compared to 73% for refinance and 27% for
purchase, respectively, in the prior quarter. Purchase activity for the broader
industry is expected to continue to increase. Gain on sale margin for the three
months ended June 30, 2021 was 1.31%, 12 bps lower than the 1.43% for the prior
quarter, primarily driven by increased competition in the third-party Wholesale
and Correspondent channels during the second quarter 2021. While increased
competition and capacity have driven gain on sale margins from their highs in
2020, we expect margins to stabilize, especially in third-party originated
channels, as industry capacity adjusts to demand.
Included in our Origination segment are the financial results of two affiliated
businesses, E Street Appraisal Management LLC ("E Street") and Avenue 365 Lender
Services, LLC ("Avenue 365"). E Street offers appraisal valuation services and
Avenue 365 provides title insurance and settlement services to Newrez .
68
--------------------------------------------------------------------------------The following table provides loan production by channel and product:
Unpaid Principal Balance
Three Months Ended Six Months Ended
(in millions) June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Production by Channel
Joint Venture $ 1,007 $ 1,049 $ 2,056 $ 1,597 $ (42) $ 459
Direct to Consumer 6,404 5,674 12,078 5,162 730 6,916
Wholesale 2,413 2,672 5,085 2,916 (259) 2,169
Correspondent 13,656 17,817 31,473 10,009 (4,161) 21,464
Total Production by Channel $ 23,480 $ 27,212 $ 50,692 $ 19,684 $ (3,732) $ 31,008
Production by Product
Agency $ 17,649 $ 19,583 $ 37,232 $ 11,901 $ (1,934) $ 25,331
Government 5,632 7,474 13,106 7,133 (1,842) 5,973
Non-QM 63 - 63 365 63 (302)
Non-Agency 120 138 258 248 (18) 10
Other 16 17 33 37 (1) (4)
Total Production by Product $ 23,480 $ 27,212 $ 50,692 $ 19,684 $ (3,732) $ 31,008
% Purchase 36 % 27 % 31 % 27 %
% Refinance 64 % 73 % 69 % 73 %
The following table provides information regarding Gain on Originated Mortgage Loans, Held-for-Sale, Net:
Three Months Ended Six Months Ended
(dollars in thousands) June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Gain on originated mortgage
loans, held-for-sale,
net(A)(B)(C)(D) $ 268,539 $ 384,423 $ 652,962 $ 440,152 $ (115,884) $ 212,810 Pull through adjusted lock volume
Gain on originated mortgage loans, as a percentage of pull through adjusted lock volume, by channel: Direct to Consumer 3.83 % 3.24 % 3.45 % 3.39 % Joint Venture 4.81 % 4.40 % 4.58 % 4.19 % Wholesale 0.95 % 1.71 % 1.37 % 1.52 % Correspondent 0.25 % 0.33 % 0.30 % 0.68 % Total gain on originated mortgage loans, as a percentage of pull through adjusted lock volume 1.31 % 1.43 % 1.38 % 1.98 % (A)Includes realized gains on loan sales and related new MSR capitalization, changes in repurchase reserves, changes in fair value of IRLCs, changes in fair value of loans held for sale and economic hedging gains and losses. (B)Includes loan origination fees of$438.9 million and$658.3 million for the three months endedJune 30, 2021 andMarch 31, 2021 , respectively. Includes loan origination fees of$1,097.3 million and$386.8 million for the six months endedJune 30, 2021 and 2020, respectively. (C)Excludes$18.3 million and$19.0 million of Gain on Originated Mortgage Loans, Held-for-Sale, Net for the three months endedJune 30, 2021 andMarch 31, 2021 , respectively, related to the MSR Related Investments, Servicing, and Residential Mortgage Loans segments, as well as intercompany eliminations (Note 8 to the Consolidated Financial Statements). Excludes$37.4 million and$38.4 million of Gain on Originated Mortgage Loans, Held-for-Sale, Net for the six months endedJune 30, 2021 and 2020, respectively. (D)Excludes mortgage servicing rights revenue on recaptured loan volume delivered back to NRM. Total Gain on Originated Mortgage Loans, Held-for-Sale, Net decreased for the three months endedJune 30, 2021 compared to the three months endedMarch 31, 2021 primarily driven by lower volumes and tighter margins. Total Gain on Originated 69 -------------------------------------------------------------------------------- Mortgage Loans, Held-for-Sale, Net increased for the six months endedJune 30, 2021 compared to the same period in 2020 primarily driven by the higher volume from all our channels. Servicing Our servicing business operates through a performing loan servicing division, Newrez Servicing, and a special servicing division, Shellpoint Mortgage Servicing ("SMS"). Newrez Servicing services performing Agency and government-insured loans. SMS services delinquent government-insured, Agency and Non-Agency loans on behalf of the owners of the underlying mortgage loans. As ofJune 30, 2021 , Newrez Servicing serviced$214.2 billion UPB of loans and Shellpoint Mortgage Servicing serviced$91.7 billion UPB of loans, for a total servicing portfolio of$305.9 billion UPB, representing a slight increase fromMarch 31, 2021 . The combined servicing represents 1,673,669 loans, a 2.1% decrease fromMarch 31, 2021 . Active forbearances within this portfolio continued to decline in the second quarter 2021 as our servicer continued to help homeowners and clients navigate the COVID-19 landscape. Only 2.3% of this portfolio was in active forbearance as ofJune 30, 2021 , down from 3.5% in the quarter prior, with minimal additions in new forbearance requests during the quarter. Our servicer has continued to leverage proprietary loss mitigation technology to help homeowners move into permanent solutions such as repayment plans, deferments, and loan modifications. The table below provides the mix of our serviced assets portfolio between subserviced performing servicing on behalf of New Residential, NRM orNewrez (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 for the periods presented. 70 --------------------------------------------------------------------------------
Unpaid Principal Balance
(in millions) June 30, 2021 March 31, 2021 June 30, 2020 QoQ Change YoY Change
Performing Servicing
MSR Assets $ 207,881 $ 205,487 $ 173,619 $ 2,394 $ 34,262
Acquired Residential Whole Loans 6,301 6,283 1,965 18 4,336
Total Performing Servicing 214,182 211,770 175,584 2,412 38,598
Special Servicing
MSR Assets 13,866 16,748 22,554 (2,882) (8,688)
Acquired Residential Whole Loans 1,450 1,456 4,032 (6) (2,582)
Third Party 76,409 74,613 75,413 1,796 996
Total Special Servicing 91,725 92,817 101,999 (1,092) (10,274)
Total Servicing Portfolio $ 305,907 $ 304,587 $ 277,583 $ 1,320 $ 28,324
Agency Servicing
MSR Assets $ 157,848 $ 157,598 $ 129,814 $ 250 $ 28,034
Acquired Residential Whole Loans - - - - -
Third Party 13,155 14,978 18,969 (1,823) (5,814)
Total Agency Servicing 171,003 172,576 148,783 (1,573) 22,220
Government-insured Servicing
MSR Assets 58,604 57,880 58,155 724 449
Acquired Residential Whole Loans - - - - -
Third Party - - - - -
Total Government Servicing 58,604 57,880 58,155 724 449
Non-Agency (Private Label) Servicing
MSR Assets 5,295 6,757 8,204 (1,462) (2,909)
Acquired Residential Whole Loans 7,751 7,739 5,997 12 1,754
Third Party 63,254 59,635 56,444 3,619 6,810
Total Non-Agency (Private Label) Servicing 76,300 74,131 70,645 2,169 5,655
Total Servicing Portfolio $ 305,907 $ 304,587 $ 277,583 $ 1,320 $ 28,324
71--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
(in thousands) June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Base Servicing Fees
MSR Assets $ 43,999 $
46,440
1,163 1,077 2,240 6,209 86 (3,969)
Third Party 25,408 27,112 52,520 59,610 (1,704) (7,090)
Total Base Servicing Fees $ 70,570 $ 74,629 $ 145,199 $ 134,490 $ (4,059) $ 10,709
Other Fees
Incentive fees $ 20,349 $ 20,249 $ 40,598 $ 16,193 $ 100 $ 24,405
Ancillary fees 11,519 10,982 22,501 20,153 537 2,348
Boarding fees 2,510 1,936 4,446 6,078 574 (1,632)
Other fees 7,516 5,719 13,235 6,713 1,797 6,522
Total Other Fees(A) $ 41,894 $ 38,886 $ 80,780 $ 49,137 $ 3,008 $ 31,643
Total Servicing Fees $ 112,464 $
113,515
(A)Includes other fees earned from third parties of
MSR Related Investments
MSRs and MSR Financing Receivables
As ofJune 30, 2021 , we had$4.8 billion carrying value of MSRs and MSR Financing Receivables. As ofJune 30, 2021 , our Full and Excess MSR portfolio decreased to$489 billion UPB from$536 billion UPB as ofDecember 31, 2020 . Full MSRs as ofJune 30, 2021 decreased to$399 billion from$435 billion UPB as ofDecember 31, 2020 . Excess MSRs as ofJune 30, 2021 decreased to$90 billion UPB from$101 billion as ofDecember 31, 2020 . The decrease in portfolio size during the periods presented was predominantly a result of prepayments, partially offset by MSRs retained from originations. We finance our 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 Consolidated Financial Statements for further information regarding financing of our MSRs and MSR Financing Receivables.
We have contracted with certain subservicers and, in relation to certain MSR purchases, interim subservicers, to perform the related servicing duties on the residential mortgage loans underlying our MSRs. As ofJune 30, 2021 , these subservicers include PHH, Mr. Cooper,LoanCare , and Flagstar, which subservice 15.6%, 14.8%, 13.7% and 0.6% of the underlying UPB of the related mortgages, respectively (includes both MSRs and MSR Financing Receivables).The remaining 55.3% of the underlying UPB of the related mortgages is subserviced byNewrez (Note 1 to our 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 byNewrez 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 72 -------------------------------------------------------------------------------- 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 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 Consolidated Financial Statements for further information regarding financing of our servicer advances.
See Note 5 to our Consolidated Financial Statements for further information regarding our MSR Financing Receivables.
The table below summarizes our MSRs and MSR Financing Receivables as ofJune 30, 2021 . Weighted Average MSR (dollars in millions) Current UPB (bps) Carrying Value MSRs GSE$ 269,342.7 28 bps$ 2,938.7 Non-Agency 8,314.4 56 15.0 Ginnie Mae 58,509.6 43 846.9 MSR Financing Receivables Non-Agency 62,396.7 48 989.8 Total$ 398,563.4 34 bps$ 4,790.4 The following table summarizes the collateral characteristics of the loans underlying our MSRs and MSR Financing Receivables as ofJune 30, 2021 (dollars in thousands): 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$ 2,938,754 $ 269,342,646 1,735,748 749 3.9 % 263 65 2.5 % 27.1 % 26.9 % 0.1 % 18.5 % Non-Agency 14,953 8,314,431 126,971 704 5.5 % 230 107 2.5 % 18.6 % 15.9 % 3.2 % 7.1 %Ginnie Mae 846,886 58,509,628 288,170 691 3.4 % 326 31 1.7 % 24.7 % 24.4 % 0.3 % 18.8 % MSR Financing Receivables Non-Agency 989,836 62,396,648 470,705 638 4.1 % 300 185 12.4 % 12.9 % 11.5 % 1.4 % 4.7 % Total$ 4,790,429 $ 398,563,353 2,621,594 722 3.9 % 277 80 3.9 % 24.3 % 23.9 % 0.4 % 16.1 % 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 0.9 % 0.2 % 2.9 % 0.3 % - % 0.2 % Non-Agency 2.1 % 0.7 % 1.8 % 2.4 % 0.5 % 2.1 % Ginnie Mae 2.3 % 0.7 % 5.5 % 0.6 % - % 0.8 % MSR Financing Receivables Non-Agency 6.0 % 1.7 % 2.2 % 6.5 % 0.7 % 2.4 % Total 2.0 % 0.6 % 3.1 % 1.4 % 0.1 % 0.7 % (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 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. 73 -------------------------------------------------------------------------------- (F)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively.
Excess MSRs
The tables below summarize the terms of our Excess MSRs:
Summary of Direct Excess MSRs as of June 30, 2021
MSR Component(A) Excess MSR
Weighted
Current UPB Weighted Average Average Excess Carrying Value
(billions) MSR (bps) MSR (bps) Interest in Excess MSR(%) (millions)
Agency $ 30.2 29 bps 21 bps 32.5% - 66.7% $ 146.6
Non-Agency(B) 34.0 35 15 33.3% - 100% 137.6
Total/Weighted Average $ 64.2 32 bps 18 bps $ 284.2
(A)The MSR is a weighted average as of June 30, 2021 , 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
Consolidated Financial Statements) on $21.7 billion UPB underlying these Excess
MSRs.
Summary of Excess MSRs Through Equity Method Investees as of June 30, 2021
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 $ 25.5 33 bps 22 bps 50.0 % 66.7 % 33.3 % $ 166.9
Total/Weighted Average $ 25.5 33 bps 22 bps $ 166.9 (A)The MSR is a weighted average as of
The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSRs as ofJune 30, 2021 (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$ 90,289 $ 19,639,343 161,595 730 4.5 % 228 138 1.6 % 28.0 % 27.4 % 0.9 % 22.1 % Recaptured Loans 56,356 10,584,956 66,348 735 4.0 % 264 48 - % 28.1 % 27.6 % 0.7 % 38.8 %$ 146,645 $ 30,224,299 227,943 731 4.3 % 242 105 1.0 % 28.1 % 27.4 % 0.8 % 28.1 % Non-Agency(F) Mr. Cooper and SLS Serviced: Original Pools$ 114,191 $ 30,421,757 176,889 679 4.2 % 269 183 8.9 % 18.4 % 16.7 % 2.4 % 13.7 % Recaptured Loans 23,454 3,561,614 17,077 742 3.8 % 273 31 0.1 % 31.2 % 31.2 % - % 39.0 %$ 137,645 $ 33,983,371 193,966 685 4.2 % 270 168 7.4 % 19.6 % 18.0 % 2.2 % 17.7 %
Total/Weighted Average(H)
421,909 706 4.3 % 257 139 4.1 % 23.5 % 22.4 % 1.6 % 23.6 %
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Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(G) 60 Days(G) 90+ Days(G) Foreclosure Owned Bankruptcy
Agency
Original Pools 1.9 % 0.5 % 5.6 % 0.5 % 0.1 % 0.1 %
Recaptured Loans 1.2 % 0.4 % 4.4 % 0.1 % - % - %
1.6 % 0.5 % 5.1 % 0.3 % 0.1 % 0.1 %Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools 10.9 % 7.5 % 4.7 % 5.3 % 0.4 % 1.3 %
Recaptured Loans 1.4 % 0.2 % 3.3 % - % - % - %
9.9 % 6.7 % 4.5 % 4.8 % 0.4 % 1.2 %
Total/Weighted Average(H) 6.1 % 3.9 % 4.8 % 2.8 % 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)We also invested in related Servicer advance investments, including the basic
fee component of the related MSR (Note 6 to our Consolidated Financial
Statements) on $21.7 billion UPB underlying these Excess MSRs.
(G)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent
the percentage of the total principal balance of the pool that corresponds to
loans that are delinquent by 30-59 days, 60-89 days or 90 or more days,
respectively.
(H)Weighted averages exclude collateral information for which collateral data
was not available as of the report date.
The following table summarizes the collateral characteristics as of June 30,
2021 of the loans underlying Excess MSRs 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 $ 78,114 $ 13,698,900 33.3 % 149,438 713 5.1 % 219 157 1.3 % 25.4 % 24.0 % 1.9 % 25.7 %
Recaptured Loans 88,754 11,848,489 33.3 % 89,597 720 4.1 % 260 57 - % 26.8 % 26.2 % 1.2 % 43.9 %
Total/Weighted Average(G)
239,035 716 4.6 % 238 110 1.3 % 26.2 % 25.0 % 1.6 % 34.5 %
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(F) 60 Days(F) 90+ Days(F) Foreclosure Owned BankruptcyAgency Original Pools 2.4 % 0.7 % 5.5 % 0.7 % 0.1 % 0.1 % Recaptured Loans 1.6 % 0.4 % 4.5 % 0.1 % - % 0.1 % Total/Weighted Average(G) 2.0 % 0.6 % 5.0 % 0.4 % 0.1 % 0.1 % (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. 75 -------------------------------------------------------------------------------- (B)Adjustable rate mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages. (C)Three-month average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool. (D)Three-month average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool. (E)Three-month average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool. (F)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively. (G)Weighted averages exclude collateral information for which collateral data was not available as of the report date.
Servicer Advance Investments
The following is a summary of our Servicer Advance Investments, including the
right to the basic fee component of the related MSRs (dollars in thousands):
June 30, 2021
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 $ 482,308 $ 502,533 $ 21,666,852 $ 420,537 1.9 %
(A)Carrying value represents the fair value of the Servicer advance investments, including the basic fee component of the related MSRs.
The following is additional information regarding our Servicer advance investments, and related financing, as of and for the six months endedJune 30, 2021 (dollars in thousands): Six Months EndedJune 30, 2021 Loan-to-Value ("LTV")(A) Cost of Funds(B) Change in Fair Face Amount of Weighted Average Weighted Average Life Value Recorded in Secured Notes and Discount Rate (Years)(C) Other Income Bonds Payable Gross Net(D) Gross Net Servicer advance investments(E) 5.2 % 6.1 $ (4,873)$ 402,039 89.4 % 88.8 % 1.3 % 1.2 % (A)Based on outstanding servicer advances, excluding purchased but unsettled servicer advances. (B)Annualized measure of the cost associated with borrowings. Gross cost of funds primarily includes interest expense and facility fees. Net cost of funds excludes facility fees. (C)Weighted average life represents the weighted average expected timing of the receipt of expected net cash flows for this investment. (D)Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve. (E)The following types of advances are included in Servicer Advance Investments: June 30, 2021 Principal and interest advances$ 81,061 Escrow advances (taxes and insurance advances) 174,351 Foreclosure advances 165,125 Total$ 420,537
MSR Related Ancillary Business
Our MSR related investments segment also includes the activity from several wholly-owned subsidiaries or minority investments in companies that perform various services in the mortgage and real estate industries. Our subsidiary Guardian is a national provider of field services and property management services. We also made a strategic minority investment in Covius,
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a provider of various technology-enabled services to the mortgage and real
estate industries. As of
Agency RMBS
The following table summarizes our Agency RMBS portfolio as ofJune 30, 2021 (dollars in thousands): 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$ 13,701,666 $ 14,158,189 100.0 %$ 16,947 $ (221,418) $ 13,953,718 61 7.1 10.2 %$ 13,803,858 (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 for the three months ended
Net Interest Spread(A)
Weighted Average Asset Yield 2.14 %
Weighted Average Funding Cost 0.17 %
Net Interest Spread 1.97 %
(A)The Agency RMBS portfolio consists of 100.0% fixed rate securities (based on amortized cost basis). See table above for details on rate resets of the floating rate securities.
We finance our investments in Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. AtJune 30, 2021 andDecember 31, 2020 , the Company pledged Agency RMBS with a carrying value of approximately$15.1 billion and$13.8 billion , respectively, as collateral for borrowings under repurchase agreements. To the extent available on desirable terms, we expect to continue to finance our acquisitions of Agency RMBS with repurchase agreement financing. See Note 11 to our Consolidated Financial Statements for further information regarding financing of our Agency RMBS.
Non-Agency RMBS
The following table summarizes our Non-Agency RMBS portfolio as ofJune 30, 2021 (dollars in thousands): Gross Unrealized Outstanding Outstanding Face Amortized Cost Carrying Repurchase Asset Type Amount Basis Gains Losses Value(A) Agreements Non-Agency RMBS$ 17,024,746 $ 938,113 $ 105,973 $ (40,915) $ 1,003,171 $ 590,640
(A)Fair value, which is equal to carrying value for all securities.
The following tables summarize the characteristics of our Non-Agency RMBS portfolio and of the collateral underlying our Non-Agency RMBS as ofJune 30, 2021 (dollars in thousands): Non-Agency RMBS Characteristics(A) Average Percentage of Minimum Outstanding Face Amortized Cost Total Amortized Weighted Average Weighted Average Vintage(B) Rating(C) Number of Securities Amount Basis Cost Basis Carrying Value Principal Subordination(D) Excess Spread(E) Life (Years) Coupon(F) Pre-2008 NR 126$ 458,559 $ 18,657 2.0 %$ 21,162 - % - % 4.2 5.3 % 2008 and later BBB 445 16,553,331 905,535 98.0 % 967,056 24.3 % 0.2 % 3.1 2.7 % Total/weighted average BBB 571$ 17,011,890 $ 924,192 100.0 %$ 988,218 23.7 % 0.2 % 3.2 2.7 % 77
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Collateral Characteristics(A)(G)
Cumulative Losses to
Vintage(B) Average Loan Age (years) Collateral Factor(H) 3-Month CPR(I) Delinquency(J) Date
Pre-2008 13.5 0.10 10.0 % 10.0 % 10.0 %
2008 and later 13.8 0.65 20.9 % 4.5 % 0.6 %
Total/weighted average 13.8 0.64 20.7 % 4.7 % 0.8 %
(A)Excludes $12.4 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 288
bonds with a carrying value of $343.2 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 of June 30, 2021 .
(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 ended June 30, 2021 .
(F)Excludes residual bonds, and certain other Non-Agency bonds, with a carrying
value of $29.2 million and $2.7 million , respectively, for which no coupon
payment is expected.
(G)The weighted average loan size of the underlying collateral is $260.4
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.
The following table summarizes the net interest spread of our Non-Agency RMBS
portfolio for the three months ended
Net Interest Spread(A)
Weighted average asset yield 3.48 %
Weighted average funding cost 3.28 %
Net interest spread 0.20 %
(A)The Non-Agency RMBS portfolio consists of 27.7% floating rate securities and 72.3% fixed rate securities (based on amortized cost basis).
We finance our investments in Non-Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. AtJune 30, 2021 andDecember 31, 2020 , the Company pledged Non-Agency RMBS with a carrying value of approximately$1.2 billion and$1.5 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 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
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aggregate UPB of the underlying residential mortgage loans within these various
securitization trusts is approximately
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 Notes 8 and 16 in our 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
As ofJune 30, 2021 , we had approximately$7.6 billion outstanding face amount of residential mortgage loans (see below). These investments were financed with secured financing agreements with an aggregate face amount of approximately$5.6 billion and secured notes and bonds payable with an aggregate face amount of approximately$1.2 billion . We acquired these loans through open market purchases, through loan origination, 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 $ 662,210 $ 617,951 11,246 5.9 % 5.2
Acquired reverse mortgage loans(E)(F)
28 7.7 % 3.7
Acquired performing loans(G)(I) 134,349 132,453 3,105 4.9 %
4.3
Acquired non-performing loans(H)(I) 221,387 205,597 1,399 5.1 %
3.2
Total residential mortgage loans, held-for-sale, at lower of cost or market$ 368,192 $ 343,998 4,532 5.1 %
3.6
Acquired performing loans(G)(I)$ 1,712,038 $ 1,742,686 10,875 3.3 %
7.6
Acquired non-performing loans 416,534.0 402,571 2 4.8 % 3.1 Originated loans 4,448,668 4,599,186 17,338 3.2 % 27.7 Total residential mortgage loans, held-for-sale, at fair value/lower of cost or market$ 6,577,240 $ 6,744,443 30,213 3.3 % 20.9 (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 52% 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. 79 -------------------------------------------------------------------------------- (G)Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due. (H)As ofJune 30, 2021 , we have placed all Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below. (I)Includes$722.4 million and$200.2 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. AtJune 30, 2021 andDecember 31, 2020 , the Company pledged mortgage loans with a carrying value of approximately$6.1 billion and$4.5 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements are subject to daily mark-to-market fluctuations and margin calls. A portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 11 to our Consolidated Financial Statements for further information regarding financing of our mortgage loans.
Other
Consumer Loans
The table below summarizes the collateral characteristics of the consumer loans, including those held in the Consumer Loan Companies and those acquired from the Consumer Loan Seller, as ofJune 30, 2021 (dollars in thousands): Collateral Characteristics Weighted Average Personal Original Average Unsecured Loans Personal FICO Weighted Adjustable Rate Average Loan Age Expected Delinquency 30 Delinquency 60 Delinquency 90+ 12-Month 12-Month UPB % Homeowner Loans % Number of Loans Score(A) Average Coupon Loan % (months) Life (Years) Days(B) Days(B) Days(B) CRR(C) CDR(D) Consumer loans$ 528,554 59.6 % 40.4 % 80,317 689 17.6 % 12.6 % 196 3.3 1.0 % 0.7 % 1.2 % 21.9 % 4.6 % (A)Weighted average original FICO score represents the FICO score at the time the loan was originated. (B)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively. (C)12-month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the three months as a percentage of the total principal balance of the pool. (D)12-month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the three months as a percentage of the total principal balance of the pool. We have financed our investments in consumer loans with securitized non-recourse long-term notes with a stated maturity date ofMay 2036 . Furthermore, the notes are non-mark-to-market and not subject to margin calls. See Note 11 to our Consolidated Financial Statements for further information regarding financing of our consumer loans.
Single-Family Rental ("SFR") Portfolio
As ofJune 30, 2021 our SFR portfolio consisted of approximately 1,155 units with an aggregate carrying value of$227.6 million , up from 625 units with an aggregate carrying value of$113.2 million as ofMarch 31, 2021 . During the three months endedJune 30, 2021 andMarch 31, 2021 , we acquired approximately 530 and368 SFR units, respectively.
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
80
--------------------------------------------------------------------------------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.
AtJune 30, 2021 , our net deferred tax liability of$100.1 million was primarily composed of deferred tax liabilities generated through the deferral of gains from loans sold by our origination business with servicing retained by us, as well as, deferred tax liabilities generated from changes in fair value of MSRs, loans, and swaps held in within taxable entities. For the three months and six months endedJune 30, 2021 , we recognized deferred tax expense of$7.0 million and$92.2 million , respectively, primarily reflecting deferred tax expense generated from changes in the fair value of MSRs, loans, and swaps held within taxable entities as well as income in our servicing and origination business segments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our 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 Consolidated Financial Statements are prudent and reasonable. Actual results historically have generally been in line with our estimates and judgments used in applying each of the accounting policies described below, as modified periodically to reflect current market conditions.
Our critical accounting policies as of
The outbreak of the novel coronavirus pandemic around the globe continues to adversely impact theU.S. and world economies and has contributed to significant volatility in global financial and credit markets. The impact of the outbreak has evolved rapidly. The major disruptions caused by COVID-19 significantly slowed many commercial activities in theU.S. , resulting in a rapid rise in unemployment claims, reduced business revenues and sharp reductions in liquidity and the fair value of many assets, including those in which we invest. The ultimate duration and impact of the COVID-19 pandemic and response thereto remains uncertain. We believe the estimates and assumptions underlying our Consolidated Financial Statements are reasonable and supportable based on the information available as ofJune 30, 2021 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as ofJune 30, 2021 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 Consolidated Financial Statements.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table summarizes the changes in our results of operations for the three months endedJune 30, 2021 compared to the three months endedMarch 31, 2021 and the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 (dollars in thousands). Our results of operations are not necessarily indicative of future performance. Three Months Ended Six Months Ended June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change Revenues Interest income$ 253,677 $ 253,735 $ 507,412 $ 634,571 $ (58) $ (127,159) Servicing revenue, net of change in fair value of mortgage servicing rights (86,511) 513,548 427,037 (379,574) (600,059) 806,611 Gain on originated mortgage loans, held-for-sale, net 286,885 403,434 690,319 478,561 (116,549) 211,758 454,051 1,170,717 1,624,768 733,558 (716,666) 891,210 Expenses Interest expense 106,539 118,905 225,444 333,258 (12,366) (107,814) General and administrative expenses 367,716 362,505 730,221 567,736 5,211 162,485 Management fee to affiliate 23,677 22,162 45,839 44,200 1,515 1,639 497,932 503,572 1,001,504 945,194 (5,640) 56,310 Other Income (Loss) Change in fair value of investments 200,383 (265,566) (65,183) (460,027) 465,949 394,844 Gain (loss) on settlement of investments, net (76,304) (11,978) (88,282) (874,538) (64,326) 786,256 Other income (loss), net 30,043 (9,613) 20,430 (43,449) 39,656 63,879 154,122 (287,157) (133,035) (1,378,014) 441,279 1,244,979 Impairment Provision (reversal) for credit losses on securities (1,756) (894) (2,650) 19,015 (862) (21,665) Valuation and credit loss provision (reversal) on loans and real estate owned (REO) (32,652) (18,713) (51,365) 103,920 (13,939) (155,285) (34,408) (19,607) (54,015) 122,935 (14,801) (176,950) Income (Loss) Before Income Taxes 144,649 399,595 544,244 (1,712,585) (254,946) 2,256,829 Income tax expense (benefit) (1,077) 98,259 97,182 (149,459) (99,336) 246,641 Net Income (Loss)$ 145,726 $ 301,336 $ 447,062 $ (1,563,126) $ (155,610) $ 2,010,188 Noncontrolling interests in income (loss) of consolidated subsidiaries 10,053 9,394 19,447 22,478 659 (3,031) Dividends on preferred stock 14,358 14,358 28,716 25,579 - 3,137 Net Income (Loss) Attributable to Common Stockholders$ 121,315 $ 277,584 $ 398,899 $ (1,611,183) $ (156,269) $ 2,010,082 Interest Income
Three months ended
Interest income was flat quarter over quarter as the yield on our interest-earning assets remained relatively unchanged. The aggregate balance of our primary interest-bearing assets as ofJune 30, 2021 andMarch 31, 2021 was$29.2 billion and$27.9 billion , respectively.
Six months ended
Interest income decreased$127.2 million year over year driven by (i) a$70.9 million decrease attributable to a smaller MSR portfolio driven by transfers from investments in MSR Financing Receivables to MSRs subsequent toJune 30, 2020 , and (ii) an$84.7 million decrease related to a reduced bond and residential loan portfolio largely attributable to sales during the first half 82 -------------------------------------------------------------------------------- of 2020 in response to the onset of COVID-19 related market factors, partially offset by (iii) a$28.4 million increase in interest income related to higher loan origination volumes atNewrez .
Servicing Revenue, Net
Servicing Revenue, Net related to MSRs consists of the following:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Servicing fee revenue $ 272,625 $ 263,743 $ 536,368 $ 660,498 $ 8,882 $ (124,130)
Ancillary and other fees 31,496 31,894 63,390 50,336 (398) 13,054
Servicing fee revenue and fees 304,121 295,637 599,758 710,834 8,484 (111,076)
Change in fair value due to:
Realization of cash flows (279,102) (317,716) (596,818) (479,940) 38,614 (116,878)
Change in valuation inputs and
assumptions(A) (106,432) 545,379 438,947 (618,127) (651,811) 1,057,074
Change in fair value of derivative
instruments 8,624 (8,823) (199) - 17,447 (199)
(Gain) loss realized (13,722) (929) (14,651) 7,659 (12,793) (22,310)
Servicing revenue, net $ (86,511) $ 513,548 $ 427,037 $ (379,574) $ (600,059) $ 806,611 (A)The following table summarizes the components of servicing revenue, net related to changes in valuation inputs and assumptions:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Changes in interest and
prepayment rates $ (222,242) $ 521,624 $ 299,382 $ (514,782) $ (743,866) $ 814,164
Changes in discount rates 89,463 - 89,463 (73,502) 89,463 162,965
Changes in other factors 26,347 23,755 50,102 (29,843) 2,592 79,945
Change in valuation and
assumptions $ (106,432) $ 545,379 $ 438,947 $ (618,127) $ (651,811) $ 1,057,074 The table below summarizes the unpaid principal balances of our MSRs:
Unpaid Principal Balance
(dollars in millions) June 30, 2021 March 31, 2021 June 30, 2020 QoQ Change YoY Change
MSRs
GSE $ 269,342.7 $ 290,005.8 $ 315,552.9 $ (20,663.1) $ (46,210.2)
Non-Agency 8,314.4 6,124.7 6,065.8 2,189.7 2,248.6
Ginnie Mae 58,509.6 57,996.5 57,779.1 513.1 730.5
Total $ 336,166.7 $ 354,127.0 $ 379,397.8 $ (17,960.3) $ (43,231.1) Three months ended
Servicing revenue, net decreased$600.1 million primarily driven by (i) a$651.8 million change from positive to negative mark-to-market adjustments, partially offset by (ii) a$38.6 million decrease in realization of cash flows. The negative mark-to-market adjustments of$106.4 million for the three months endedJune 30, 2021 were primarily driven by changes in assumptions related to prepayment rates, partially offset by a decrease in discount rates.
Six months ended
Servicing revenue, net increased$806.6 million primarily driven by (i) a$1.1 billion change from negative to positive mark-to-market adjustments as a result of slower prepayment rates, lower delinquency rates, and a decrease in discount rates, partially offset by (ii) a$116.9 million increase in realization of cash flows as a result of an increase in average portfolio size from 83 --------------------------------------------------------------------------------
acquisitions and originations as well as transfers from investments in MSR
Financing Receivables to MSRs subsequent to
Gain on Originated Mortgage Loans, Held-for-Sale, Net
The following table provides information regarding Gain on Originated Mortgage
Loans, Held-for-Sale, Net as a percentage of pull through adjusted lock volume,
by channel:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30,
2021 June 30, 2020
Direct to Consumer 3.83 % 3.24 % 3.45 % 3.39 %
Joint Venture 4.81 % 4.40 % 4.58 % 4.19 %
Wholesale 0.95 % 1.71 % 1.37 % 1.52 %
Correspondent 0.25 % 0.33 % 0.30 % 0.68 %
1.31 % 1.43 % 1.38 % 1.98 %
The following table provides loan production by channel:
Unpaid Principal Balance
Three Months Ended Six Months Ended
March 31,
(in millions) June 30, 2021 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Production by Channel
Joint Venture $ 1,007 $ 1,049 $ 2,056 $ 1,597 $ (42) $ 459
Direct to Consumer 6,404 5,674 12,078 5,162 730 6,916
Wholesale 2,413 2,672 5,085 2,916 (259) 2,169
Correspondent 13,656 17,817 31,473 10,009 (4,161) 21,464
Total Production by Channel $ 23,480 $ 27,212 $ 50,692 $ 19,684 $ (3,732) $ 31,008 Three months ended
Gain on originated mortgage loans, held-for-sale, net decreased$116.5 million driven by tighter margins attributable to change in funded loan volume mix. Gain on sale margin for the three months endedJune 30, 2021 was 1.31%, 12 bps lower than 1.43% for the prior quarter. For the second quarter of 2021, loan origination volume was$23.5 billion , down from$27.2 billion in the prior quarter. Correspondent decreased$4.2 billion to$13.7 billion during the second quarter of 2021 while Direct to Consumer increased$730.0 million to$6.4 billion . Both Joint Venture and Wholesale slightly decreased during the period.
Six months ended
Gain on originated mortgage loans, held-for-sale, net increased primarily driven
by higher volume across all channels. For the first half of 2021, loan
origination volume was
Interest Expense
Three months ended
Interest expense decreased by
Six months ended
Interest expense decreased$107.8 million year over year primarily attributable to (i) a$112.8 million decrease related to a reduced bond and residential loan portfolio largely attributable to sales made during the first half of 2020 in response to the onset of COVID-19 related market factors, and (ii) a$22.2 million decrease in interest expense due to runoff of MSR-related investments. The aforementioned items were partially offset by (iii) an increase in interest expense on originations of$17.9 84 --------------------------------------------------------------------------------
million largely driven by higher origination volume, and (iv) a
Management Fee to Affiliate
Three months ended
Management fee to affiliate increased
Six months ended
Management fee to affiliate increased
General and Administrative Expenses
General and Administrative Expenses consists of the following:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Compensation and benefits $ 61,432 $ 65,426 $ 126,858 $ 110,839 $ (3,994) $ 16,019
Compensation and benefits,
origination 133,298 133,218 266,516 134,426 80 132,090
Legal and professional 18,587 18,219 36,806 41,589 368 (4,783)
Loan origination 44,916 40,245 85,161 35,866 4,671 49,295
Occupancy 10,221 10,350 20,571 16,839 (129) 3,732
Subservicing 45,278 49,839 95,117 140,113 (4,561) (44,996)
Loan servicing 4,627 4,679 9,306 15,002 (52) (5,696)
Property and maintenance 15,755 12,130 27,885 16,352 3,625 11,533
Other miscellaneous general and
administrative 33,602 28,399 62,001 56,710 5,203 5,291
General and administrative expenses $ 367,716 $ 362,505 $ 730,221 $ 567,736 $ 5,211 $ 162,485 Three months ended
General and administrative expenses increased$5.2 million primarily attributable to higher property and maintenance at Guardian Asset Management coupled with increased marketing and office expenses fromNewrez . Property maintenance revenues and expenses at Guardian is expected to continue increasing in future periods as the company continues to expand and grow.
Six months ended
General and administrative expenses increased$162.5 million primarily attributable to growth in headcount. As ofJune 30, 2021 , headcount within our operating companies totaled approximately 6,129 employees compared to 4,595 as ofJune 30, 2020 . During the first half of 2021,Newrez funded$50.7 billion in origination volume compared to$19.7 billion for the first half of 2020. On the servicing side,Newrez and Shellpoint Mortgage Servicing serviced$305.9 billion in UPB as ofJune 30, 2021 compared to$277.6 billion UPB of servicing volume as ofJune 30, 2020 . Additionally, growth in Guardian Asset Management inspection and property management contracts resulted in an increase of expenses incurred related to performing such services. 85 --------------------------------------------------------------------------------
Change in Fair Value of Investments
Change in Fair Value of Investments consists of the following:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Excess MSRs $ (4,211) $ (4,618) $ (8,829) $ (11,109) $ 407 $ 2,280
Excess MSRs, equity method investees (568) 3,165 2,597 (2,509) (3,733) 5,106
MSR financing receivables (29,517) (25,778) (55,295) (225,631) (3,739) 170,336
Servicer advance investments (4,502) (371) (4,873) (2,712) (4,131) (2,161)
Real estate and other securities 156,792 (498,339) (341,547) (28,194) 655,131 (313,353)
Residential mortgage loans 121,242 60,174 181,416 (165,246) 61,068 346,662
Consumer loans held-for-investment (1,626) (6,004) (7,630) (5,750) 4,378 (1,880)
Derivative instruments (37,227) 206,205 168,978 (18,876) (243,432) 187,854
Change in fair value of investments $ 200,383 $ (265,566) $ (65,183) $ (460,027) $ 465,949 $ 394,844 Change in Fair Value of Excess MSRs
Change in Fair Value of Excess MSRs consists of the following:
Three Months Ended Six Months Ended
March 31,
June 30, 2021 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Changes in interest rates and
prepayment rates $ (1,477) $ 5,537 $ 4,060 $ 3,034 $ (7,014) $ 1,026
Changes in discount rates - - - (4,015) - 4,015
Changes in other factors (2,734) (10,155) (12,889) (10,128) 7,421 (2,761)
Change in fair value of Excess MSRs
$ (8,829) $ (11,109) $ 407 $ 2,280
Three months ended
The negative mark-to-market fair value adjustments during the three months endedJune 30, 2021 were mainly driven by increases in delinquency rates in our conventional, agency, and PLS excess mortgage servicing rights pools and reduced recapture rates. Additionally, decreased interest rates and increased prepayment speeds further drove the negative marks. The negative mark-to-market fair value adjustments during the three months endedMarch 31, 2021 were mainly driven by increases in delinquency rates in our conventional, agency, and PLS excess mortgage servicing rights pools and reduced recapture rates. This was partially offset by favorable changes in interest rates and reduced prepayment speeds.
Six months ended
The negative mark-to-market fair value adjustments during the six months endedJune 30, 2021 were mainly driven by increases in delinquency rates in our conventional, agency, and PLS excess mortgage servicing rights pools and reduced recapture rates. This was partially offset by favorable changes in interest rates and prepayment speeds. The negative mark-to-market fair value adjustments during the six months endedJune 30, 2020 were mainly driven by increases in delinquency rates and higher discount rates. This was partially offset by increased interest rates and decreased prepayment speeds. 86 --------------------------------------------------------------------------------
Change in Fair Value of Excess MSRs, Equity Method Investees
Change in Fair Value of Excess MSRs, Equity Method Investees consists of the
following:
Three Months Ended Six Months Ended
March 31, June 30,
June 30, 2021 2021 2021 June 30, 2020 QoQ Change YoY Change
Changes in interest rates and
prepayment rates $ (377) $ 1,074 $ 697 $ 352 $ (1,451) $ 345
Changes in discount rates - - - (743) - 743
Changes in other factors (191) 2,091 1,900 (2,118) (2,282) 4,018
Total $ (568) $ 3,165 $ 2,597 $ (2,509) $ (3,733) $ 5,106 Three months ended
The negative mark-to-market fair value adjustments during the three months endedJune 30, 2021 were mainly driven by decreased interest rates and increased prepayment speeds. The positive mark-to-market fair value adjustments during the three months endedMarch 31, 2021 were mainly driven by favorable changes in interest rates and prepayment speeds.
Six months ended
The positive mark-to-market fair value adjustments during the six months endedJune 30, 2021 were mainly driven by favorable changes in interest rates and prepayment speeds. The negative mark-to market adjustments during the six months endedJune 30, 2020 were mainly driven by increasing delinquency rates and reduced recapture rates.
Change in Fair Value of MSR Financing Receivables
The component of changes in the fair value of MSR Financing Receivables consists of the following:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Realization of cash flows $ (18,676) $ (21,954) $ (40,630) $ (145,951) $ 3,278 $ 105,321
Change in valuation inputs and
assumptions (9,413) (3,554) (12,967) (77,931) (5,859) 64,964
(Gain) loss on sales (1,428) (270) (1,698) (1,749) (1,158) 51
Total $ (29,517) $ (25,778) $ (55,295) $ (225,631) $ (3,739) $ 170,336
(A)The following table summarizes the components of changes in the fair value of
MSR Financing Receivables related to changes in valuation inputs and
assumptions:
Three Months Ended Six Months Ended
March 31,
June 30, 2021 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Changes in interest and
prepayment rates $ (4,760) $ 19,163 $ 14,403 $ 44,043 $ (23,923) $ (29,640)
Changes in discount rates 23,842 - 23,842 (12,744) 23,842 36,586
Changes in other factors (28,495) (22,717) (51,212) (109,230) (5,778) 58,018
Total $ (9,413) $ (3,554) $ (12,967) $ (77,931) $ (5,859) $ 64,964 Three months ended
Change in fair value of MSR Financing Receivables decreased
87
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by (ii) a
Six months ended
Change in fair value of MSR Financing Receivables increased$170.3 million primarily driven by (i) a$105.3 million decrease in realization of cash flows as a result of slower prepayments and transfers from investments in MSR Financing Receivables to MSRs subsequent toJune 30, 2020 , and (ii) a$65.0 million decrease in negative mark-to-market adjustments as a result of lower delinquency rates and a decrease in discount rates, partially offset by higher costs of financing.
Change in Fair Value of Servicer Advance Investments
Changes in Fair Value of Servicer Advance Investments consists of the following:
Three Months Ended Six Months Ended
March 31,
June 30, 2021 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Changes in interest and prepayment
rates $ (1,000) $ 12 $ (988) $ (2,074) $ (1,012) $ 1,086
Changes in discount rates - - - - - -
Changes in other factors (3,502) (383) (3,885) (638) (3,119) (3,247)
Total $ (4,502) $ (371) $ (4,873) $ (2,712) $ (4,131) $ (2,161) Three months ended
The negative mark-to-market adjustments during the three months endedJune 30, 2021 were driven by increased prepayment speeds resulting in a decrease in the UPB for the loans underlying the advances. Additionally, during the second quarter of 2021, the advance to UPB ratio increased resulting in less advance recoveries. The negative mark-to-market adjustments during the three months endedMarch 31, 2021 were driven by changes in the overall delinquency of the servicer advance portfolio coupled with changes in the debt fee rate for related servicer advance financing.
Six months ended
The negative mark-to-market adjustments during the six months endedJune 30, 2021 were driven by increased prepayment speeds resulting in a decrease in the UPB for the loans underlying the advances. Additionally, the advance to UPB ratio increased resulting in less advance recoveries driving negative mark-to-market adjustments. The negative mark-to-market adjustments during the six months endedJune 30, 2020 were driven by decreased interest rates resulting in increased prepayment rates. The increased prepayment rates resulted in decreased UPB for the loans underlying the advances.
Change in Fair Value of Real Estate and
Three months ended
Change in fair value of investments in real estate securities increased$655.1 million primarily driven by favorable adjustments in Agency securities due to lower interest rates and other favorable changes in comparable fixed income assets. These items were partially offset by unfavorable adjustments in Non-Agency securities due to a decrease in value of interest-only bonds attributable due to higher projected prepayments.
Six months ended
Change in fair value of investments in real estate securities decreased
Change in Fair Value of Residential Mortgage Loans
Three months ended
Change in fair value of investments in residential mortgage loans increased
88
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Six months ended
Change in fair value of investments in residential mortgage loans increased
Change in Fair Value of Consumer Loans Held-for-Investment
Three months ended
Change in fair value of consumer loans increased$4.4 million primarily due to favorable changes in inputs and assumptions, including lower delinquency rates and higher recoveries.
Six months ended
Change in fair value of consumer loans decreased
Change in Fair Value of Derivative Instruments
Three months ended
Change in fair value of derivative instruments decreased
Six months ended
Change in fair value of derivative instruments increased
Gain (Loss) on Settlement of Investments, Net
Gain (Loss) on Settlement of Investments, Net consists of the following:
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Gain (loss) on sale of real estate
securities $ (24,708) $ (983) $ (25,691) $ (761,209) $ (23,725) $ 735,518
Gain (loss) on sale of acquired
residential mortgage loans 19,198 30,399 49,597 (12,094) (11,201) 61,691
Gain (loss) on settlement of
derivatives (49,256) (27,373) (76,629) (109,907) (21,883) 33,278
Gain (loss) on liquidated
residential mortgage loans (268) 897 629 2,381 (1,165) (1,752)
Gain (loss) on sale of REO (239) (3,946) (4,185) 1,616 3,707 (5,801)
Gain (loss) on extinguishment of
debt 89 (6) 83 1,461 95 (1,378)
Other gains (losses) (21,120) (10,966) (32,086) 3,214 (10,154) (35,300)
$ (76,304) $ (11,978) $ (88,282) $ (874,538) $ (64,326) $ 786,256 Three months ended
Loss on settlement of investments, net increased$64.3 million primarily related to (i) a$23.7 million increase in losses on security sales,$22.9 million from Agency securities and$0.8 million from Non-agency securities, (ii) a$21.9 million increase in losses on derivatives, (iii) a$22.4 million increase in loss from collapsed loans recorded at market value, and (iv) an$11.2 89 --------------------------------------------------------------------------------
million of losses on sales of residential mortgage loans related to the
2020-NPL1 sale. These items were partially offset by (v) a
Six months ended
Loss on settlement of investments, net decreased$786.3 million primarily attributable to a large reduction in our Agency RMBS portfolio in the first half of 2020 in order to generate liquidity and de-risk our balance sheet in response to the onset of COVID-19 related market factors. We realized significant losses due to the timing of the bond sales.
Other Income (Loss), Net
Other Income (Loss), Net consists of the following:
Three Months Ended Six Months Ended
March 31,
June 30, 2021 2021 June 30, 2021 June 30, 2020 QoQ Change YoY Change
Unrealized gain (loss) on secured
notes and bonds payable $ 5,638 $ (4,422) $ (4,930) Unrealized gain (loss) on contingent consideration - (408) (408) (3,871) 408
3,463
Unrealized gain (loss) on equity investments (1,834) (2,783) (4,617) (47,697) 949
43,080
Gain (loss) on transfer of loans to REO 2,790 1,321 4,111 4,307 1,469
(196)
Gain (loss) on transfer of loans to other assets 44 (21) 23 (261) 65 284 Gain (loss) on Ocwen common stock 1,725 (186) 1,539 (4,121) 1,911
5,660
Provision for servicing losses (16,643) (6,158) (22,801) (16,030) (10,485) (6,771)
Rental and ancillary revenue 14,195 5,827 20,022 11,061 8,368 8,961
Property and maintenance revenue 25,104 19,906 45,010 28,658 5,198 16,352
Other income (loss) (976) (22,689) (23,665) (21,641) 21,713 (2,024)
$ 30,043 $ (9,613) $ 20,430 $ (43,449) $ 39,656 $ 63,879 Three months ended
As summarized in the table above, total other income increased$39.7 million primarily due to (i) a$14.5 million write off of receivables and other items in the first quarter of 2021, (ii) a$10.1 million change in unrealized gains on secured notes and bonds payable due to a$6.9 million increase related to changes in valuation inputs and assumptions and a$3.2 million increase from realization of gain through bond settlements, (iii) an$8.4 million increase in rental and ancillary revenue from single family rental properties, driven by increased property purchases, (iv) a$5.2 million increase in property and maintenance revenue at Guardian Asset Management, partially offset by (v) a$10.5 million increase in provision for servicing losses atNewrez .
Six months ended
As summarized in the table above, total other income increased$63.9 million primarily attributable to (i) a$43.1 million write down of our equity method investments due to a large write off during the first quarter of 2020, (ii) a$16.4 million increase in property and maintenance revenue at Guardian Asset Management, (iii) a$5.7 million decrease in losses on Ocwen common stock, and (iv) a$9.0 million increase in rental and ancillary revenue from single family rental properties, driven by increased property purchases, partially offset by (v) a$4.9 million decrease in unrealized gains on our secured notes and bonds payable 90 --------------------------------------------------------------------------------
related to changes in valuation inputs and assumptions, and (vi) a
Provision (Reversal) for Credit Losses on Securities
Three months ended
The reversal for credit losses on securities increased
Six months ended
The reversal for credit losses on securities increased$21.7 million primarily due to an increase in fair values on Non-Agency RMBS purchased with existing credit impairment driven largely by continued improvements in macroeconomic forecasts attributable to the recovery of the COVID-19 pandemic.
Valuation and Credit Loss Provision (Reversal) on Loans and Real Estate Owned
Three months ended
The valuation and credit loss reversal on loans and real estate owned increased$13.9 million driven by (i) a$15.4 million reversal of impairment on certain loans related to changes in interest rates and improved performance, partially offset by (ii) a$1.4 million increase of impairment on certain REOs.
Six months ended
The valuation and credit loss reversal on loans and real estate owned increased$155.3 million driven by (i) a$149.0 million increase in reversal of impairment on residential mortgage loans due to lower delinquency rates and improved performance, and (ii) a$6.3 million increase in reversal of impairment on certain REOs with an increase in home prices.
Income Tax Expense (Benefit)
Three months ended
Income tax expense decreased
Six months ended
Income tax expense increased$246.6 million . The tax benefit for the prior year primarily reflected deferred tax benefits resulting from changes in the fair value of loans and MSRs, partially offset by deferred tax expense generated from income in our servicing and origination business segments.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Three months ended
Noncontrolling interests in income increased
Six months ended
Noncontrolling interests in income decreased$3.0 million attributable to (i) a$6.2 million decrease related to interest income and fair value adjustments at our Consumer Loan Companies, which are 46.5% owned by third parties, partially offset by (ii) a$2.1 million increase related toAdvance Purchaser LLC and (iii) a$1.0 million increase from the Shelter JVs, driven by higher earnings from originations for the first half of 2021.
Dividends on Preferred Stock
Three months ended
91
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Dividends on preferred stock of
Six months ended
Dividends on preferred stock of$28.7 million for the first half of 2021 relate to our Preferred Series A, Preferred Series B, and Preferred Series C outstanding. Dividends on preferred stock increased$3.1 million during the first half of 2021 due to the issuance of Preferred Series C shares in February of 2020.
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, 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. The Company's total cash and cash equivalents atJune 30, 2021 was$956.2 million . Our ability to utilize funds generated by the MSRs held in our servicer subsidiaries, NRM andNewrez , is subject to and limited by certain regulatory requirements, including maintaining excess capital and related tangible net worth. As ofJune 30, 2021 , approximately$658.3 million of our cash and cash equivalents were held at NRM andNewrez , of which$510.7 million were in excess of regulatory liquidity requirements. NRM andNewrez are expected to maintain compliance with applicable net worth requirements throughout the year. 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 ofJune 30, 2021 , we had outstanding secured financing agreements with an aggregate face amount of approximately$21.3 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 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. 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,$2.8 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 92 --------------------------------------------------------------------------------
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. While market volatility has subsided since the onset of COVID-19 inmid-March 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. 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 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. 93 --------------------------------------------------------------------------------
Debt Obligations
The following table presents certain information regarding our debt obligations
(dollars in thousands):
June 30, 2021 December 31, 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) Carrying Value
Secured Financing Agreements(C)
Repurchase Agreements:
Warehouse Credit Facilities-Residential
Mortgage Loans(F) $ 5,595,304 $ 5,595,001 Aug-21 to Dec-22 2.18 % 0.6 $ 6,137,572 $ 6,062,869 $ 6,108,837 24.4 $ 4,039,564
Agency RMBS(D) 14,935,294 14,935,294 Jul-21 to Jan-22 0.17 % 0.1 14,771,792 15,278,052 15,059,319 1.0 12,682,427
Non-Agency RMBS(E) 691,034 691,034 Jul-21 to Sep-21 3.28 % 0.0 13,954,357 1,113,243 1,200,347 0.7 817,209
Real Estate Owned(G)(H) 69,532 69,533 Sep-21 to Dec-22 2.83 % 2.9 N/A N/A 83,916 N/A 8,480
Total Secured Financing Agreements 21,291,164 21,290,862 0.81 % 0.2 17,547,680
Secured Notes and Bonds Payable Excess MSRs(I) 264,277 264,277 Aug-24 4.36 % 3.2 89,755,059 293,976 365,997 6.2 275,088 MSRs(J) 2,505,820 2,494,717 Mar-22 to May-26 4.06 % 3.5 388,124,130 4,363,971 4,701,128 6.2 2,691,791 Servicer Advance Investments(K) 402,039 401,166 Aug-21 to Dec-22 1.33 % 1.3 420,537 482,308 502,533 6.1 423,144 Servicer Advances(K) 2,411,938 2,405,718 Aug-21 to Sep-23 2.32 % 1.7 2,709,963 2,719,410 2,719,410 0.7 2,585,575 Residential Mortgage Loans(L) 1,208,383 1,197,064 Sep-22 to Jul-43 2.30 % 4.7 1,326,788 1,461,742 1,449,245 18.5 1,039,838 Consumer Loans(M) 535,106 541,064 Sep-37 2.04 % 3.5 527,541 537,287 591,248 3.3 628,759 Total Secured Notes and Bonds Payable 7,327,563 7,304,006 2.91 % 3.0 7,644,195 Total/ Weighted Average$ 28,618,727 $ 28,594,868 1.35 % 0.9$ 25,191,875 (A)Net of deferred financing costs. (B)All debt obligations with a stated maturity through the date of issuance were refinanced, extended or repaid. (C)These secured financing agreements had approximately$73.5 million of associated accrued interest payable as ofJune 30, 2021 . (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$13.6 million and$18.0 million , respectively, on retained bonds collateralized by Agency MSRs. (F)Includes$234.6 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 as well as$45.4 million of financing collateralized by a portion of our single family rental portfolio. (I)Includes$264.3 million of corporate loans which bear interest at a fixed rate of 4.4%. (J)Includes$328.9 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 3.3%;$239.9 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 3.9%; and$1,937.0 million of capital markets notes with fixed interest rates ranging 3.0% to 5.4%. The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the MSRs and MSR Financing Receivables that secure these notes. (K)$2.0 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 1.1% to 3.9%. Collateral includes Servicer Advance Investments, as well as servicer advances receivable related to the mortgage servicing rights and MSR financing receivables owned by NRM. (L)Represents (i) a$5.9 million note payable to Mr. Cooper which includes a$1.6 million receivable from government agency and bears interest equal to one-month LIBOR plus 2.9%, (ii)$38.7 million face amount ofSAFT 2013-1 mortgage-backed securities issued with a fixed interest rate of 3.7% (see Note 12 for fair value details), (iii)$68.8 million of MDST Trusts asset-backed notes held by third parties which bear interest equal to 6.2% (see Note 12 for fair value details), (iv)$244.5 million of bonds held by third parties which bear interest at a fixed rate ranging from 3.6% to 5.0%, (v) a$100.5 million note payable collateralized by SFR with a fixed interest rate of 2.8%, and (vi)$750.0 million securitization backed by a revolving warehouse facility to finance newly originated first-lien, fixed- and 94 -------------------------------------------------------------------------------- adjustable-rate mortgage loans which bears interest equal to one-month LIBOR plus 1.1% (refer to Note 13 for further discussion). (M)Includes the SpringCastle debt, which is primarily composed of the following classes of asset-backed notes held by third parties:$482.1 million UPB of Class A notes with a coupon of 2.0% and a stated maturity date inSeptember 2037 and$53.0 million UPB of Class B notes with a coupon of 2.7% and a stated maturity date inSeptember 2037 (collectively, "SCFT 2020-A").
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$21.3 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):
Six Months Ended
Outstanding
Balance at Average Daily Amount Maximum Amount Weighted Average
June 30, 2021 Outstanding(A) Outstanding Daily Interest Rate
Secured Financing Agreements
Agency RMBS $ 14,935,294 $ 14,330,520 $ 18,667,907 0.20 %
Non-Agency RMBS 691,034 764,820 1,300,468 3.36 %
Residential mortgage loans 5,254,527 4,644,326 5,695,945 2.07 %
Real estate owned 24,103 19,294 24,511 2.67 %
Secured Notes and Bonds Payable
MSRs 50,000 50,000 50,000 3.34 % Servicer advances 503,837 1,221,258 928,259 3.32 % Total/weighted average$ 21,458,795 $ 21,030,218 $ 26,667,090 0.85 %
(A)Represents the average for the period the debt was outstanding.
Average Daily Amount Outstanding(A)
Three Months Ended
September 30,
June 30, 2021 March 31, 2021 December 31, 2020 2020
Secured Financing Agreements
Agency RMBS $ 15,169,877 $ 13,833,811 $ 11,391,397 $ 6,899,998
Non-Agency RMBS 724,014 806,260 447,824 1,459,942
Residential mortgage loans 4,622,809 4,552,293 3,655,906 3,112,376
Real estate owned 19,294 2,282 2,581 3,222
(A)Represents the average for the period the debt was outstanding.
Corporate Debt
On
InAugust 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 conjunction with the issuance of the 2020 Term Loan, we issued warrants providing the lenders with the right to acquire, subject to anti-dilution adjustments, up to 43.4 million shares of the Company's common stock in the aggregate (the "2020 Warrants"). The 2020 Warrants are exercisable in cash or on a cashless basis and expire onMay 19, 2023 and are exercisable, in whole or in part, at any time or from time to time afterSeptember 19, 2020 at the following prices (subject to certain anti- 95 -------------------------------------------------------------------------------- dilution provisions): approximately 24.6 million shares of common stock at$6.11 per share and approximately 18.9 million shares of common stock at$7.94 per share. As ofJune 30, 2021 , the weighted average exercise price was$6.67 per share. 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 2020 (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 . 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. 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% 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%.
For additional information on our debt activities, see Note 11 to our Consolidated Financial Statements.
Maturities
Our debt obligations as ofJune 30, 2021 , as summarized in Note 11 to our Consolidated Financial Statements, had contractual maturities as follows (in thousands): Year Ending Nonrecourse(A) Recourse(B)
Total
$ 18,824,249 2022 1,345,932 3,130,691 4,476,623 2023 1,379,007 256,041 1,635,048 2024 750,000 445,916 1,195,916 2025 244,533 1,705,176 1,949,709 2026 and thereafter 642,574 444,608 1,087,182$ 4,369,958 $ 24,798,769 $ 29,168,727
(A)Includes secured notes and bonds payable of
The weighted average differences between the fair value of the assets and the face amount of available financing for the Agency RMBS repurchase agreements and Non-Agency RMBS repurchase agreements were 1% and 42%, respectively, and for residential mortgage loans and REO were 7% and 17%, respectively, during the six months endedJune 30, 2021 . 96 --------------------------------------------------------------------------------
Borrowing Capacity
The following table represents our borrowing capacity as ofJune 30, 2021 (in thousands): Borrowing Balance Available Debt Obligations/ Collateral Capacity Outstanding Financing(A) Secured Financing Agreements Residential mortgage loans and REO$ 4,073,745 $ 1,918,829 $ 2,154,916 New loan origination 6,503,000 3,746,008 2,756,992 Secured Notes and Bonds Payable Excess MSRs 286,380 264,277 22,103 MSRs 3,761,960 2,505,820 1,256,140 Servicer advances 4,460,000 2,813,977 1,646,023 Residential mortgage loans 200,000 100,504 99,496$ 19,285,085 $ 11,349,415 $ 7,935,670
(A)Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions as set forth in the applicable agreements, including any applicable advance rate.
Covenants
Certain of the debt obligations are subject to customary loan covenants and event of default provisions, including event of default provisions triggered by certain specified declines in our equity or failure to maintain a specified tangible net worth, liquidity, or indebtedness to tangible net worth ratio. We were in compliance with all of our debt covenants as ofJune 30, 2021 .
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
Three Months Ended Six Months Ended
Number of Shares June 30 , June 30 ,
Liquidation Issuance
Series June 30, 2021 December 31, 2020 Preference(A) Discount Carrying Value 2021 2020 2021 2020
Fixed-to-floating rate cumulative
redeemable preferred:
Series A, 7.50% issued July 2019 6,210 6,210 $ 155,250 3.15 % $ 150,026 $ 0.47 $ 0.47 $ 0.94 $ 0.94
Series B, 7.125% issued August
2019 11,300 11,300 282,500 3.15 % 273,418 0.45 0.45 0.89 0.89
Series C, 6.375% issuedFebruary 2020 16,100 16,100 402,500 3.15 % 389,548 0.40 0.40 0.80 0.80 Total 33,610 33,610$ 840,250 $ 812,992 $ 1.32 $ 1.32 $ 2.63 $ 2.63
(A)Each series has a liquidation preference of
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 , andFebruary 14, 2020 but excluding,August 15, 2024 andFebruary 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 97 --------------------------------------------------------------------------------$1.875 ,$1.781 , and$1.600 per annum per share), respectively, and from and includingAugust 15, 2024 andFebruary 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 beforeAugust 15, 2024 and the Preferred Series C will not be redeemable beforeFebruary 15, 2025 , except under certain limited circumstances intended to preserve our qualification as a REIT forU.S. federal income tax purposes and except upon the occurrence of a Change of Control (as defined in the Certificate of Designations). On or afterAugust 15, 2024 for the Preferred Series A and Preferred Series B andFebruary 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
OnFebruary 16, 2021 , we announced that our board of directors had authorized the repurchase of up to$200.0 million of our common stock throughDecember 31, 2021 . 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. OnApril 14, 2021 , the Company priced its underwritten public offering of 45,000,000 shares of its common stock at a public offering price of$10.10 per share. The offering closed onApril 19, 2021 . In connection with the offering, the Company granted the underwriters an option for a period of 30 days to purchase up to an additional 6,750,000 shares of common stock at a price of$10.10 per share. OnApril 16, 2021 , the underwriters exercised their option, in part, to purchase an additional 6,725,000 shares of common stock. To compensate the Manager for its successful efforts in raising capital for New Residential, the Company granted options to the Manager relating to 5.2 million shares of New Residential's common stock at$10.10 per share. The Company intends to use the net proceeds of approximately$512.0 million from the offering, along with cash on hand and other sources of liquidity, to finance the acquisition of Caliber. In the event that the Caliber acquisition does not occur, the Company intends to use the net proceeds from the offering for general corporate purposes. OnMay 19, 2021 , New Residential entered into a Distribution Agreement to sell shares of its common stock, par value$0.01 per share (the "ATM Shares"), having an aggregate offering price of up to$500.0 million , from time to time, through an "at-the-market" equity offering program (the "ATM Program"). No share issuances were made during the three months endedJune 30, 2021 . As ofJune 30, 2021 , our outstanding options had a weighted average exercise price of$14.52 . Our outstanding options as ofJune 30, 2021 were summarized as follows: Held by the Manager 16,840,175
Issued to the Manager and subsequently assigned to certain of the Manager's employees
2,753,980
Issued to the independent directors 6,000 Total 19,600,155 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% 98 -------------------------------------------------------------------------------- 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. 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. The table below summarize common dividends declared for the periods presented: Common Dividends Declared for the Period Ended Paid/Payable Amount Per Share June 30, 2020 July 2020 $ 0.10 September 30, 2020 October 2020 $ 0.15 December 31, 2020 January 2021 $ 0.20 March 31, 2021 April 2021 $ 0.20 June 30, 2021 July 2021 $ 0.20 Cash Flow Operating Activities Net cash flows used in operating activities decreased approximately$3.8 billion for the six months endedJune 30, 2021 as compared to the six months endedJune 30, 2020 . Operating cash flows for the six months endedJune 30, 2021 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of$52.8 billion , servicing fees received of$555.3 million , net recoveries of servicer advances receivable of$253.6 million , and net interest income received of$369.4 million . Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of$3.8 billion , originations of$50.5 billion , management fees paid to the Manager of$45.3 million , income taxes paid of$14.5 million , subservicing fees paid of$160.8 million and other outflows of approximately$702.8 million including general and administrative costs and loan servicing fees. The$1.5 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 ($2.4 billion ) for the six months endedJune 30, 2021 . Investing activities consisted primarily of the acquisition of 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.
Financing Activities
Cash flows provided by (used in) financing activities were approximately$3.5 billion during the six months endedJune 30, 2021 . 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. 99 --------------------------------------------------------------------------------
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$1.0 billion . As ofJune 30, 2021 , there was$11.9 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 ofJune 30, 2021 . 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 ofJune 30, 2021 included all of the material contractual obligations referred to in our annual report on Form 10-K for the year endedDecember 31, 2020 , excluding debt that was repaid as described in "-Liquidity and Capital Resources-Debt Obligations."
In addition, we executed the following material contractual obligations during
the six months ended
•Derivatives - as described in Note 10 to our Consolidated Financial Statements, we have altered the composition of our economic hedges during the period. •Debt obligations - as described in Note 11 to our Consolidated Financial Statements, we borrowed additional amounts.
See Notes 15 and 18 to our Consolidated Financial Statements included in this report for information regarding commitments and material contracts entered into subsequent toJune 30, 2021 , 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. In addition, the Consumer Loan Companies have invested in loans with an aggregate of$254.9 million of unfunded and available revolving credit privileges as ofJune 30, 2021 . 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
100
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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.
Beginning January 1, 2020 , our investments in consumer loans are accounted for
under the fair value option. Core earnings adjusts earnings on the consumer
loans to a level yield to present income recognition across the consumer loan
portfolio in the manner in which it is economically earned, to avoid potential
delays in loss recognition, and align it with our overall portfolio of
mortgage-related assets which generally record income on a level yield basis.
With respect to consumer loans classified as held-for-sale, the level yield is
computed through the expected sale date. With respect to the gains recorded
under GAAP in 2014 and 2016 as a result of a refinancing of, and the
consolidation of, the Consumer Loan Companies, respectively, we continue to
record a level yield on those assets based on their original purchase price.
While incentive compensation paid to our Manager may be a material operating
expense, we exclude it from core earnings because (i) from time to time, a
component of the computation of this expense will relate to items (such as gains
or losses) that are excluded from core earnings, and (ii) it is impractical to
determine the portion of the expense related to core earnings and non-core
earnings, and the type of earnings (loss) that created an excess (deficit) above
or below, as applicable, the incentive compensation threshold. To illustrate why
it is impractical to determine the portion of incentive compensation expense
that should be allocated to core earnings, we note that, as an example, in a
given period, we may have core earnings in excess of the incentive compensation
threshold but incur losses (which are excluded from core earnings) that reduce
total earnings below the incentive compensation threshold. In such case, we
would either need to (a) allocate zero incentive compensation expense to core
earnings, even though core earnings exceeded the incentive compensation
threshold, or (b) assign a "pro forma" amount of incentive compensation expense
to core earnings, even though no incentive compensation was actually incurred.
We believe that neither of these allocation methodologies achieves a logical
result. Accordingly, the exclusion of incentive compensation facilitates
comparability between periods and avoids the distortion to our non-GAAP
operating measure that would result from the inclusion of incentive compensation
that relates to non-core earnings.
With regard to non-capitalized transaction-related expenses, management does not
view these costs as part of our core operations, as they are considered by
management to be similar to realized losses incurred at acquisition.
Non-capitalized transaction-related expenses are generally legal and valuation
service costs, as well as other professional service fees, incurred when we
acquire certain investments, as well as costs associated with the acquisition
and integration of acquired businesses.
Since the third quarter of 2018, as a result of the Shellpoint Acquisition, we,
through our wholly owned subsidiary, Newrez , 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 how Shellpoint operates its business and its impact on our
operating performance, core earnings includes Shellpoint's GAAP net income with
the exception of the unrealized gains or losses due to changes in valuation
inputs, assumptions on MSRs owned by Newrez , net of unrealized gains and losses
on MSR hedges owned by Newrez , and non-capitalized transaction-related expenses.
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
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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.
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 with U.S.
GAAP, and our calculation of this measure may not be comparable to similarly
entitled measures reported by other companies. For a further description of the
difference between cash flows provided by operations and net income, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources" above. Set forth below is a
reconciliation of core earnings to the most directly comparable GAAP financial
measure (dollars in thousands, except share and per share data):
Three Months Ended Six Months Ended
June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020
Net (loss) income attributable to common stockholders $ 121,315 $ 277,584 $ 398,899 $ (1,611,183)
Adjustments for Non-Core Earnings: Impairment (34,408) (19,607) (54,015)
122,935
Change in fair value of investments (98,766) (275,419) (374,185)
928,016
(Gain) loss on settlement of investments, net 120,212 31,335 151,547 892,853 Other (income) loss, net 14,226 24,339 38,565 90,950 Other income and impairment attributable to non-controlling interests (1,473) (4,511) (5,984)
(2,947)
Non-capitalized transaction-related expenses 9,905 10,623 20,528
31,097
Preferred stock management fee to affiliate 3,048 3,048 6,096 5,343 Deferred taxes 6,965 85,230 92,195 (141,640) Interest income on residential mortgage loans, held-for-sale 7,073 7,570 14,643
20,567
Adjust consumer loans to level yield - - -
(1,510)
Core earnings of equity method investees: Excess mortgage servicing rights (1,463) 4,576 3,113 4,090 Core earnings$ 146,634 $ 144,768 $ 291,402 $ 338,571 Net income (loss) per diluted share $ 0.26 $ 0.65 $ 0.88 $
(3.88)
Core earnings per diluted share $ 0.31 $ 0.34 $ 0.65 $
0.81
Weighted average number of shares of common stock
outstanding, diluted 472,729,245 429,491,379 451,229,665 415,625,468
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