RITHM CAPITAL CORP. Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements and notes thereto, and with Part I, Item 1A, "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. This section generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2019 items and year-to-year comparisons between 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 .
GENERAL
New Residential is an investment manager with a vertically integrated mortgage platform. We seek to generate long-term value for our investors by using our investment expertise to identify, manage and invest 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/or 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." Our portfolio is currently composed of mortgage servicing related assets (including investments in operating entities consisting of servicing, origination, and related businesses), residential securities (and associated called rights) and loans, and consumer loans. Within our portfolio, we target complementary assets that generate stable long-term cash flows and employ conservative capital structures in an effort to generate returns across different interest rate environments. Our investment approach and capital allocation decisions combine a focus on asset selection, relative value, and risk management, taking into consideration relevant macroeconomic factors. In our efforts to identify and invest in target assets, we compete with banks, other REITs, non-bank mortgage lenders and servicers, private equity firms, hedge funds, and other large financial services companies. In the face of this competition, the experience of members of our management team and dedicated investment professionals provided by our manager provide us with a competitive advantage when pursuing attractive investment opportunities. Our investments in operating entities include our mortgage origination and servicing subsidiary,NewRez , and its special servicing divisions,NewRez Servicing and SMS, as well as investments in related businesses, such as Avenue 365 and eStreet, that provide services that are complementary to our origination and servicing businesses and our other portfolios of mortgage related assets. Our origination business sources and originates loans through four distinct channels: Direct to Consumer, Joint Venture, Wholesale, and Correspondent. Our servicing platforms offer our subsidiaries and third-party clients performing and special servicing capabilities. Within our operating entities, we also have a title company called Avenue 365 and an appraisal company called eStreet. We also have investments in Guardian, and our non-controlling interest in, and partnerships with,Covius Holdings, Inc. (collectively with its subsidiaries, "Covius") and other entities that provide services that support the mortgage and housing industries. We seek to protect book value and the value of our assets by actively managing and hedging our portfolio. Diversification of our overall portfolio, including our portfolio assets and operating entities, and a variety of hedging strategies, help contribute to book value stability. Both our portfolio composition (inclusive of long and short duration instruments and various operating businesses) as well as specific hedging instruments (including Agency MBS, interest rate swaps and others) are employed to mitigate book value volatility. We believe that the actions we have taken over the past number of years to diversify and grow our portfolio have allowed us to operate efficiently and perform dynamically across economic conditions. We also attempt to protect our assets and reduce the impact of prepayments on our MSRs and Excess MSR investments through recapture agreements with our subservicers and through our origination and servicing operations. Under these agreements, New 73 -------------------------------------------------------------------------------- Residential is generally entitled to the MSRs or a pro rata interest in the Excess MSRs on any initial or subsequent refinancing of loans relating to MSRs and Excess MSRs subserviced or serviced by PHH,LoanCare , Flagstar, Mr. Cooper, or SLS. In addition, we obtain new production MSRs associated with loans originated byNewRez , which partially offset prepayments of MSRs in our portfolio.
As of
We have elected to be treated as a REIT for
OUR MANAGER
We are externally managed by an affiliate of
On
CAPITAL ACTIVITIES
InJuly 2018 , we entered into a Distribution Agreement to sell shares of our 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"). OnAugust 1, 2019 , the Distribution Agreement was amended to, among other things, (i) add additional sales agents under the ATM Program, and (ii) restore the aggregate offering price under the ATM Program to the original amount of$500.0 million . During the year endedDecember 31, 2020 , we sold 77.6 thousand shares through our ATM program at a weighted average price of$17.02 . InAugust 2019 , we announced a share repurchase program authorizing the repurchase of up to$200.0 million of our common shares from time to time in the open market or in privately negotiated transactions throughDecember 31, 2020 . Repurchases may impact our financial results, including fees paid to our Manager. For the year endedDecember 31, 2020 , we repurchased 1.0 million shares at a weighted average price of$7.44 . InFebruary 2020 , we raised approximately$402.5 million of gross proceeds in an underwritten public offering of 6.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ("Preferred Series C"). The net proceeds were for investments and general corporate purposes.
In
InSeptember 2020 , we priced$550 million of 6.250% senior unsecured notes due 2025. The net proceeds from the offering were used, together with cash on hand, to prepay and retire the existing three-year senior secured term loan facility and to pay related fees and expenses. InNovember 2020 , we announced a preferred share repurchase program authorizing the repurchase of up to$100.0 million of our preferred shares, which includes our 7.500% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, 7.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock and 6.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (collectively "preferred shares"), from time to time in the open market or in privately negotiated transactions throughDecember 31, 2021 . As ofDecember 31, 2020 , no preferred shares had been repurchased. OnFebruary 8, 2021 , our board of directors authorized the repurchase of up to$200.0 million of its common stock throughDecember 31, 2021 . Repurchases may be made 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 Securities Exchange Act of 1934 or by means of one or more tender offers, in each case, as permitted by securities laws and other legal requirements. The share repurchase program may be suspended or discontinued at any time. As ofDecember 31, 2020 , no shares had been repurchased. 74 -------------------------------------------------------------------------------- During the year endedDecember 31, 2020 , we declared an aggregate common stock dividend of$0.50 per common share, and declared aggregate preferred dividends of$1.875 per share of Preferred Series A,$1.781 per share of Preferred Series B, and$1.598 per share of Preferred Series C, respectively.
MARKET CONSIDERATIONS
Beginning in the first quarter of 2020, the emergence of the outbreak of the COVID-19 pandemic significantly impacted economies across the global. TheWorld Health Organization subsequently designated COVID-19 as a pandemic, and numerous countries, includingthe United States , declared national emergencies with respect to COVID-19. Throughout 2020, the global impact of COVID-19 rapidly evolved, and many countries reacted by instituting quarantines and restrictions on travel, closing financial markets and/or restricting trading and limiting operations of non-essential offices and retail centers. Such actions created disruption in global supply chains, increasing rates of unemployment and adversely impacting many industries. As the COVID-19 pandemic unfolded in theU.S. inmid-March 2020 , financial and mortgage-related asset markets experienced significant volatility. During March and April of 2020, the significant dislocation in the financial markets caused, among other things, credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and mortgage-backed securities markets. These conditions put significant pressure on the mortgage industry, including as related to financing operations, pricing mortgage assets and meeting liquidity needs. In response to the market conditions created by the COVID-19 pandemic, theFederal Reserve took a number of proactive measures during 2020, including cutting its target benchmark interest rate to 0%-0.25%, instituting a quantitative easing program, including the purchase of an unconstrained amount of Agency RMBS, and establishing a commercial paper funding facility and term and overnight repurchase agreement financing facilities. These measures ultimately bolstered liquidity and promoted price stability and reduced volatility in theU.S. housing finance system. As of the end of 2020, the Fed had purchases of$1.5 trillion Agency MBS during the year. As noted above, theFederal Reserve measures were intended to address the volatility in the Agency RMBS market. Without similar support from theFederal Reserve , in comparison, the Non-Agency market continued to experience unprecedented volatility and liquidity issues particularly with respect to financing of these assets with repurchase agreement financing facilities. As Non-Agency assets were sold in rapid fashion, the value of these assets dropped precipitously, resulting in lenders initiating margin calls on companies that financed these assets with repurchase agreements. A margin call requires the borrower to transfer additional cash or securities to the lender to get back to the contractual LTV of the trade. During this period of volatility, New Residential, like a number of others in the industry, experienced this phenomenon beginning in mid-March. We also during this period, observed a mark-down of a portion of our Non-Agency mortgage assets by the counterparties to our financing arrangements, resulting in our having to pay cash or securities to satisfy higher than historical levels of margin calls. In light of these events, we took a number of immediate and on-going actions to reduce our risk, increase our liquidity and stabilize financing sources, both as a means of strengthening our balance sheet and positioning our Company to take advantage of opportunities when market conditions stabilize. This included the sale of approximately$6.1 billion face value of Non-Agency residential mortgage-backed securities inApril 2020 , and raising$600.0 million through entry into a private senior secured loan agreement. As a result of the unprecedented illiquidity in repurchase agreement financing, we procured and continue to procure financing, such as securitizations and term financings, that provides less or no exposure to fluctuations in the daily collateral repricing determinations. We achieved this by securing longer-dated financing arrangements, moving more of our financing into the capital markets and negotiating margin holidays with regards to certain assets. While the cost of funds for such financings may be greater relative to repurchase agreement funding, we believe, given on-going market conditions, financing with more limited mark-to-market provisions allows us to better manage our liquidity risk and reduce exposures to events like those caused by the COVID-19 pandemic. We will continue in the near term to explore additional financing arrangements to further strengthen our balance sheet and position ourselves for future investment opportunities, including, without limitation, additional issuances of our equity and debt securities and longer-termed financing arrangements; however, there can be no assurance that we will be able to access any such financing or to successfully negotiate the size, timing or terms thereof. We continue to hold an increased amount of unrestricted cash due to the uncertainty surrounding the reopening of the economy and the continued spread of COVID-19. The events created by the COVID-19 outbreak, such as elevated unemployment levels and changes in consumer behavior related to loans, as well as government policies and pronouncements, impacted borrowers' ability to meet their obligations or seek to forbear payment on their mortgage loans. OnMarch 27, 2020 , theU.S. government enacted the CARES Act, an approximately$2 trillion emergency economic stimulus package in response to the COVID-19 pandemic. The CARES Act, among other things, provided any homeowner with a federally-backed mortgage who is experiencing financial hardship the option of up to six months of forbearance on their mortgage payments, with a potential to extend that forbearance for another 75 --------------------------------------------------------------------------------
six months. During the forbearance period, no additional fees, penalties or interest could accrue on the homeowner's account. The CARES Act also established a 60-day moratorium on foreclosures.
In the aftermath of the CARES Act, requests for forbearances increased across the industry, peaking inJune 2020 and then generally declining across the remainder of the year as borrowers remained active in their payments, worked through modifications or had their forbearance and COVID-19 related hardship end. Our servicer worked diligently with our borrowers during this time to help them find solutions to their COVID-19 related hardships. As hardships end, our servicing team members continue to work with borrowers and are focused on utilizing proprietary loss mitigation technology to help homeowners move into permanent solutions such as repayment plans, deferments, and loan modifications. As ofDecember 31, 2020 , 3.4% of borrowers in our servicing portfolio and 5.5% of our Full MSR portfolio are in active forbearance. The COVID-19 pandemic also introduced unprecedented challenges for our operating investments, including the health and safety of our employees. To protect our employees, we took immediate action and enacted various precautions to mitigate the related health and safety risks, including moving a significant portion of our staff to work-from-home status, restricting non-essential travel and face-to-face meetings and enhancing sanitization of our facilities. Beginning inMay 2020 , volatility somewhat subsided andU.S. stocks rallied to a number of new highs across the remainder of the year. Concerns around the length and scope of the COVID-19 pandemic as well as speculation on the outcome of theU.S. presidential election added volatility into the end of the year. During that time, theFederal Reserve continued to use all available tools to support markets, assist economic recovery and provide additional accommodation as needed. Ultimately the S&P 500 finished 2020 up 16% year over year and up approximately 78% from the lows of March. The rebound in stocks was largely driven by increased liquidity attributable to actions taken by theFederal Reserve to stabilize markets, hopeful sentiment about "reopening" of the economy and optimism around plans for a COVID-19 vaccine. During the third and fourth quarters of 2020, the financial markets continued their recovery largely due to continued support from theFederal Reserve and generally positive economic data. Indicative of the improvement in economic data, the unemployment rate ended 2020 at 6.7% down from a high of 14.7% inMay 2020 . To aid in the recovery, the Fed, in the months since the beginning of the pandemic, have maintained the Federal Funds Rate in the 0.00 - 0.25% range and reiterated its commitment to maintain accommodative financial conditions, stating that they will continue to keep rates at the zero lower bound until "labor market conditions have reached levels consistent with the Committee's assessment of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time." Spreads for the mortgage-backed sectors extended their rebound from the first half of the year and continued to tighten further through year end but nonetheless remain wide compared to pre-COVID-19 levels, which we believe is due to the ongoing uncertainty regarding the sustainability of reopening plans, fears regarding any additional COVID-19 waves and the continued uncertainty regarding additional federal stimulus. While global economic activity and consumer sentiment showed signs of significant advancement towards the end of 2020 and progress was made on the roll-out of an vaccine, consumer spending levels remain well below normal economic progress is still expected to suffer as COVID-19 case counts continue to rise in theU.S. In light of these on-going conditions, the new administration's proposals to pass a massive COVID-19 stimulus plan, addressing healthcare, economic and societal harms caused by the COVID-19 pandemic, will likely be crucial to the health of the overall economy. To further support consumers and homeowners, onFebruary 9, 2021 , the FHFA announced that it was extending the maximum time a borrower can be in COVID-19 forbearance to 15 months, up from 12 months previously. The FHFA also announced that it had extended its moratorium on foreclosure on single-family homes throughMarch 31, 2021 . These announcements represented the first time that the agency extended the forbearance period but the sixth time it extended the foreclosure moratorium. The results of our business operations are affected by a number of factors, many of which are beyond our control, and primarily depend on, among other things, the level of our net interest income, the market value of our assets, which is driven by numerous factors, including the supply and demand for mortgage, housing and credit assets in the marketplace, the ability of borrowers of loans that underlie our investments to meet their payment obligations, the terms and availability of adequate financing and capital, general economic and real estate conditions, the impact of government actions in the real estate, mortgage, credit and financial markets, and the credit performance of our credit sensitive assets.
The market conditions discussed above significantly influence our investment
strategy and results, many of which have been significantly impacted since
76
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The following table summarizes the annualized
Three Months Ended
December 31, September 30, June 30, March 31, December 31,
2020(A) 2020 2020 2020 2019
(Percent change from the preceding quarter)
Real GDP 4.0 % 33.4 % (31.4) % (5.0) % 2.1 %
(A)Annualized rate based on the advance estimate.
The following table summarizes the
December 31, September 30, June 30,
2020 2020 2020 2020 2019
Unemployment rate 6.7 % 7.9 % 11.1 % 4.4 % 3.5 %
The following table summarizes the 10-year Treasury rate and the 30-year fixed
mortgage rates:
December 31, September 30, June 30, March 31, December 31,
2020 2020 2020 2020 2019
10-year U.S. Treasury rate 0.93 % 0.69 % 0.66 % 0.70 % 1.92 %
30-year fixed mortgage rate 2.68 % 2.89 % 3.16 % 3.45 % 3.72 %
We believe the estimates and assumptions underlying our consolidated financial
statements are reasonable and supportable based on the information available as
of December 31, 2020 ; however, uncertainty over the ultimate impact COVID-19
will have on the global economy generally, and our business in particular, makes
any estimates and assumptions as of December 31, 2020 inherently less certain
than they would be absent the current and potential impacts of COVID-19. Actual
results may materially differ from those estimates. The COVID-19 pandemic and
its impact on the current financial, economic and capital markets environment,
and future developments in these and other areas present uncertainty and risk
with respect to our financial condition, results of operations, liquidity and
ability to pay distributions.
PROPOSED CHANGES TO LIBOR
LIBOR is used extensively in theU.S. and globally as a "benchmark" or "reference rate" for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either immediately stop publication of LIBOR or cause LIBOR's regulator to determine that its quality has degraded to the degree that it is no longer representative of its underlying market. TheU.S. and other countries are currently working to replace LIBOR with alternative reference rates. In theU.S. , the Alternative Reference Rates Committee ("ARRC), has identified the Secured Overnight Financing Rate ("SOFR"), as its preferred alternative rate forU.S. dollar-based LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized byU.S. Treasury securities, and is based on directly observableU.S. Treasury -backed repurchase transactions. Some market participants may continue to explore whether otherU.S. dollar-based reference rates would be more appropriate for certain types of instruments. The ARRC has proposed a paced market transition plan to SOFR, and various organizations are currently working on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. We have material contracts that are indexed to USD-LIBOR and are monitoring this activity, and evaluating the related risks and our exposure. 77 --------------------------------------------------------------------------------
OUR PORTFOLIO
Our portfolio is currently composed of servicing and origination, including our subsidiary operating entities, residential securities and loans and other investments, as described in more detail below. The assets in our portfolio are described in more detail below (dollars in thousands), as ofDecember 31, 2020 . Residential Securities Servicing and Origination and Loans MSR Related Total Servicing Real Estate Residential Consumer Origination Servicing Investments and Origination Securities Mortgage Loans Loans Corporate TotalDecember 31, 2020 Investments$ 2,947,113 $ -$ 5,534,752 $ 8,481,865 $ 14,244,558 $ 3,029,339 $ 685,575 $ -$ 26,441,337 Cash and cash equivalents 123,124 59,798 412,578 595,500 222,372 7,472 3,182 116,328 944,854 Restricted cash 14,826 49,913 28,128 92,867 15,652 96 27,004 - 135,619 Other assets 551,910 206,646 4,538,045 5,296,601 232,837 86,762 38,465 46,171 5,700,836Goodwill 11,836 12,540 5,092 29,468 - - - - 29,468 Total assets$ 3,648,809 $ 328,897 $ 10,518,595 $ 14,496,301 $ 14,715,419 $ 3,123,669 $ 754,226 $ 162,499 $ 33,252,114 Debt$ 2,700,962 $ 3,285 $ 5,998,711 $ 8,702,958 $ 13,473,239 $ 2,386,919 $ 628,759 $ 541,516 $ 25,733,391 Other liabilities 298,106 89,713 1,520,959 1,908,778 20,863 28,577 622 130,199 2,089,039 Total liabilities 2,999,068 92,998 7,519,670 10,611,736 13,494,102 2,415,496 629,381 671,715 27,822,430 Total equity 649,741 235,899 2,998,925 3,884,565 1,221,317 708,173 124,845 (509,216) 5,429,684 Noncontrolling interests in equity of consolidated subsidiaries 19,402 - 43,882 63,284 - - 45,384 - 108,668 Total New Residential stockholders' equity$ 630,339 $ 235,899 $ 2,955,043 $ 3,821,281 $ 1,221,317 $ 708,173 $ 79,461 $ (509,216) $ 5,321,016 Investments in equity method investees $ - $ -$ 129,873 $ 129,873 $ - $ - $ - $ -$ 129,873 Operating Investments Origination Our origination business operates through the lending division ofNewRez .NewRez has a multi-channel lending platform, offering purchase and refinance loan products.NewRez provides refinance opportunities to eligible existing servicing customers, primarily through the Direct to Consumer channel, and originates or purchases loans from brokers or originators through our Joint Venture, Wholesale, and Correspondent channels. We originate or purchase residential mortgage loans conforming to the underwriting standards of the Agencies, government-insured residential mortgage loans which are insured by the FHA,VA andUSDA , and non-conforming loans, through our SMART Loan Series.NewRez's non-conforming loan products provide a variety of options for highly qualified borrowers who fall outside the specific requirements of Agency mortgage loans. Through this platform,NewRez underwrites quality loans that meet its guidelines and pricing models for these borrowers. WhileNewRez's origination of Non-QM loans paused at the onset of COVID-19 in the first quarter of 2020, the Company restarted production in the first quarter of 2021.NewRez generates revenue through sales of residential mortgage loans, including, but not limited to, gain on loans originated and sold, the settlement of mortgage loan origination derivative instruments and the value of MSRs retained on transfer of the loans. Profit margins per loan vary by channel, with correspondent typically being the lowest and Joint Venture, a retail channel, being the highest. In 2020, gain on sale margins were particularly attractive driven by significant demand for loans amidst industry capacity constraints whereby demand for new loans exceeded the industry's ability to fulfill the demand.NewRez sells conforming loans to the GSEs and Non-QM to another subsidiary of New Residential.NewRez relies on warehouse financing to fund loans at origination through the sale date. For the full year endedDecember 31, 2020 ,NewRez's funded loan origination volume was$61.6 billion , up from$22.3 billion in the year prior. During the year endedDecember 31, 2020 , the continued lower interest rate environment, increased refinance activity by borrowers, integration ofDitech's origination platform, and increased market share helped drive growth across all channels. 71% of 2020 funded volume was refinance, up from 55% for the full year 2019. For the full year 2020, 66% of funded production was Agency, 33% was Government, 0.5% was Non-Agency and 0.4% was Non-QM. Notably,NewRez increased its origination market share during 2020 to 1.54% from 0.95% relative to the full year 2019. Gain on sale margins for the full year endedDecember 31, 2020 was 1.85%, 29bps, or 19% higher than 1.56% for the same period in 2019. After pausing Wholesale and Correspondent channel originations to reduce pipeline, hedge, and margin risk inMarch 2020 , we re-entered these channels inMay 2020 and volumes from June throughDecember 2020 significantly exceeded the pre-pause levels. 78 -------------------------------------------------------------------------------- Direct to Consumer - For the full year endedDecember 31, 2020 , we funded$12.8 billion in Direct to Consumer originations, representing 21% of our total funded origination volume and a 213% increase to 2019 volumes. Direct to Consumer pull through adjusted lock volume for the full year 2020 was$17.3 billion , a 240% increase to 2019 volumes. JointVenture - As ofDecember 31, 2020 , Shelter had 18 joint venture footprints across 30 states in theU.S , an increase of new joint ventures from 2019. For the full year endedDecember 31, 2020 , we funded$4.0 billion in Joint Venture originations, representing 6% of our total funded origination volume and a 78% increase to 2019 volumes. Wholesale - For the full year endedDecember 31, 2020 , we funded$7.2 billion in Wholesale originations, representing 12% of our total funded origination volume and a 45% increase to 2019 volumes.
Correspondent - For the full year ended
Included in our Origination segment are the financial results of two affiliated businesses,E Street Appraisal Management LLC ("eStreet") andAvenue 365 Lender Services, LLC ("Avenue 365"). E Street offers appraisal valuation services and Avenue 365 provides title insurance and settlement services toNewRez . In the second quarter of 2020 we announced a strategic relationship with Salesforce, a global leader in Customer Relationship Management (CRM). This strategic relationship is focused on developing a more integrated experience for customers across our origination and servicing operations.NewRez will also serve as an industry design advisor to Salesforce for its mortgage solutions platform. The partnership is a key initiative that will further the organization's focus on growing recapture volume. 79 -------------------------------------------------------------------------------- The charts below provide selected operating statistics for our Origination segment: Unpaid Principal Balance for the Year Ended December 31, Increase (Decrease) 2020 2019 Amount %
Production by Channel (in millions)
Joint Venture$ 3,999 $ 2,240 $ 1,759 78.5 % Direct to Consumer 12,847 4,100 8,747 213.3 % Wholesale 7,223 4,973 2,250 45.2 % Correspondent 37,535 11,022 26,513 240.5 % Total Production by Channel$ 61,604 $ 22,335 $ 39,269 175.8 %
Production by Product (in millions)
Agency$ 40,424 11,810 28,614 242.3 % Government 20,279 8,346 11,933 143.0 % Non-QM 365 1,499 (1,134) (75.7) % Non-Agency 454 597 (143) (24.0) % Other 82 83 (1) (1.2) % Total Production by Product$ 61,604 $ 22,335 $ 39,269 175.8 % % Purchase 29 % 45 % % Refinance 71 % 55 % Year Ended December 31, Increase (Decrease) 2020 2019 Amount %
Origination Revenue (in thousands)
Gain on loans originated and sold(A)$ 773,246 $
3,091
Gain (loss) on settlement of mortgage loan derivative instruments(B) (396,262) (52,878) (343,384) 649.4 % MSRs retained on transfer of loans(C) 630,004 365,974 264,030 72.1 % Other(D) 53,023 21,733 31,290 144.0 % Realized gain on sale of originated mortgage loans, net$ 1,060,011 $ 337,920 $ 722,091 213.7 % Change in fair value of loans$ 101,621 $ 25,010 $ 76,611 306.3 % Change in fair value of interest rate lock commitments 249,183 26,151 223,032 852.9 %
Change in fair value of derivative instruments (121,231)
1,900 (123,131) (6480.6) %
Unrealized origination revenue $ 229,573 $ 53,061 $ 176,512 332.7 %
Gain on originated mortgage loans, held-for-sale,
net(E)(F) $ 1,289,584 $ 390,981 $ 898,603 229.8 %
Pull through adjusted lock volume $ 69,795,637 $ 25,079,573 $ 44,716,064 178.3 %
Gain on originated mortgage loans, as a
percentage of pull through adjusted lock volume,
by channel:
Direct to Consumer 3.61 % 2.65 %
Joint Venture 4.57 % 3.94 %
Wholesale 2.38 % 1.36 %
Correspondent 0.56 % 0.55 %
Total gain on originated mortgage loans, as a
percentage of pull through adjusted lock volume 1.85 % 1.56 %
(A)Includes loan origination fees of$1,658.6 million and$421.3 million inDecember 31, 2020 and 2019, respectively. (B)Represents settlement of forward securities delivery commitments utilized as an economic hedge for mortgage loans not included within forward loan sale commitments. (C)Represents the initial fair value of the capitalized mortgage servicing rights upon loan sales with servicing retained. (D)Includes fees for services associated with the loan origination process, and the provision for repurchase reserves, net of release. 80 -------------------------------------------------------------------------------- (E)Excludes$109.5 million and$69.1 million of gain on originated mortgage loans, held-for-sale, net for the year endedDecember 31, 2020 and 2019, respectively, related to the MSR Related Investments, Servicing, andResidential Securities and Loans segments, as well as intercompany eliminations (Note 4 to our Consolidated Financial Statements). (F)Excludes mortgage servicing rights revenue on recaptured loan volume delivered back to NRM.
Servicing
Our servicing business operates through a performing loan servicing division,
NewRez Servicing and a special servicing division, Shellpoint Mortgage Servicing
("SMS"). NewRez Servicing services performing Agency and government-insured
loans. SMS services delinquent Agency loans and Non-Agency loans on behalf of
the owners of the underlying mortgage loans.
As of December 31, 2020 , NewRez Servicing serviced $204.4 billion UPB of loans
and SMS serviced $93.3 billion UPB of loans, for a total servicing portfolio of
$297.8 billion UPB, representing a 35.7% increase from December 31, 2019 . The
combined servicing portfolio represented 1,733,197 customers, an increase of
55.8% from 1,112,332 customers as of December 31, 2019 . The increase in the
portfolio year over year was primarily a result of increased origination
activity from NewRez , transfer of loans from the Ditech acquisition and transfer
of loans from PHH during the year.
Third-party servicing, or servicing on behalf of third-party clients, is an
important part of SMS' platform. As of December 31, 2020 , SMS has over 61
third-party clients, compared to 52 third party clients as of the end of 2019.
These institutional clients include, but are not limited to, GSEs, money center
banks and whole loan investors.
As of year end December 31, 2020 , approximately 210,309 homeowners serviced by
NewRez Servicing and SMS had indicated during the year that they are or were
impacted by COVID-19. As of December 31, 2020 , only 59,701 of the forbearance
plans remained active. While the number of forbearances is elevated relative to
non-COVID-19 related periods, SMS has seen a significant decrease in the number
of active forbearances from the peak in the second quarter of 2020. As of
December 31, 2020 , active forbearances in our Full MSR portfolio had declined to
5.5% of loans from 8.6% relative to the second quarter of 2020. As of December
31, 2020 , active forbearances in our servicing portfolio had declined to 3.4% of
loans from 10.5% relative to the second quarter of 2020.
SMS is generally entitled to receive incentive fees, including fees paid in
connection with the completion of a repayment plan or payment deferral plan.
Incentives are expected to range from
During the year endedDecember 31, 2020 , we boarded approximately 1.1 million loans, completing the remainingDitech acquisition transfers and additional transfers from PHH. Prior to the impact of COVID-19, our cost to service declined as we achieved the benefits of scale and created efficiencies. SinceMarch 2020 our cost to service increased in connection with supporting performing homeowners navigate forbearance programs and due to a rise in delinquencies. However, annualized direct cost to service per loan declined approximately 18.6% to$139.5 per loan in 2020 from$171.4 per loan for the same time period in the prior year. Higher costs are expected to be offset by incentive and performance fees in the future as delinquencies are resolved. Direct cost to service is comprised of costs associated with administering loans and does not include corporate overhead allocations. The table below provides the mix of our serviced assets portfolio between subserviced performing servicing on behalf of New Residential, NRM 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 as ofDecember 31, 2020 and 2019. 81 --------------------------------------------------------------------------------
Unpaid Principal Balance
as of December 31, Increase (Decrease)
2020 2019 Amount %
Performing Servicing (in millions)
MSR Assets $ 199,405 $ 136,409 $ 62,996 46.2 %
Acquired Residential Whole Loans 5,041 2,322 2,719 117.1 %
Total Performing Servicing 204,446 138,731 65,715 47.4 %
Special Servicing (in millions)
MSR Assets $ 21,475 $ 3,835 $ 17,640 460.0 %
Acquired Residential Whole Loans 4,952 5,597 (645) (11.5) %
Third Party 66,892 71,264 (4,372) (6.1) %
Total Special Servicing 93,319 80,696 12,623 15.6 %
Total Servicing Portfolio $ 297,765 $ 219,427 $ 78,338 35.7 %
Agency Servicing (in millions)
MSR Assets $ 157,210 $ 110,493 $ 46,717 42.3 %
Acquired Residential Whole Loans - - - - %
Third Party 15,566 19,995 (4,429) (22.2) %
Total Agency Servicing 172,776 130,488 42,288 32.4 %
Government Servicing (in millions)
MSR Assets $ 57,148 $ 29,213 $ 27,935 95.6 %
Acquired Residential Whole Loans - - - - %
Third Party - 1,771 (1,771) (100.0) %
Total Government Servicing 57,148 30,984 26,164 84.4 %
Non-Agency (Private Label) Servicing (in
millions)
MSR Assets $ 6,522 $ 538 $ 5,984 1112.3 %
Acquired Residential Whole Loans 9,993 7,919 2,074 26.2 %
Third Party 51,326 49,498 1,828 3.7 %
Total Non-Agency (Private Label) Servicing 67,841 57,955 9,886 17.1 %
Total Servicing Portfolio $ 297,765 $ 219,427 $ 78,338 35.7 %
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Base Servicing Fees (in thousands):
MSR Assets $ 137,916 $ 52,297 $ 85,619 163.7 %
Acquired Residential Whole Loans 16,081 8,074 8,007 99.2 %
Third Party 139,480 71,145 68,335 96.1 %
Total Base Servicing Fees $ 293,477 $ 131,516 $ 161,961 123.1 %
Other Fees (in thousands):
Incentive fees $ 53,195 $ 35,866 $ 17,329 48.3 %
Ancillary fees 41,076 30,161 10,915 36.2 %
Boarding fees 12,018 8,111 3,907 48.2 %
Other fees 17,672 4,328 13,344 308.3 %
Total Other Fees $ 123,961 $ 78,466 $ 45,495 58.0 %
Total Servicing Fees $ 417,438 $ 209,982 $ 207,456 98.8 %
(A)Includes other fees earned from third parties of
82
--------------------------------------------------------------------------------MSR Related Investments
MSRs and MSR Financing Receivables
As ofDecember 31, 2020 , we had$4.6 billion carrying value of MSRs and MSR financing receivables. For the year endedDecember 31, 2020 our Full and Excess MSR portfolio decreased to$536 billion UPB from$627 billion UPB as ofDecember 31, 2019 . Full MSRs decreased to$435 billion UPB as ofDecember 31, 2020 from$505 billion UPB as ofDecember 31, 2019 . Excess MSRs decreased to$101 billion UPB as ofDecember 31, 2020 from$122 billion UPB as ofDecember 31, 2019 . While there were numerous transfers of MSRs to New Residential fromNewRez throughout the year, the decrease in portfolio size during the year was predominantly a result of elevated prepayments. We finance our investments in MSRs and MSR financing receivables with short- and medium-term bank and public capital markets notes. These borrowings are primarily recourse debt and bear both fixed and variable interest rates offered by the counterparty for the term of the notes of a specified margin over LIBOR. The capital markets notes are typically issued with a collateral coverage percentage, which is a quotient expressed as a percentage equal to the aggregate note amount divided by the market value of the underlying collateral. The market value of the underlying collateral is generally updated on a quarterly basis and if the collateral coverage percentage becomes greater than or equal to a collateral trigger, generally 90%, we may be required to add funds, pay down principal on the notes, or add additional collateral to bring the collateral coverage percentage below 90%. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." During the year endedDecember 30, 2020 , we increased the percentage of our MSR portfolio that is financed through capital markets term notes through various transactions. We priced four MSR capital markets term notes in 2020 for$1.4 billion . As a result, 60.6% of our MSR portfolio was financed with capital markets term notes as ofDecember 31, 2020 compared to 57.5% as ofDecember 31, 2019 .
See Note 12 to our Consolidated Financial Statements for further information regarding financing of our MSRs and MSR financing receivables.
We have contracted with certain subservicers to perform the related servicing duties on the residential mortgage loans underlying our MSRs.As ofDecember 31, 2020 , these subservicers includeLoanCare , Nationstar, PHH and Flagstar, which subservice 17.5%, 16.2%, 15.4%, and 0.7%of the underlying UPB of the related mortgages, respectively (includes both MSRs and MSR Financing Receivables). The remaining 50.2% of the underlying UPB of the related mortgages is subserviced byNewRez . 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 mortgages on our MSRs and MSR financing receivables. Generally, we will advance funds when the borrower fails to meet 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. Per the servicing agreements, we are obligated to make certain advances on mortgages to be in compliance with applicable requirements. In certain instances, the subservicer is required to reimburse us for any advances that were deemed nonrecoverable or advances that were not made in accordance with the related servicing contract. We finance our 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 12 to our Consolidated Financial Statements for further information regarding financing of our servicer advances. See Note 6 to our Consolidated Financial Statements for further information regarding our MSR financing receivables. See "Results of Operations-Change in Fair Value of MSR Financing Receivables" below for further information regarding the impact of the economic uncertainties resulting from COVID-19 and the associated impacted on our MSR investments. 83 -------------------------------------------------------------------------------- The table below summarizes our MSRs and MSR financing receivables as ofDecember 31, 2020 . Current UPB Weighted Average Carrying Value (millions) MSR (bps) (millions) MSRs GSE$ 300,200.8 28 bps$ 2,799.7 Non-Agency 5,962.2 55 17.5 Ginnie Mae 57,106.9 45 672.4 MSR Financing Receivables GSE 5,517.7 25 49.3 Non-Agency 66,648.2 48 1,046.9 Total$ 435,435.8 34 bps$ 4,585.8
The following tables summarize the collateral characteristics of the loans
underlying our investments in MSRs and MSR financing receivables as of
Collateral Characteristics
Three Month Three Month Three Month Three Month
Current Carrying Current Principal Average Loan Age Adjustable Rate Average Average Average Average
Amount Balance Number of Loans WA FICO Score(A) WA Coupon WA Maturity (months) (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
MSRs
GSE $ 2,799,728 $ 300,200,826 1,936,462 745 4.1 % 264 69 2.8 % 34.8 % 34.6 % 0.2 % 10.6 %
Non-Agency 17,512 5,962,225 124,280 671 6.7 % 197 157 3.6 % 23.8 % 20.4 % 4.2 % 1.9 %
Ginnie Mae 672,435 57,106,825 286,615 687 3.7 % 323 33 2.2 % 30.0 % 29.8 % 0.2 % 25.8 %
MSR Financing
Receivables
GSE 49,275 5,517,730 28,307 747 4.0 % 268 47 - % 33.7 % 33.3 % 0.5 % 25.5 %
Non-Agency 1,046,891 66,648,221 496,493 641 4.2 % 303 179 13.3 % 11.2 % 9.4 % 1.8 % 3.3 %
Total $ 4,585,841 $ 435,435,827 2,872,157 720 4.1 % 277 82 4.3 % 30.4 % 29.9 % 0.5 % 11.6 %
Collateral Characteristics
Delinquency 30 Delinquency 60 Delinquency 90+ Real Estate
Days(F) Days(F) Days(F) Loans in Foreclosure Owned Loans in Bankruptcy
MSRs
GSE 1.5 % 0.5 % 3.9 % 0.3 % - % 0.3 %
Non-Agency 3.7 % 1.4 % 3.4 % 4.4 % 0.6 % 2.7 %
Ginnie Mae 3.2 % 1.3 % 7.8 % 0.8 % - % 0.9 %
MSR Financing
Receivables
GSE 1.0 % 0.4 % 4.3 % - % - % - %
Non-Agency 5.7 % 2.1 % 2.3 % 6.8 % 0.9 % 2.4 %
Total 2.4 % 0.8 % 4.1 % 1.4 % 0.2 % 0.7 %
(A)The WA FICO score is based on the weighted average of information provided by
the loan servicer on a monthly basis. The loan servicer generally updates the
FICO score when loans are refinanced or become delinquent.
(B)Adjustable Rate Mortgage % represents the percentage of the total principal
balance of the pool that corresponds to adjustable rate mortgages.
(C)Three Month Average CPR, or the constant prepayment rate, represents the
annualized rate of the prepayments during the quarter as a percentage of the
total principal balance of the pool.
(D)Three Month Average CRR, or the voluntary prepayment rate, represents the
annualized rate of the voluntary prepayments during the quarter as a percentage
of the total principal balance of the pool.
(E)Three Month Average CDR, or the involuntary prepayment rate, represents the
annualized rate of the involuntary prepayments (defaults) during the quarter as
a percentage of the total principal balance of the pool.
(F)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent
the percentage of the total principal balance of the pool that corresponds to
loans that are delinquent by 30-59 days, 60-89 days or 90 or more days,
respectively.
Excess MSRs
84--------------------------------------------------------------------------------
The tables below summarize the terms of our Excess MSRs:
Summary of Direct Excess MSR Investments as of
MSR Component(A) Excess MSR
Current UPB Weighted Average Weighted Average Interest in Excess Carrying Value
(billions) MSR (bps) Excess MSR (bps) MSR (%) (millions)
Agency $ 34.6 30 21 32.5% - 66.7% $ 162.6
Non-Agency(B) 38.1 35 15 33.3% - 100% 148.3
Total/Weighted Average $ 72.7 33 bps 18 bps $ 310.9
(A)The MSR is a weighted average as of December 31, 2020 , and the Excess MSR
represents the difference between the weighted average MSR and the basic fee
(which fee remains constant).
(B)Serviced by Mr. Cooper and SLS, we also invested in related Servicer Advance
Investments, including the basic fee component of the related MSR (Note 7 to our
Consolidated Financial Statements) on $26.1 billion UPB underlying these Excess
MSRs.
Summary of Excess MSR Investments Through Equity Method Investees as of
December 31, 2020
MSR Component(A)
Weighted
Weighted Average New Residential Investee New Residential
Current UPB Average Excess MSR Interest in Interest in Effective Investee Carrying
(billions) MSR (bps) (bps) Investee (%) Excess MSR (%) Ownership (%) Value (millions)
Agency $ 28.5 33 22 50.0 % 66.7 % 33.3 % $ 179.8
(A)The MSR is a weighted average as of December 31, 2020 , and the Excess MSR
represents the difference between the weighted average MSR and the basic fee
(which fee remains constant).
The following tables summarize the collateral characteristics of the loans
underlying our direct Excess MSR investments as of December 31, 2020 (dollars in
thousands):
Collateral Characteristics
Current Three Month Three Month Three Month Three Month
Carrying Current Principal Average Loan Age Adjustable Rate Average Average Average Average
Amount Balance Number of Loans WA FICO Score(A) WA Coupon WA Maturity (months) (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
Agency
Original Pools $ 110,030 $ 23,676.332 185,673 722 4.5 % 232 130 1.7 % 25.5 % 25.1 % 0.6 % 13.5 %
Recaptured Loans 52,615 10,917.074 67,681 725 4.2 % 268 49 - % 25.3 % 25.0 % 0.4 % 31.7 %
$ 162,645 $ 34,593.406 253,354 723 4.4 % 244 103 1.2 % 25.4 % 25.1 % 0.5 % 19.4 %
Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools $ 125,248 $ 34,468.703 198,936 668 4.3 % 271 177 9.2 % 14.7 % 12.5 % 2.6 % 10.0 %
Recaptured Loans 23,045 3,626.796 17,214 736 4.0 % 276 32 0.1 % 32.6 % 32.7 % - % 33.6 %
$ 148,293 $ 38,095.499 216,150 674 4.3 % 272 164 7.8 % 16.3 % 14.2 % 2.4 % 14.8 %
Total/Weighted Average(I) $ 310,938 $ 72,688.905 469,504 697 4.4 % 259 136 4.3 % 20.6 % 19.4 % 1.5 % 17.6 %
Collateral Characteristics
Delinquency 30 Delinquency 60 Delinquency 90+ Real Estate
Days(G) Days(G) Days(G) Loans in Foreclosure Owned Loans in Bankruptcy
Agency
Original Pools 2.0 % 0.7 % 6.2 % 0.4 % 0.1 % 0.1 %
Recaptured Loans 1.5 % 0.6 % 5.5 % 0.1 % - % - %
1.8 % 0.7 % 6.0 % 0.3 % 0.1 % 0.1 %
Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools 10.9 % 5.9 % 4.7 % 5.2 % 0.6 % 1.5 %
Recaptured Loans 1.7 % 0.3 % 4.6 % 0.1 % - % - %
10.1 % 5.4 % 4.7 % 4.7 % 0.5 % 1.4 %
Total/Weighted Average(H) 6.3 % 3.2 % 5.3 % 2.7 % 0.3 % 0.8 %
85-------------------------------------------------------------------------------- (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. (F)We also invested in related Servicer Advance Investments, including the basic fee component of the related MSR (Note 7 to our Consolidated Financial Statements) on$26.1 billion UPB underlying these Excess MSRs. (G)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively. (H)Weighted averages exclude collateral information for which collateral data was not available as of the report date. The following tables summarize the collateral characteristics as ofDecember 31, 2020 of the loans underlying Excess MSR investments made through joint ventures accounted for as equity method investees (dollars in thousands). For each of these pools, we own a 50% interest in an entity that invested in a 66.7% interest in the Excess MSRs. Collateral Characteristics New Residential Three Month Current Current Effective Three Month Three Month Three Month Average Carrying Principal Ownership Number Average Loan Adjustable Rate Average Average Average Recapture Amount Balance (%) of Loans WA FICO Score(A) WA Coupon WA Maturity (months) Age (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Rate Agency Original Pools$ 94,727 $ 15,994,267 33.3 % 168,177 704 5.2 % 223 150 1.3 % 20.6 % 19.7 % 1.0 % 17.7 % Recaptured Loans 85,035 12,459,245 33.3 % 92,376 710 4.2 % 262 56 - % 23.8 % 23.4 % 0.7 % 36.7 % Total/Weighted Average$ 179,762 $ 28,453,512 260,553 706 4.7 % 241 109 1.3 % 22.0 % 21.3 % 0.9 % 26.8 % Collateral Characteristics Delinquency 30 Delinquency 60 Delinquency 90+ Real Estate Days(F) Days(F) Days(F) Loans in Foreclosure Owned Loans in Bankruptcy Agency Original Pools 2.9 % 1.0 % 5.8 % 0.7 % 0.1 % 0.2 % Recaptured Loans 2.0 % 0.8 % 5.6 % 0.2 % - % 0.1 % Total/Weighted Average(G) 2.5 % 0.9 % 5.7 % 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. (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. 86 --------------------------------------------------------------------------------
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):
December 31, 2020
Servicer Advances to
UPB of Underlying UPB of Underlying
Amortized Cost Carrying Residential Outstanding Residential Mortgage
Basis Value(A) Mortgage Loans Servicer Advances Loans
Servicer Advance Investments
Mr. Cooper and SLS serviced
pools $ 512,958 $ 538,056 $ 26,061,499 $ 449,150 1.7 %
(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 year ended,December 31, 2020 (dollars in thousands): Year Ended December 31, 2020 Loan-to-Value ("LTV")(A) Cost of Funds(B) Weighted Weighted Face Amount of Average Average Life Change in Fair Secured Notes and Discount Rate (Years)(C) Value Bonds Payable Gross Net(D) Gross Net Servicer Advance Investments(E) 5.2 % 6.0 $ 763$ 423,144 88.4 % 88.6 % 1.5 % 1.3 % (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: December 31,
2020
Principal and interest advances $ 84,976
Escrow advances (taxes and insurance advances) 186,426
Foreclosure advances 177,748
Total $ 449,150
The Buyer
We, through a wholly owned subsidiary, are the managing member of the Buyer. As
of
In the event that any member of the Buyer does not fund its capital contribution, each other member has the right, but not the obligation, to make pro rata capital contributions in excess of its stated commitment, provided that any member's decision not to fund any such capital contribution will result in a reduction of its membership percentage.
Servicing Fee
Mr. Cooper and SLS remain the named servicers under the applicable servicing
agreements and will continue to perform all servicing duties for the related
residential mortgage loans. The Buyer, or the related New Residential
subsidiary, as applicable, has the right, but not the obligation, to become the
named servicer with respect to its investments, subject to obtaining consents
and ratings agency approvals required for a formal change of the named servicer.
In exchange for their services, we pay Mr. Cooper and SLS a monthly servicing
fee representing a portion of the amounts from the purchased basic fee.
The Mr. Cooper Servicing Fee is equal to a fixed percentage of the amounts from
the purchased basic fee. This percentage was equal to approximately 9.2%, which
is equal to (i) 2 bps divided by (ii) the basic fee, which is 21.8 bps, on a
weighted average
87
--------------------------------------------------------------------------------
basis as of
Targeted Return/Incentive Fee
The Buyer Targeted Return and the Mr. Cooper Performance Fee, with respect to
Mr. Cooper, are designed to achieve three objectives (i) provide a reasonable
risk-adjusted return to the Buyer based on the expected amount and timing of
estimated cash flows from the purchased basic fee and advances, with both upside
and downside based on the performance of the investment, (ii) provide Mr. Cooper
with a sufficient fee to compensate it for acting as servicer, and (iii) provide
Mr. Cooper with an incentive to effectively service the underlying loans. The
Buyer Targeted Return implements these objectives by allocating payments in
respect of the purchased basic fee between the Buyer and Mr. Cooper. The SLS
Incentive Fee functions in the same fashion with respect to the SLS Transaction
(See Note 7 to our Consolidated Financial Statements).
The amount available to satisfy the Buyer Targeted Return is equal to (i) the
amounts from the purchased basic fee, minus (ii) the Mr. Cooper Servicing Fee
("Mr. Cooper Net Collections"). The Buyer will retain the amount of Mr. Cooper
Net Collections necessary to achieve the Buyer Targeted Return. Amounts in
excess of the Buyer Targeted Return will be used to pay the Mr. Cooper
Performance Fee.
The Buyer Targeted Return, which is payable monthly, is generally equal to
(i) 14% multiplied by (ii) the Buyer's total invested capital. Total invested
capital is generally equal to the sum of the Buyer's (i) equity in advances as
of the beginning of the prior month, plus (ii) working capital (equal to a
percentage of the equity as of the beginning of the prior month), plus
(iii) equity and working capital contributed during the course of the prior
month.
The Buyer Targeted Return is calculated after giving effect to (i) interest
expense on the advance financing, (ii) other expenses and fees of the Buyer and
its subsidiaries related to financing facilities, (iii) write-offs on account of
any non-recoverable servicer advances, and (iv) any shortfall with respect to a
prior month in the satisfaction of the Buyer Targeted Return.
The Mr. Cooper Performance Fee is calculated as follows. Pursuant to a Master
Servicing Rights Purchase Agreement and related sale supplements, Mr. Cooper Net
Collections is divided into two subsets: the "Retained Amount" and the "Surplus
Amount." If the amount necessary to achieve the Buyer Targeted Return is equal
to or less than the Retained Amount, then 50% of the excess Retained Amount (if
any) and 100% of the Surplus Amount is paid to Mr. Cooper as the Mr. Cooper
Performance Fee. If the amount necessary to achieve the Buyer Targeted Return is
greater than the Retained Amount but less than Mr. Cooper Net Collections, then
100% of the excess Surplus Amount is paid to Mr. Cooper as a Mr. Cooper
Performance Fee. Mr. Cooper Performance Fee payments were made to Mr. Cooper in
the amounts of $21.9 million , $26.8 million and $33.9 million during the year
ended December 31, 2020 , 2019 and 2018, respectively.
The SLS Incentive Fee is equal to up to 4.0 bps on the UPB of the underlying
loans, depending on the ratio of the outstanding servicer advances to the UPB of
the underlying loans.
A discussion of the sensitivity of these incentive fees to changes in LIBOR is included below under "Quantitative and Qualitative Disclosures About Market Risk."
MSR Related Ancillary Business
Our MSR related investments segment also includes the activity from several
wholly-owned subsidiaries that perform various services in the mortgage and real
estate industries. Our subsidiary Guardian is a national provider of field
services and property management services. We also made a strategic investment
in Covius, a leading provider of technology-enabled services to the financial
services industry.
88
--------------------------------------------------------------------------------Agency RMBS
The following table summarizes our Agency RMBS portfolio as ofDecember 31, 2020 (dollars in thousands): Gross Unrealized Percentage of Outstanding Outstanding Face Amortized Cost Total Amortized Carrying Weighted Average 3-Month Repurchase Asset Type Amount Basis Cost Basis Gains Losses Value(A) Count Life (Years) CPR(B) Agreements Agency RMBS$ 12,491,152 $ 12,951,608 100.0 %$ 112,026 $ -$ 13,063,634 58 0.1 5.4 %$ 12,288,861 (A)Fair value, which is equal to carrying value for all securities. (B)Three month average constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total amortized cost basis.
The following table summarizes the net interest spread of our Agency RMBS
portfolio as of
Net Interest Spread(A)
Weighted Average Asset Yield 2.22 %
Weighted Average Funding Cost 0.24 %
Net Interest Spread 1.98 %
(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 largely employ our Agency RMBS position as a hedge to our MSR portfolio. While we reduced our Agency RMBS position during the first quarter of 2020 due to COVID-19 related market factors, we ultimately maintained an elevated Agency RMBS portfolio, with a portfolio of$12.5 billion as ofDecember 31, 2020 compared to$11.3 billion as ofDecember 31, 2019 . We finance our 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. AtDecember 31, 2020 and 2019, the Company pledged Agency RMBS with a carrying value of approximately$13.8 billion and$15.9 billion , respectively, as collateral for borrowings under repurchase agreements. To the extent available on desirable terms, we expect to continue to finance our acquisitions of Agency RMBS with repurchase agreement financing. See Note 12 to our Consolidated Financial Statements for further information regarding financing of our Agency RMBS. 89 --------------------------------------------------------------------------------
Non-Agency RMBS
During the first and second quarters of 2020, markets for mortgage-backed securities and other credit-related assets experienced significant volatility, widening credit spreads and sharp declines in liquidity. These factors had a material impact on our investment portfolio. Prior to the onset of COVID-19, a significant portion of our Non-Agency RMBS portfolio was financed with repurchase agreements. Fluctuations in the value of our portfolio of Non-Agency RMBS duringMarch 2020 , including as a result of changes in credit spreads, resulted in our being required to post additional collateral with our counterparties under these repurchase agreements. These fluctuations and requirements to post additional collateral were material. In an effort to mitigate the impact to our business from these developments and improve our liquidity, we sold a substantial portion of our Non-Agency RMBS portfolio inMarch 2020 , for which we recorded significant realized losses. Refer to Note 17 to our Consolidated Financial Statements for further information regarding Non-Agency RMBS sales with affiliates. During 2020, we sold in aggregate$5.3 billion of Non-Agency RMBS. During 2020, we also significantly altered the composition of the financing profile of our Non-Agency RMBS portfolio. As ofDecember 31, 2020 , 17.7% of our Non-Agency RMBS portfolio was financed with non-daily mark-to-market financing, compared to 92.8% as ofDecember 31, 2019 . Within our Non-Agency RMBS portfolio we retain and own risk retention bonds from our securitizations in conjunction with risk retention regulations under the Dodd-Frank Act. As ofDecember 31, 2020 , 49.3% of our Non-Agency RMBS portfolio was related to bonds retained pursuant to required risk retention regulations. The following table summarizes our Non-Agency RMBS portfolio as ofDecember 31, 2020 (dollars in thousands): Gross Unrealized Outstanding Outstanding Face Amortized Cost Carrying Repurchase Asset Type Amount Basis Gains Losses Value(A) Agreements Non-Agency RMBS$ 19,378,530 $ 1,153,643 $ 88,098 $ (60,817) $ 1,180,924 $ 705,713
(A)Fair value, which is equal to carrying value for all securities.
The following tables summarize the characteristics of our Non-Agency RMBS
portfolio and of the collateral underlying our Non-Agency RMBS as of
Non- Agency RMBS Characteristics(A)
Percentage of Total
Average Minimum Outstanding Face Amortized Cost Amortized Cost Weighted Average Weighted Average
Vintage(B) Rating(C) Number of Securities Amount Basis Basis Carrying Value Principal Subordination(D) Excess Spread(E) Life (Years)
Coupon(F)
Pre 2006 NR 96 $ 88,110 $ 16,728 1.5 % $ 16,519 - % - % 6.0 6.9 %
2006 NR 15 91,603 - - % 1 - % - % - 0.1 %
2007 NR 16 170,240 3,043 0.2 % 5,052 - % - % 2.8 0.1 %
2008 and later BBB- 455 19,015,055 1,121,012 98.3 % 1,145,967 20.0 % - % 4.9 2.8 %
Total/Weighted
Average BBB- 582 $ 19,365,008 $ 1,140,783 100.0 % $ 1,167,539 19.6 % - % 4.9 2.8 %
Collateral Characteristics(A) (G)
Cumulative Losses
Vintage(B) Average Loan Age (years) Collateral Factor(H) 3-Month CPR(I) Delinquency(J) to Date
Pre 2006 18.2 0.1 8.4 % 13.1 % 11.0 %
2006 14.3 0.2 11.8 % - % 93.5 %
2007 13.5 0.2 13.7 % 16.1 % 25.6 %
2008 and later 13.6 0.7 16.5 % 5.4 % 0.4 %
Total/Weighted Average 13.7 0.7 16.3 % 5.6 % 0.7 %
(A)Excludes $13.0 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 289
bonds with a carrying value of $432.5 million which either have never been rated
or for which rating information is no
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longer provided. We had no assets that were on negative watch for possible
downgrade by at least one rating agency as of December 31, 2020 .
(D)The percentage of amortized cost basis of securities and residual interests
that is subordinate to our investments. This excludes interest-only bonds.
(E)The current amount of interest received on the underlying loans in excess of
the interest paid on the securities, as a percentage of the outstanding
collateral balance for the quarter ended December 31, 2020 .
(F)Excludes residual bonds, and certain other Non-Agency bonds, with a carrying
value of $27.4 million and $2.6 million , respectively, for which no coupon
payment is expected.
(G)The weighted average loan size of the underlying collateral is $242.5
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 as of
Net Interest Spread(A)
Weighted Average Asset Yield 4.08 %
Weighted Average Funding Cost 3.48 %
Net Interest Spread 0.60 %
(A)The Non-Agency RMBS portfolio consists of 30.3% floating rate securities and 69.7% fixed rate securities (based on amortized cost basis).
We finance our 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. AtDecember 31, 2020 and 2019, the Company pledged Non-Agency RMBS with a carrying value of approximately$1.5 billion and$8.0 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls. In addition, a portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 12 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 aggregate UPB of the underlying residential mortgage loans within these various securitization trusts is approximately$80.0 billion . We continue to evaluate the call rights we acquired from each of our servicers, and our ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. See "Risk Factors-Risks Related to Our Business-Our ability to exercise our cleanup call rights may be limited or delayed if a third party also possessing such cleanup call rights exercises such rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings." The actual UPB of the residential mortgage loans on which we can successfully exercise call rights and realize the benefits therefrom may differ materially from our initial assumptions. We have exercised our call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO contained in such trusts prior to their termination. In certain cases, we sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, we received par on the 91 --------------------------------------------------------------------------------
securities issued by the called trusts which we owned prior to such trusts' termination. Refer to Note 9 in our Consolidated Financial Statements for further details on these transactions.
On
Refer to Note 17 in our Consolidated Financial Statements for further details on these transactions for additional discussion regarding call rights and transactions with affiliates.
Residential Mortgage Loans
InMarch 2020 , we began selling assets to manage and generate liquidity and de-risk our balance sheet. During 2020, we sold in aggregate$65.5 billion of residential mortgage loans. To realign our balance sheet in reaction to increased market risk and raise liquidity as a result of the COVID-19 pandemic, we reduced our exposure to loan pools financed using repurchase agreements. Furthermore, while typically more expensive, to the extent possible, the Company has been opportunistically seeking long-term financing arrangements rather than short-term repurchase agreements to reduce volatility risk associated with assets valuations and margin calls. As ofDecember 31, 2020 , 100% of our Non-Agency Residential Mortgage Loan portfolio was financed with non-daily mark-to-market financing, compared to 5.4% as ofDecember 31, 2019 . As ofDecember 31, 2020 , we had approximately$6.1 billion outstanding face amount of residential mortgage loans. These investments were financed with secured financing agreements with an aggregate face amount of approximately$4.0 billion and secured notes and bonds payable with an aggregate face amount of approximately$1.0 billion .
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 $ 769,348 $ 674,179 12,353 6.6 % 5.6
Acquired reverse mortgage loans(E)(F)$ 12,007 $ 5,884 28 7.8 %
3.8
Acquired performing loans(G)(I) 138,109 129,345 3,278 6.7 %
4.5
Acquired non-performing loans(H)(I) 487,022 374,658 3,253 7.5 %
3.3
Total residential mortgage loans,
held-for-sale, at lower of cost or market
6,559 7.3 % 3.6
Acquired performing loans(G)(I)$ 1,446,457 $ 1,423,159 7,189 3.8 %
6.6
Acquired non-performing loans 428,079 335,544 2,798 7.5 % 3.3 Originated loans 2,801,297 2,947,113 10,797 2.8 % 27.7 Total residential mortgage loans, held-for-sale, at fair value$ 4,675,833 $ 4,705,816 20,784 3.5 % 18.9 (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 atDecember 31, 2020 . Approximately 47.8% of these loans outstanding have reached a termination event. As a result of the termination event, each such loan has matured and the borrower can no longer make draws on these loans. (F)FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan. (G)Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due. (H)As ofDecember 31, 2020 , we have placed all Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below. 92 -------------------------------------------------------------------------------- (I)Includes$798.1 million and$20.5 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 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. AtDecember 31, 2020 and 2019, the Company pledged mortgage loans with a carrying value of approximately$4.5 billion and$5.1 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements are subject to daily mark-to-market fluctuations and margin calls. A portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 12 to our Consolidated Financial Statements for further information regarding financing of our mortgage loans.
Other
Consumer Loans
The table below summarizes the collateral characteristics of the consumer loans, including those held in the Consumer Loan Companies and those acquired from the Consumer Loan Seller, as ofDecember 31, 2020 (dollars in thousands): Collateral Characteristics Weighted Average Personal Personal Homeowner Original FICO Weighted Adjustable Rate Average Loan Age Average Expected Delinquency 30 Delinquency 60 Delinquency 90+ 12-Month UPB Unsecured Loans % Loans % Number of Loans Score(A) Average Coupon Loan % (months) Life (Years) Days(B) Days(B) Days(B) 12-Month CRR(C) CDR(D) Consumer loans, held-for-investment$ 620,983 61.0 % 39.0 % 90,068 682 17.5 % 12.3 % 189 3.6 1.4 % 0.9 % 1.3 % 19.8 % 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. In addition, as ofDecember 31, 2019 , our investments inPF LoanCo Funding LLC ("LoanCo") andPF WarrantCo Holdings, LP ("WarrantCo") had been fully distributed to us. The final distribution resulted in a gain of$3.6 million on the investment. We have financed our investments in consumer loans with securitized non-recourse long-term notes with a stated maturity date ofMay 2036 . During 2020, we refinanced our previous SpringCastle securitization with a new$663 million securitization, ultimately lowering cost of funds. Furthermore, the notes are non-mark-to-market and not subject to margin calls. See Note 12 to our Consolidated Financial Statements for further information regarding financing of our consumer loans. TAXES We have elected to be treated as a REIT forU.S. federal income tax purposes. As a REIT we generally pay no federal or state and local income tax on assets that qualify under the REIT requirements if we distribute out at least 90% of the current taxable income generated from these assets. We hold certain assets, including Servicer Advance Investments and MSRs, in taxable REIT subsidiaries ("TRSs") that are subject to federal, state and local income tax because these assets either do not qualify under the REIT requirements or the status of these assets is uncertain. We also operate our securitization program, servicing, origination, and ancillary businesses through TRSs. 93 --------------------------------------------------------------------------------
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.
As ofDecember 31, 2020 , our net deferred tax liability of$7.9 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 the Company, offset by deferred tax assets generated from changes in fair value of loans and MSRs. For the year endedDecember 31, 2020 , we recognized total tax expense (benefit) of$16.9 million driven primarily by deferred tax benefits resulting from changes in the fair value of loans and MSRs during the first quarter of 2020, offset by tax expense generated from income in our servicing and origination business segments in subsequent quarters. The taxable income of the operating businesses is largely absorbed by our historical net operating losses, reducing current taxable income in our TRSs.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company's accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As disclosed in Note 2, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and require management's most difficult, subjective and complex judgments. We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as ofDecember 31, 2020 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as ofDecember 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may materially differ from those estimates.
MSRs and MSR Financing Receivables
Classification and valuation - As an approved owner of MSRs, upon acquisition,
we account for our MSRs as servicing assets or servicing liabilities as we have
undertaken an obligation to service financial assets. We measure our MSRs at
fair value at acquisition and elect to subsequently measure at fair value at
each reporting date using the fair value measurement method. Our MSRs are
categorized as Level 3 under the GAAP fair value hierarchy, as described in Note
13 to our Consolidated Financial Statements. The inputs used in the valuation of
MSRs include prepayment rate, delinquency rate, recapture rate, mortgage
servicing amount, discount rate, and estimated market level future costs to
service. These inputs are primarily based on current market data obtained from
servicers and other third parties, which may be adjusted based on our
expectations for the future, and requires significant judgement. The
determination of estimated cash flows used in pricing models is inherently
subjective and imprecise. The methods used to estimate fair value may not result
in an amount that is indicative of net realizable value or reflective of future
fair values. Changes in market conditions, as well as changes in the assumptions
or methodology used to determine fair value, could result in a significant
increase or decrease in fair value.
In order to evaluate the reasonableness of our fair value determinations, we
engage an independent valuation firm to separately measure the fair value of our
MSRs. The independent valuation firm determines an estimated fair value range
based on its own models. We compare the range provided by the independent
valuation firm to the values generated by our internal models. To date, we have
not made any significant valuation adjustments as a result of the values
provided by the third-party valuation adjustments.
In certain cases, we have legally purchased MSRs or the right to the economic
interest in MSRs, however, we determined that the respective purchase agreement
would not be treated as a sale under GAAP. Therefore, rather than recording an
investment in MSRs, we have recorded an investment in MSR financing receivables.
We have elected to measure the investment at fair value, with changes in fair
value reflected within Change in fair value of investments in the Consolidated
Statements of Income. In order to evaluate the reasonableness of our fair value
determinations, similar to MSRs, we engage an independent valuation firm to
separately measure the fair value of our MSR Financing Receivables.
Revenue and interest income recognition - We recognize income from investment in
MSRs as Servicing revenue, net which comprises (i) income from the MSRs, plus or
minus (ii) the mark-to-market on the MSRs including change in fair value due to
realization of cash flows.
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--------------------------------------------------------------------------------We recognize income from MSR financing receivables as interest income net of subservicing fees.
Servicer Advance Investments
Classification and valuation - We have elected to account for the Servicer advance investments at fair value. Accordingly, we estimate the fair value of the Servicer advance investments at each financial reporting date and reflect changes in the fair value of the Servicer advance investments as gains or losses. We categorize Servicer advance investments under Level 3 of the GAAP hierarchy because we use internal pricing models to estimate the future cash flows related to the Servicer advance investments that incorporate significant unobservable inputs and include assumptions that are inherently subjective and imprecise. In order to evaluate the reasonableness of our fair value determinations, we engage an independent valuation firm to separately measure the fair value of our Servicer advance investments. The independent valuation firm determines an estimated fair value range based on its own models. Our estimations of future cash flows include the combined cash flows of all of the components that comprise the Servicer advance investments: existing advances, the requirement to purchase future advances and the right to the basic fee component of the related MSR. The factors that most significantly impact the fair value include (i) the rate at which the servicer advance balance declines, (ii) the duration of outstanding servicer advances, which we estimate is approximately nine months on average for an advance balance at a given point in time (not taking into account new advances made with respect to the pool), and (iii) the UPB of the underlying loans with respect to which we have the obligation to make advances and own the basic fee component.
Interest income and expense recognition - We recognize income from Servicer advance investments in the form of interest income. Interest income is calculated using the interest method, with adjustments to the yield applied based upon changes in actual or expected cash flows under the retrospective method. The servicer advances are not interest-bearing, but we accrete the effective rate of interest applied to the aggregate cash flows from the servicer advances and the basic fee component of the related MSR.
We remit to our servicers a portion of the basic fee component of the MSR related to our Servicer advance investments as compensation for acting as servicer, as described in more detail under "-Our Portfolio-Servicing Related Assets-Servicer Advances." Our interest income is recorded net of the servicing fees owed to our servicers.
Classification and valuation - Our securities portfolio primarily consists of Agency and Non-Agency RMBS. Agency RMBS are securities issued or guaranteed as to principal and/or interest by a federally chartered corporation, such as Fannie Mae or Freddie Mac, or an agency of theU.S. Government , such asGinnie Mae . Non-Agency RMBS are not issued or guaranteed by Fannie Mae, Freddie Mac, orGinnie Mae and are therefore subject to credit risk. RMBS investments are classified as either available-for-sale or accounted for under the fair value option. We determine the appropriate classification of our securities at the time they are acquired and evaluate the appropriateness of such classifications at each balance sheet date. If classified as available-for-sale, investments are carried at fair value, with net unrealized gains or losses reported as a component of accumulated other comprehensive income. If classified under the fair value option, changes in fair value are recorded in the Consolidated Statements of Income as a component of Change in fair value of investments. We generally categorize Agency RMBS under Level 2 and Non-Agency as Level 3 of the GAAP hierarchy. We estimate the fair value of the majority of our RMBS based upon broker quotations, counterparty quotations or pricing service quotations. Pricing services generally develop their pricing of RMBS based on transaction prices of recent trades for similar financial instruments, when available. When recent trades for similar financial instruments are not available, cash flow models or other pricing models are used. The significant inputs used in the valuation of our securities include the discount rate, prepayment rates, default rates and loss severities, as well as other variables. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. The methods used to estimate fair value may not be indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. Impairment - Periods afterJanuary 1, 2020 - For periods subsequent to the application of ASU 2016-13, Financial Instruments - Credit Losses ("CECL"), we evaluate the cost basis of investments in securities not accounted for under the fair value option on at least a quarterly basis under ASC 326-30, Financial Instruments-Credit Losses: Available-for-Sale Debt 95 -------------------------------------------------------------------------------- Securities. When the fair value of a security is less than its amortized cost basis as of the balance sheet date, the security's cost basis is considered impaired. We must evaluate the decline in the fair value of the impaired security and determine whether such decline resulted from a credit loss or non-credit related factors. In our assessment of whether a credit loss exists, we compare the present value of estimated future cash flows of the impaired security with the amortized cost basis of such security. The estimated future cash flows reflect those that a "market participant" would use and typically include assumptions related to fluctuations in interest rates, prepayment speeds, default rates, collateral performance, and the timing and amount of projected credit losses, as well incorporating observations of current market developments and events. Cash flows are discounted at an interest rate equal to the current yield used to accrete interest income. If the present value of estimated future cash flows is less than the amortized cost basis of the security, an expected credit loss exists and is included in Provision (reversal) for credit losses on securities in the Consolidated Statements of Income. If it is determined as of the financial reporting date that all or a portion of a security's cost basis is not collectible, then we will recognize a realized loss to the extent of the adjustment to the security's cost basis. This adjustment to the amortized cost basis of the security is reflected in Gain (loss) on settlement of investments, net in the Consolidated Statements of Income. Periods prior toJanuary 1, 2020 - We must assess whether unrealized losses on securities, if any, reflect a decline in value that is other-than-temporary and, if so, record an other-than-temporary impairment through earnings. A decline in value is deemed to be other-than-temporary if (i) it is probable that we will be unable to collect all amounts due according to the contractual terms of a security that was not impaired at acquisition (there is an expected credit loss), or (ii) if we have the intent to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell a security in an unrealized loss position prior to its anticipated recovery (if any). For the purposes of performing this analysis, we will assume the anticipated recovery period is until the expected maturity of the applicable security. Also, for securities that represent beneficial interests in securitized financial assets within the scope of ASC 325-40, whenever there is a probable adverse change in the timing or amounts of estimated cash flows of a security from the cash flows previously projected, an other-than-temporary impairment will be deemed to have occurred. Our Non-Agency RMBS acquired with evidence of deteriorated credit quality for which it was probable, at acquisition, that we would be unable to collect all contractually required payments receivable, fall within the scope of ASC 310-30, as opposed to ASC No. 325-40. All of our other Non-Agency RMBS, those not acquired with evidence of deteriorated credit quality, fall within the scope of ASC 325-40. Interest income recognition - There are several different accounting models that may be applicable for purposes of the recognition of interest income on RMBS depending on whether the security is designated as available-for-sale or fair value option.
The following accounting models apply to RMBS classified as available-for-sale:
(i) RMBS of high credit quality rated 'AA' or higher that, at the time of purchase, we expect to collect all contractual cash flows and the security cannot be contractually prepaid in such a way that we would not recover substantially all of our recorded investment.
(ii) Non-Agency RMBS which are not of high credit quality at the time of purchase or that can be contractually prepaid or otherwise settled in such a way that we would not recover substantially all of our recorded investment.
For RMBS of high credit quality accounted for under (i) above, we recognize
interest income by applying the permitted "interest method," whereby purchase
premiums and discounts are amortized and accreted, respectively, as an
adjustment to contractual interest income accrued at each security's stated
coupon rate. The interest method is applied at the individual security level
based upon each security's effective interest rate. We calculate each security's
effective interest rate at the time of purchase by solving for the discount rate
that equates the present value of that security's remaining contractual cash
flows (assuming no principal prepayments) to its purchase price. Because each
security's effective interest rate does not reflect an estimate of future
prepayments, we refer to this manner of applying the interest method as the
"contractual effective interest method." When applying the contractual effective
interest method to its investments in RMBS, as principal prepayments occur, a
proportional amount of the unamortized premium or discount is recognized in
interest income such that the contractual effective interest rate on the
remaining security balance is unaffected.
For Non-Agency RMBS accounted for under (ii) above, we recognize interest income
by applying the required prospective level-yield methodology. Interest income
under this methodology is impacted by management judgments around both the
amount and timing of credit losses (defaults) and prepayments. Consequently,
interest income on these Non-Agency RMBS is recognized based on the timing and
amount of cash flows expected to be collected, as opposed to being based on
contractual cash flows. These securities are generally purchased at a discount
to the principal amount. At the original acquisition date, we estimate the
timing and amount of cash flows expected to be collected and calculate the
present value of those amounts to our purchase price. In each subsequent balance
sheet date, we revise our estimates of the remaining timing and amount of cash
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flows expected to be collected. If there is a positive change in the amount and
timing of future cash flows expected to be collected from the previous estimate,
the effective interest rate in future accounting periods may increase resulting
in an increase in the reported amount of interest income in future periods. A
positive change in the amount and timing of future cash flows expected to be
collected is considered to have occurred when the net present value of future
cash flows expected to be collected has increased from the previous estimate.
This can occur from a change in either the timing of when cash flows are
expected to be collected (i.e., from changes in prepayment speeds or the timing
of estimated defaults) or in the amount of cash flows expected to be collected
(i.e., from reductions in estimates of future defaults). If there is a negative
or adverse change in the amount and timing of future cash flows expected to be
collected from the previous estimate, and the security's fair value is below its
amortized cost, an impairment loss equal to the adverse change in cash flows
expected to be collected, discounted using the security's effective rate before
impairment, is required to be recorded in current period earnings. Additionally,
while the effective interest rate used to accrete interest income after an
impairment has been recognized will generally be the same, the amount of
interest income recorded in future periods will decline because of the reduced
balance of the amortized cost basis of the investment to which such effective
interest rate is applied.
The following accounting models apply to RMBS accounted for under the fair value option:
(iii) RMBS of high credit quality rated 'AA' or higher that, at the time of purchase, we expect to collect all contractual cash flows and the security cannot be contractually prepaid in such a way that we would not recover substantially all of our recorded investment.
(iv) Non-Agency RMBS which are not of high credit quality at the time of purchase or that can be contractually prepaid or otherwise settled in such a way that we would not recover substantially all of our recorded investment.
Interest income on RMBS accounted for in (iii) above is recognized based on the stated coupon rate and the outstanding principal amount. The original purchase premium or discount is not amortized or accreted as part of interest income but rather reflected as part of the security's fair value.
Interest income on Non-Agency RMBS accounted for in (iv) above is recognized in accordance with the model described in (ii) above.
Residential Mortgage Loans
Classification and valuation - Loans are classified as (i) held-for-investment at fair value, (ii) held-for-sale at fair value or (iii) held-for-sale at lower of cost or fair value. Loans are also eligible to be accounted for under the fair value option which are recorded on the Consolidated Balance Sheets at fair value and the periodic changes in fair value is recorded as a component of Change in fair value of investments in the Statements of Income. When we have the intent and ability to hold loans for the foreseeable future or to maturity/payoff, such loans are classified as held for investment. When we have the intent to sell loans, such loans are classified as held for sale. Our loans are generally categorized as Level 3 under the GAAP fair value hierarchy, as described in Note 13 to our Consolidated Financial Statements. The fair value of loans is affected by, among other things, changes in interest rates, credit performance, prepayments, and market liquidity. To the extent interest rates change or market liquidity and or credit conditions materially change, the value of these loans could decline, which could have a material effect on reported earnings. For originated residential mortgage loans measured at fair value, the fair value is generally determined using a market approach by utilizing either (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics.
For acquired residential mortgage loans measured at fair value, the fair value is generally determined by discounting the expected future cash flows using inputs such as default rates, prepayment speeds and discount rates.
For loans measured at the lower of cost or fair value, we account for any excess
of cost over fair value as a valuation allowance and include changes in the
valuation allowance in in the period in which the change occurs. Purchase price
discounts or premiums are deferred in a contra loan account until the related
loan is sold. The deferred discounts or premiums are an adjustment to the basis
of the loan and are included in the quarterly determination of the lower of cost
or fair value adjustments and/or the gain or loss recognized at the time of
sale.
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--------------------------------------------------------------------------------Interest income recognition - Interest earned on residential mortgage loans measured at fair value are reported in Interest income in the Consolidated Statements of Income.
Impairment - Subsequent to the adoption of CECL onJanuary 1, 2020 , all residential mortgage loans are carried at fair value or the lower of cost or fair value. As a result, these loans are not subject to an allowance for credit losses under the CECL impairment model. A loan is determined to be past due when a monthly payment is due and unpaid for 30 days or more. Loans, other than PCD loans, are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of collection. Loans held-for-sale are subject to the nonaccrual policy. A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan. Our ability to recognize interest income on nonaccrual loans as cash interest payments are received rather than as a reduction of the carrying value of the loans is based on the recorded loan balance being deemed fully collectible.
Investment Consolidation
The analysis as to whether to consolidate an entity is subject to a significant
amount of judgment. Some of the criteria considered are the determination as to
the degree of control over an entity by its various equity holders, the design
of the entity, how closely related the entity is to each of its equity holders,
the relation of the equity holders to each other and a determination of the
primary beneficiary in entities in which we have a variable interest. These
analyses involve estimates, based on our assumptions, as well as judgments
regarding significance and the design of entities.
Variable interest entities ("VIEs") are defined as entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. A VIE is
required to be consolidated by its primary beneficiary, and only by its primary
beneficiary, which is defined as the party who has the power to direct the
activities of a VIE that most significantly impact its economic performance and
who has the obligation to absorb losses or the right to receive benefits from
the VIE that could potentially be significant to the VIE.
Our investments and certain other interests in Non-Agency RMBS are variable interests. We monitor these investments and analyze the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements.
These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary of a VIE since they involve subjective determinations of significance, with respect to both power and economics. The result could be the consolidation of an entity that otherwise would not have been consolidated or the de-consolidation of an entity that otherwise would have been consolidated. Unless stated otherwise, we have not consolidated the securitization entities that issued our Non-Agency RMBS. This determination is based, in part, on our assessment that we do not have the power to direct the activities that most significantly impact the economic performance of these entities, such as if we owned a majority of the currently controlling class. In addition, we are not obligated to provide, and have not provided, any financial support to these entities. We have not consolidated the entities in which we hold a 50% interest that made an investment in Excess MSRs. We have determined that the decisions that most significantly impact the economic performance of these entities will be made collectively by us and the other investor in the entities. In addition, these entities have sufficient equity to permit the entities to finance their activities without additional subordinated financial support. Based on our analysis, these entities do not meet any of the VIE criteria. We have invested in Mr. Cooper serviced Servicer Advance Investments, including the basic fee component of the related MSRs, through the Buyer, of which we are the managing member. The Buyer was formed through cash contributions by us and third-parties in exchange for membership interests. As ofDecember 31, 2020 , we owned an approximately 73.2% interest in the Buyer, and the third-party investors owned the remaining membership interests. Through our managing member interest, we direct substantially all of the day-to-day activities of the Buyer. The third-party investors do not possess substantive participating rights or the power to direct the day-to-day activities that most directly affect the operations of the Buyer. In addition, no single third-party investor, or group of third-party investors, possesses the substantive ability to remove us as the managing member of the Buyer. We have determined that the Buyer is a voting interest entity. As a result of our managing 98 --------------------------------------------------------------------------------
member interest, which represents a controlling financial interest, we consolidate the Buyer and its wholly owned subsidiaries and reflect membership interests in the Buyer held by third parties as noncontrolling interests.
In
A wholly owned subsidiary ofShellpoint ,NewRez , was deemed to be the primary beneficiary of theSAFT 2013-1 securitization entity as a result of its ability to direct activities that most significantly impact the economic performance of the entity in its role as servicer and its ownership of subordinate retained interests. A wholly owned subsidiary ofShellpoint ,Shelter Mortgage Company LLC ("Shelter") is a mortgage originator specializing in retail origination. Shelter operates its business through a series of joint ventures and was deemed to be the primary beneficiary of the joint ventures as a result of its ability to direct activities that most significantly impact the economic performance of the entities and its ownership of a significant equity investment. InOctober 2019 , as a result of our acquisition of servicing assets fromDitech and our pre existing ownership of the equity, we consolidateMid-State Capital Corporation 2004-1 Trust ("MDST 2004-1"), Mid-State Trust VII ( "MDST VII"), Mid-State Trust VIII ("MDST VIII") andMid-State Capital Trust 2010-1 ("MDST 2010-1") and collectively ("MDST Trusts"). Our determination to consolidate theMDST Trust is a result of our ownership of the equity in these trusts in conjunction with the ability to direct activities that most significantly impact the economic performance of the entities with the acquisition of the servicing byNewRez . Income Taxes We intend to operate in a manner that allows us to qualify for taxation as a REIT. As a result of our expected REIT qualification, we do not generally expect to payU.S. federal or state and local corporate level taxes on income earned outside of our Taxable REIT Subsidiaries ("TRSs"). Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject toU.S. federal, state and local income and franchise taxes, and we would face a variety of adverse consequences. See "Risk Factors-Risks Related to Our Taxation as a REIT." New Residential operates various business segments, including servicing, origination, and MSR related investments, through TRSs that are subject to regular corporate income taxes.
Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements.
Accounting Impact of Valuation Changes
New Residential's assets fall into three general categories as disclosed in the table below. These categories are:
Marked to Market Assets ("MTM Assets") - Assets that are marked to market
through the Consolidated Statements of Income. Changes in the value of these
assets (i) are recorded in the Consolidated Statement of Income, as unrealized
gains or losses that impact net income, and (ii) impact our Total New
Residential Stockholders' Equity (net book value).
Other Comprehensive Income Assets ("OCI Assets") - Assets that are marked to
market through the Consolidated Statements of Comprehensive Income. Changes in
the value of these assets (i) are recorded in the Consolidated Statements of
Comprehensive Income as unrealized gains or losses, and therefore do not impact
net income on the Consolidated Statement of Income, and (ii) impact our Total
New Residential Stockholders' Equity (net book value).
Cost Assets - Assets that are not marked to market. Changes in value of these
assets do not impact net income in the Consolidated Statement of Income nor do
they impact our Total New Residential Stockholders' Equity (net book value).
An exception to these descriptions results from changes in value that represent
impairment. Any such change (i) is recorded in the Consolidated Statements of
Income, as impairment that impacts net income, and (ii) impacts our Total New
Residential Stockholders' Equity (net book value). In the case of Residential
mortgage loans, held-for-sale, at lower of cost or fair value, any reductions in
value are considered impairment. Impairment on loans and REO as well as
securities subsequent to the adoption of CECL on January 1, 2020 is subject to
reversal if values subsequently increase.
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All of New Residential's liabilities, with the exception of derivatives,
residential mortgage loan repurchase liability, and contingent consideration
liabilities (which are marked to market through the Consolidated Statements of
Income), are recorded at their amortized cost basis.
The table below summarizes New Residential's assets by category as of
MTM Assets OCI Assets Cost Assets
Residential mortgage loans,
Real estate and other securities Real estate and other held-for-sale, at lower of cost or
accounted for under the fair value option securities, available-for-sale fair value Excess MSRs
Real estate owned (REO)
Excess MSRs, equity method investees Servicer advances receivable
MSRs Trades receivable
MSR financing receivables Deferred tax asset, net
Other assets, except as described
Servicer advance investments above
Certain assets within Other assets,
primarily derivatives and equity
investments
Residential mortgage loans, held-for-sale
at fair value
Residential mortgage loans,
held-for-investment, at fair value
Consumer loans
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RESULTS OF OPERATIONS
The following tables summarize the changes in our results of operations for the year endedDecember 31, 2020 compared to 2019 year-to-year (dollars in thousands). Our results of operations are not necessarily indicative of our future performance. Year Ended December 31, Increase (Decrease) 2020 2019 Amount % Revenues Interest income$ 1,102,537 $ 1,766,130 $ (663,593) (37.6) % Servicing revenue, net of change in fair value of mortgage servicing rights of$(1,889,741) and$(712,950) , respectively (555,041) 385,159 (940,200) (244.1) % Gain on originated mortgage loans, held-for-sale, net 1,399,092 460,107 938,985 204.1 % 1,946,588 2,611,396 (664,808) (25.5) % Expenses Interest expense 584,469 933,751 (349,282) (37.4) % General and administrative expenses 1,120,087 781,971 338,116 43.2 % Management fee to affiliate 89,134 79,472 9,662 12.2 % Incentive compensation to affiliate - 91,892 (91,892) (100.0) % 1,793,690 1,887,086 (93,396) (4.9) % Other income (loss) Change in fair value of investments (437,126) (307,396) (129,730) 42.2 % Gain (loss) on settlement of investments, net (930,131) 227,981 (1,158,112) (508.0) %
Earnings from investments in consumer loans, equity method investees
- (1,438) 1,438 (100.0) %
Other income (loss), net (2,797) 39,819 (42,616) (107.0) %
(1,370,054) (41,034) (1,329,020) 3238.8 %
Impairment
Provision (reversal) for credit losses on
securities 13,404 25,174 (11,770) (46.8) %
Valuation and credit loss provision (reversal) on
loans and real estate owned ("REO") 110,208 10,403 99,805 959.4 %
123,612 35,577 88,035 247.4 %
Income (Loss) Before Income Taxes (1,340,768) 647,699 (1,988,467) (307.0) %
Income tax expense (benefit) 16,916 41,766 (24,850) (59.5) %
Net Income (Loss) $ (1,357,684) $ 605,933 $ (1,963,617) (324.1) %
Noncontrolling Interests in Income of Consolidated Subsidiaries
52,674 42,637 10,037 23.5 %
Dividends on Preferred Stock 54,295 13,281 41,014 308.8 %
Net Income (Loss) Attributable to Common
Stockholders $ (1,464,653) $ 550,015 $ (2,014,668) (366.3) %
Interest Income
Prior to the onset of the COVID-19 pandemic in mid-March 2020 , we financed a
significant portion of our interest-earning assets with repurchase agreements.
As the COVID-19 pandemic began to unfold, financial and mortgage-related asset
markets experienced significant volatility, causing, among other things, credit
spread widening, a sharp decrease in interest rates and unprecedented
illiquidity in repurchase agreement financing. These conditions put significant
pressure on financing assets with repurchase agreements resulting in lenders
initiating margin calls. In March 2020 , we began selling assets to manage and
generate liquidity and de-risk our balance sheet. We sold a substantial portion
of our Non-Agency RMBS portfolio in March 2020 and realized significant losses
as a result of these sales. Refer to Gain (loss) on investment of securities,
net for further details. We also reduced our exposure to loan pools financed
using repurchase agreements.
As a result of the factors discussed above, our total interest income for the
year ended December 31, 2020 decreased by $663.6 million , of which $388.2
million was attributable to a smaller average size bond portfolio. The remainder
of the decrease was driven by (i) a $181.3 million decrease from MSR related
investments and servicing primarily due to MSR financing receivables
transferring to investments in MSRs during the third quarter of 2020 (the
revenue associated with these transferred
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MSRs is reported as Servicing revenue, net rather than Interest income in our
Consolidated Statements of Income), portfolio runoff, less REO referral
commission due to lower volume, and decrease in ancillary and other fees due to
lower interest rates, as well as (ii) a $115.1 million decrease largely
attributable $3.0 billion of residential mortgage loan sales in April 2020 in
response to COVID-19.
Servicing Revenue, Net
Servicing revenue, net recognized by New Residential related to its MSRs comprises the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Servicing fee revenue $ 1,224,060 $ 899,623 $ 324,437 36.1 %
Ancillary and other fees 110,640 198,486 (87,846) (44.3) %
Servicing fee revenue and fees 1,334,700 1,098,109 236,591 21.5 %
Change in fair value due to:
Realization of cash flows (1,360,954) (530,031) (830,923) 156.8 %
Change in valuation inputs and assumptions(A) (531,183) (186,204)
(344,979) 185.3 %
(Gain) loss on realized 2,396 3,285 (889) (27.1) %
Servicing revenue, net $ (555,041) $ 385,159 $ (940,200) (244.1) %
(A)The following table summarizes the components of servicing revenue, net related to changes in valuation inputs and assumptions:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Changes in interest rates and prepayment
rates $ (573,674) $ (433,098) $ (140,576) 32.5 %
Changes in discount rates (1,705) 127,314 (129,019) (101.3) %
Changes in other factors 44,196 119,580 (75,384) (63.0) %
Total $ (531,183) $ (186,204) $ (344,979) 185.3 %
Servicing revenue, net decreased $940.2 million for the year ended December 31,
2020 primarily driven by (i) a $830.9 million decline in fair value resulting
from the realization of cash flows as a result of MSR acquisitions subsequent to
December 31, 2019 and historically low mortgage rates which resulted in faster
prepayments, (ii) a $345.0 million increase in negative mark-to-market
adjustments, (iii) a $87.8 million decrease in ancillary and other fees due to
lower interest rates, specifically lower interest earned on custodial accounts,
partially offset by (iv) a $324.4 million increase in servicing collections as a
result of MSR acquisitions that closed subsequent to December 31, 2019 . The
negative mark-to-market adjustments of $345.0 million for the year ended
December 31, 2020 were primarily driven by changes in interest rates resulting
in lower custodial earnings, faster prepayment rates, and higher delinquency
rates due to changes in estimates regarding the economic outlook caused by
COVID-19.
Gain on Originated Mortgage Loans, Held-for-Sale, Net
Gain on originated mortgage loans, held-for-sale, net increased$939.0 million for the year endedDecember 31, 2020 primarily driven by an increase in loan origination volume and higher gain on sales margins. As noted in the "Our Portfolio" section, during the year endedDecember 31, 2020 , loan origination volume atNewRez was$61.6 billion , up from$22.3 billion in the year prior. During the twelve months endedDecember 31, 2020 , the continued lower interest rate environment, increased refinance activity by borrowers, integration ofDitech's platform, and increased market share helped drive volume growth across all origination channels. Gain on sale margins during the year endedDecember 31, 2020 was 1.85%, 19% higher than 1.56% for the same period in 2019. The increase in margin was driven by higher investor demand for Agency securities during the first half of the year due to increased volatility caused by the onset of COVID-19 inmid-March 2020 . Margins also benefited from decreasing interest rates throughout the year, resulting in higher volumes of loan refinancing.
Interest Expense
Interest expense decreased by$349.3 million for the year endedDecember 31, 2020 primarily attributable to (i) a$296.2 million decrease in the average size of our bond portfolio, (ii) an$80.3 million decrease largely driven by$3.0 billion of 102 -------------------------------------------------------------------------------- residential mortgage loan sales inApril 2020 in response to COVID-19, and (iii) a$13.2 million decrease in interest expense due to runoff of MSR related investments, partially offset by (iv) a$36.8 million increase in interest expense as a result of entering into a three-year senior secured term loan facility for$600.0 million at 11.0% inMay 2020 and subsequently refinanced inSeptember 2020 with proceeds from the$550.0 million of 6.250% senior unsecured notes due 2025. Refer to the "Liquidity and Capital Resources" section for further details.
General and Administrative Expenses
General and administrative expenses is composed of the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Compensation and benefits expense $ 230,009 $ 121,004 $ 109,005 90.1 %
Compensation and benefits expense, origination 341,637 164,485 177,152 107.7 %
Legal and professional expense 70,502 89,489 (18,987) (21.2) %
Loan origination expense 92,081 45,483 46,598 102.5 %
Occupancy expense 36,799 19,388 17,411 89.8 %
Subservicing expense 201,444 227,482 (26,038) (11.4) %
Loan servicing expense 14,126 31,737 (17,611) (55.5) %
Property and maintenance expense 42,508 8,112 34,396 424.0 %
Other 90,981 74,791 16,190 21.6 %
$ 1,120,087 $ 781,971 $ 338,116 43.2 %
General and administrative expenses increased $338.1 million for the year ended
December 31, 2020 primarily attributable to increases in NewRez origination and
servicing volumes. As noted in the "Our Portfolio" section, during the year,
loan origination volume at NewRez was $61.6 billion , up from $22.3 billion in
the year prior and loans serviced at NewRez was $297.8 billion UPB, up from
$219.4 billion UPB in the year prior. Higher origination and servicing volumes
resulted in higher headcount and the associated compensation and benefits
expense, loan origination expense, and property and maintenance expense.
Additionally, growth in Guardian Asset Management inspection and property
management contracts resulted in the increase of $34.4 million of expenses
incurred related to performing such services, accompanied with an increase in
compensation and benefits due to higher employee headcount.
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--------------------------------------------------------------------------------Management Fee to Affiliate
Management fee to affiliate increased
Incentive Compensation to Affiliate
Incentive compensation to affiliate decreased$91.9 million for the year endedDecember 31, 2020 due to the fact that the incentive calculation determined in accordance with the management agreement was in a cumulative net loss position.
Change in Fair Value of Investments
Change in fair value of investments is composed of the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Excess mortgage servicing rights $ (16,232) $ (10,505) $ (5,727) 54.5 %
Excess mortgage servicing rights, equity method
investees (3,489) 6,800 (10,289) (151.3) %
Mortgage servicing rights financing receivables (279,168)
(189,023) (90,145) 47.7 % Servicer advance investments 763 10,288 (9,525) (92.6) % Real estate and other securities 28,455 2,101 26,354 1254.4 % Residential mortgage loans (107,604) (70,914) (36,690) 51.7 % Consumer loans held-for-investment (6,384) - (6,384) - % Derivative instruments (53,467) (56,143) 2,676 (4.8) % Total$ (437,126) $ (307,396) $ (129,730) 42.2 %
Change in Fair Value of Excess Mortgage Servicing Rights
Changes in the fair value of Excess MSRs related to the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Changes in interest rates and prepayment rates $ 1,357 $ (18,279) $ 19,636 (107.4) %
Changes in discount rates (365) 13,446 (13,811) (102.7) %
Changes in other factors (17,224) (5,672) (11,552) 203.7 %
Total $ (16,232) $ (10,505) $ (5,727) 54.5 %
The unfavorable mark-to-market adjustments for the year ended December 31, 2020
were primarily driven by increases in delinquency rates from higher forbearance
in our conventional, Agency, and PLS Excess MSR pools. Lower recapture rates
were also a key contributor to the negative mark-to-market adjustments seen
during the year. The unfavorable mark-to-market fair value adjustments during
the year ended December 31, 2019 were primarily driven by increased interest
rates and prepayment rates, partially offset by a decrease in discount rates
during the year.
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--------------------------------------------------------------------------------Change in Fair Value of Excess Mortgage Servicing Rights, Equity Method Investees
Changes in the fair value of Excess MSRs, equity method investees related to the
following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Changes in interest rates and prepayment rates $ (151) $ (7,659) $ 7,508 (98.0) %
Changes in discount rates (82) 3,939 (4,021) (102.1) %
Changes in other factors (3,256) 10,520 (13,776) (131.0) %
Total $ (3,489) $ 6,800 $ (10,289) (151.3) %
The unfavorable mark-to-market adjustments during the year ended December 31,
2020 were primarily driven by increases in delinquency from higher forbearance
in our conventional, Agency, and PLS Excess MSR pools. Lower recapture rates
were also a key contributor to the negative mark-to-market adjustments seen
during the year. The favorable mark-to-market adjustments for the year ended
December 31, 2019 were primarily driven by interest income, net of expenses
recorded at the investee level, a decrease in discount rates and delinquency
rates, partially offset by increases in interest rates and prepayment rates.
Change in Fair Value of MSR Financing Receivables
The component of changes in the fair value of MSR financing receivables related
to the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Realization of cash flows $ (222,674) $ (203,732) $ (18,942) 9.3 %
Change in valuation inputs and assumptions(A) (54,745) 21,094 (75,839) (359.5) %
(Gain) loss on sales (1,749) (6,385) 4,636 (72.6) %
Total $ (279,168) $ (189,023) $ (90,145) 47.7 %
(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:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Changes in interest rates and prepayment
rates $ 29,334 $ (112,269) $ 141,603 (126.1) %
Changes in discount rates 10,950 99,674 (88,724) (89.0) %
Changes in other factors (95,029) 33,689 (128,718) (382.1) %
Total $ (54,745) $ 21,094 $ (75,839) (359.5) %
The change in fair value of investments in MSR Financing Receivables decreased
$90.1 million for the year ended December 31, 2020 , of which $75.8 million was
attributable to changes in valuation inputs and assumptions. The change in fair
value for the year ended December 31, 2020 was primarily due to higher
delinquency rates, partially offset by a decrease in discount rates and changes
in interest rates. These changes resulted mainly from changes in estimates
regarding the economic outlook caused by COVID-19. The remaining decrease was
primarily due to an $18.9 million increase in realization of cash flows as a
result of faster prepayments in 2020, partially offset by transfers from
investments in MSR Financing Receivables to MSRs during the third quarter of
2020.
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--------------------------------------------------------------------------------Change in Fair Value of Servicer Advance Investments
Changes in the fair value of Servicer Advance Investments related to the
following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Changes in interest rates and prepayment rates $ (1,866) $ 628 $ (2,494) (397.1) %
Changes in discount rates 2,219 17,786 (15,567) (87.5) %
Changes in other factors 410 (8,126) 8,536 (105.0) %
Total $ 763 $ 10,288 $ (9,525) (92.6) %
The positive mark-to-market adjustments during the year ended December 31, 2020
were mainly driven by a decrease in discount rates, partially offset by
increased prepayment speeds. The positive mark-to-market adjustments during the
year ended December 31, 2019 were mainly driven by a decrease in discount rates.
Change in Fair Value of Real Estate and
The change in fair value of real estate and other securities increased$26.4 million for the year endedDecember 31, 2020 primarily due to higher purchases of Agency RMBS made throughout the year accounted for under the fair value option.
Change in Fair Value of Residential Mortgage Loans
The change in fair value of residential mortgage loans decreased$36.7 million for the year endedDecember 31, 2020 primarily due to (i) a$239.6 million decrease related to changes in valuation inputs and assumptions largely driven by the economic outlook caused by COVID-19, offset by (ii)$276.3 million of higher unrealized losses on loans compared to the prior year.
Change in Fair Value of Consumer Loans
Change in fair value of consumer loans decreased$6.4 million for the year endedDecember 31, 2020 due to unfavorable changes in inputs and assumptions largely driven by the economic outlook caused by COVID-19.
Change in Fair Value of Derivative Instruments
Change in fair value of derivative instruments increased$2.7 million for the year endedDecember 31, 2020 primarily due to a decrease in unrealized loss on interest rate swaps largely resulting from changes in the forward LIBOR curve during the year.
Gain (Loss) on Settlement of Investments, Net
Gain (loss) on settlement of investments, net is composed of the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Gain (loss) on sale of real estate securities $ (753,713) $ 205,989 $ (959,702) (466) %
Gain (loss) on sale of acquired residential
mortgage loans (5,662) 153,174 (158,836) (104) %
Gain (loss) on settlement of derivatives (74,812) (129,923) 55,111 (42) %
Gain (loss) on liquidated residential mortgage
loans 4,644 (4,872) 9,516 (195) %
Gain (loss) on sale of REO (21,925) (11,521) (10,404) 90 %
Gain (loss) on extinguishment of debt (66,233) (8,532) (57,701) 676 %
Gain (loss) on Excess MSR recapture agreements - - - - %
Other gains (losses) (12,430) 23,666 (36,096) (153) %
$ (930,131) $ 227,981 $ (1,158,112) (508) %
Gain (loss) on settlement of investments, net decreased
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$121.0 million decrease in gains realized on collapse transactions due to lower
collapse volume during the year, (iii) a $57.7 million loss on extinguishment of
debt primarily attributable to the 2020 term loan refinancing in the third
quarter, (iv) a $41.6 million loss on loan sales during the year, (v) a $22.9
million increase in loss on sales of MSRs, (vi) a $10.4 million increase in loss
on REO sales related to legacy receivable write-offs during the fourth quarter
of 2020, partially offset by (vii) a $50.2 million decrease in losses on TBAs,
and (viii) a $4.9 million increase in gain on settlement of derivatives.
Other Income (Loss), Net
Other income (loss), net is composed of the following:
Year Ended December 31, Increase (Decrease)
2020 2019 Amount %
Unrealized gain (loss) on secured notes and
bonds payable $ (966) $ (1,236) $ 270 (21.8) %
Unrealized gain (loss) on contingent
consideration (6,568) (10,487) 3,919 (37.4) %
Unrealized gain (loss) on equity investments (54,455) (3,096) (51,359) 1658.9 %
Gain (loss) on transfer of loans to REO 7,945 11,842 (3,897) (32.9) %
Gain (loss) on transfer of loans to other
assets (939) (1,144) 205 (17.9) %
Gain (loss) on Ocwen common stock 3,235 174 3,061 1759.2 %
Provision for servicing losses (15,330) (9,102) (6,228) 68.4 %
Bargain Purchase Gain - 49,539 (49,539) (100.0) %
Rental and ancillary revenue 25,409 6,732 18,677 277.4 %
Property and maintenance revenue 70,527 14,449 56,078 388.1 %
Other income (loss) (31,655) (17,852) (13,803) 77.3 %
$ (2,797) $ 39,819 $ (42,616) (107.0) %
As summarized in the table above, Other income decreased $42.6 million for the
year ended December 31, 2020 primarily due to an increase in unrealized losses
on our equity method investments (TSX and Covius), one time gains in 2019
related to the Ditech purchase, Springcastle acquisition, partially offset by an
increase of property inspection and maintenance revenue at Guardian, as well as
a $16.4 million increase of recovery income.
Provision (Reversal) for Credit Losses on Securities
The provision for credit losses on securities decreased$11.8 million for the year endedDecember 31, 2020 primarily due to a smaller average bond portfolio due to sales of securities during the year in response to COVID-19, newly acquired securities accounted for under the fair value election, and improved credit spreads throughout the year on our Non-Agency RMBS.
Valuation and Credit Loss Provision (Reversal) on Loans and Real Estate Owned
Valuation and credit loss provision (reversal) on loans and real estate owned increased$99.8 million primarily due to (i) a$133.2 million increase in impairment on residential mortgage loans related to the economic outlook caused by COVID-19, partially offset by (ii) a$31.0 million decrease in the provision due to the application of the fair value election on consumer loans in conjunction with the adoption of CECL onJanuary 1, 2020 .
Income Tax Expense (Benefit)
Income tax expense (benefit) decreased$24.9 million for the year endedDecember 31, 2020 primarily driven by deferred tax benefits from changes in the fair value of loans and MSRs during the first quarter of 2020, offset by deferred tax expense generated from income in our servicing and origination segments in subsequent quarters. The taxable income of the operating businesses is largely absorbed by our historical net operating losses, reducing current taxable income in our TRSs.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Noncontrolling interests ("NCI") in income of consolidated subsidiaries
increased by $10.0 million primarily due to (i) a $9.4 million increase in NCI
at the Shelter JVs, driven by higher earnings from originations, and (ii) a $4.0
million increase in NCI related to our Consumer Loan Companies, which are 46.5%
owned by third parties, partially offset by (iii) a $3.4 million
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decrease in other's interest in the net income of the Buyer as a result of lower
fair value adjustments and interest income during the twelve months ended
Dividends on Preferred Stock
The dividends on preferred stock is related to our 7.500% Preferred Series A, 7.125% Preferred Series B, and 6.375% Preferred Series C. There was a$41.0 million increase in dividends on our preferred stock during the year endedDecember 31, 2020 attributable to the issuance of the Preferred Series A, Preferred Series B, and Preferred Series C inJuly 2019 ,August 2019 , andFebruary 2020 , respectively.
Other Comprehensive Income. See "-Accumulated Other Comprehensive Income (Loss)" below.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain investments, and other general business needs. Additionally, to maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT taxable income. We note that a portion of this requirement may be able to be met in future years through stock dividends, rather than cash, subject to limitations based on the value of our stock. Our primary sources of funds are cash provided by operating activities (primarily income from servicing and originations), sales of and repayments from our investments, potential debt financing sources, including securitizations, and the issuance of equity securities, when feasible and appropriate. Our primary uses of funds are the payment of interest, management fees, incentive compensation, servicing and subservicing expenses, outstanding commitments (including margins and mortgage loan originations), other operating expenses, repayment of borrowings and hedge obligations, dividends and funding of future servicer advances. The ongoing economic impact of the COVID-19 pandemic has resulted in an increase in servicing advances and liquidity demands related to the utilization of forbearance programs offered by the CARES Act. SinceApril 2020 , we expanded our committed advance facilities capacity by$1.4 billion , which we believe will be adequate for our needs. In addition, inMay 2020 , we entered into a three-year senior secured term loan facility agreement in principal amount of$600.0 million with a fixed annual rate of 11.00%. InSeptember 2020 , we priced$550 million of 6.250% senior unsecured notes due 2025. The net proceeds from the offering were used, together with cash on hand, to prepay and retire the existing three-year senior secured term loan facility. The issuance of term debt during 2020 increased our cash on hand to higher than normal relative to historical periods and we continue to hold an increased amount of unrestricted cash due to the uncertainty surrounding the reopening of the economy and the continued spread of COVID-19. Total cash and cash equivalents atDecember 31, 2020 was$944.9 million compared to$528.7 million atDecember 31, 2019 . 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 ofDecember 31, 2020 , approximately$580.6 million of our cash and cash equivalents was held at NRM andNewRez , of which$412.6 million was 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, secured notes and bonds payable, securitizations and unsecured term loan. As ofDecember 31, 2020 , we had outstanding secured financing agreements with an aggregate face amount of approximately$17.6 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, for example from 3%-12% for Agency RMBS, 12%-80% for Non-Agency RMBS, and 5%-25% for residential mortgage loans. During the term of the secured financing agreement, the counterparty holds the security as collateral. If the agreement is subject to margin calls, the counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral (or "margin") in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we may, from time to time, be a party to derivative agreements or financing arrangements that may be subject to margin calls based on the value of such instruments. In addition,$3.0 billion face amount of our MSR and Excess MSR financing is subject to mandatory monthly repayment to the extent that the outstanding balance 108 -------------------------------------------------------------------------------- exceeds the market value (as defined in the related agreement) of the financed asset multiplied by the contractual maximum loan-to-value ratio. We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls or related requirements resulting from decreases in value related to a reasonably possible (in our opinion) change in interest rates. Our ability to obtain borrowings and to raise future equity capital is dependent on our ability to access borrowings and the capital markets on attractive terms. We continually monitor market conditions for financing opportunities and at any given time may be entering or pursuing one or more of the transactions described above. Our Manager's senior management team has extensive long-term relationships with investment banks, brokerage firms and commercial banks, which we believe enhance our ability to source and finance asset acquisitions on attractive terms and access borrowings and the capital markets at attractive levels. Our ability to fund our operations, meet financial obligations and finance target asset acquisitions may be impacted by our ability to secure and maintain our secured financing agreements, credit facilities and other financing arrangements. Because secured financing agreements and credit facilities are short-term commitments of capital, lender responses to market conditions may make it more difficult for us to renew or replace, on a continuous basis, our maturing short-term borrowings and have imposed, and may continue to impose, more onerous conditions when rolling such financings. If we are not able to renew our existing facilities or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under our financing facilities or if we are required to post more collateral or face larger haircuts, we may have to curtail our asset acquisition activities and/or dispose of assets. Issues related to financing are exacerbated in times of significant dislocation in the financial markets, such as those experienced during the first quarter of 2020 due to the COVID-19 pandemic. While market volatility somewhat subsided in the latter half of 2020, it is possible that volatility may increase again, and our lenders may become unwilling or unable to provide us with financing and we could be forced to sell our assets at an inopportune time when prices are depressed. In addition, if the regulatory capital requirements imposed on our lenders change, they may be required to significantly increase the cost of the financing that they provide to us. Our lenders also have revised and may continue to revise their eligibility requirements for the types of assets they are willing to finance or the terms of such financings, including haircuts and requiring additional collateral in the form of cash, based on, among other factors, the regulatory environment and their management of actual and perceived risk. Moreover, the amount of financing we receive under our secured financing agreements will be directly related to our lenders' valuation of our target assets that cover the outstanding borrowings. As the COVID-19 pandemic unfolded in theU.S. inmid-March 2020 , financial and mortgage-related asset markets experienced significant volatility. During March and April of 2020, the significant dislocation in the financial markets caused, among other things, credit spread widening, a sharp decrease in interest rates and unprecedented illiquidity in repurchase agreement financing and mortgage-backed securities markets. These conditions put significant pressure on the mortgage REIT industry, including as related to financing operations, pricing mortgage assets and meeting liquidity needs. With respect to repurchase agreements, we observed (i) an increase in haircuts and (ii) a mark-down of our mortgage assets held as collateral by our financing counterparties, which resulted in us having to provide additional cash or securities to satisfy higher than historical levels of margin calls. As a response, we used our cash on hand, a portion of the approximately$389.5 million proceeds from our underwritten public offering of 6.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock inFebruary 2020 and the proceeds from asset sales to meet margin calls. Furthermore, in the aftermath of these events, we took a number of immediate and on-going actions to increase our liquidity and stabilize financing sources, both as a means of strengthening our balance sheet. As a result of the unprecedented illiquidity in repurchase agreement financing, we procured and continue to procure financing, such as securitizations and term financings, that provides less or no exposure to fluctuations in the daily collateral repricing determinations. We achieved this by securing longer-dated financing arrangements such as the aforementioned three-year senior secured term loan facility agreement in principal amount of$600.0 million with a fixed annual rate of 11.00% (subsequently refinanced with a$550 million of 6.250% senior unsecured notes due 2025), moving more of our financing into the capital markets and negotiating margin holidays with regards to certain assets. While the cost of funds for such financings may be greater relative to repurchase agreement funding, we believe, given on-going market conditions, financing with more limited mark-to-market provisions allows us to better manage our liquidity risk and reduce exposures to events like those caused by the COVID-19 pandemic. We will continue in the near term to explore additional financing arrangements to further strengthen our balance sheet and position ourselves for future investment opportunities. Refer to "Our Portfolio" section for further discussion regarding changes to our financing structure. 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 109 -------------------------------------------------------------------------------- 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. 110 --------------------------------------------------------------------------------
Debt Obligations
The following table presents certain information regarding New Residential's
secured financing agreements and secured notes and bonds payable debt
obligations:
December 31, 2020 December 31, 2019
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(A)
Secured Financing Agreements(C)
Repurchase Agreements:
Warehouse Credit Facilities-Residential
Mortgage Loans(F) $ 4,043,156 $ 4,039,564 Feb-21 to Dec-22 2.18 % 0.6 $ 4,370,264 $ 4,496,831 $ 4,465,054 19.5 $ 5,053,207
Agency RMBS(D) 12,682,427 12,682,427 Jan-21 0.24 % 0.2 12,929,057 13,715,013 13,800,351 0.9 15,481,677
Non-Agency RMBS(E) 818,063 817,209 Jan-21 to Mar-21 3.48 % 0.3 17,183,226 1,534,798 1,548,351 0.7 7,317,519
Real Estate Owned(G) (H) 8,480 8,480 Feb-21 to Dec-22 3.13 % 1.9 N/A N/A 11,098 N/A 63,822
Total Secured Financing Agreements 17,552,126 17,547,680 0.84 % 0.3 27,916,225
Secured Notes and Bonds Payable
Excess MSRs(I) 275,088 275,088 Aug-24 4.36 % 3.7 101,142,417 317,234 398,969 6.1 217,300
MSRs(J) 2,704,923 2,691,791 Jul-22 to Dec-25 4.52 % 3.5 416,212,194 4,457,541 4,400,657 5.6 2,640,036
Servicer Advance Investments(K) 423,144 423,144 Apr-21 to Dec-22 1.45 % 1.5 449,150 512,958 538,056 6.0 443,248
Servicer Advances(K) 2,593,643 2,585,575 Apr-21 to Sep-23 2.42 % 1.8 2,970,329 3,002,267 3,002,267 0.7 2,738,424
Residential Mortgage Loans(L) 1,045,275 1,039,838 Apr-21 to Aug-60 4.25 % 30.2 1,602,289 1,535,095 1,365,250 4.8 864,451
Consumer Loans(M) 625,166 628,759 Sep -37 2.03 % 3.6 618,055 682,866 682,866 3.6 816,689
Total Secured Notes and Bonds Payable 7,667,239 7,644,195 3.39 % 6.5 7,720,148
Total/Weighted Average $ 25,219,365 $ 25,191,875 1.61 % 2.2 $ 35,636,373
(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 $48.5 million of
associated accrued interest payable as of December 31, 2020 .
(D)All Agency RMBS repurchase agreements have a fixed rate.
(E)All Non-Agency RMBS secured financing agreements have LIBOR-based floating
interest rates. This also includes repurchase agreements and related collateral
of $25.2 million and $35.1 million , respectively, on retained bonds
collateralized by Agency MSRs.
(F)Includes $258.0 million of repurchase agreements which bear interest at a
fixed rate of 4.4%. All remaining repurchase agreements have LIBOR-based
floating interest rates.
(G)All repurchase agreements have LIBOR-based floating interest rates.
(H)Includes financing collateralized by receivables including claims from FHA on
Ginnie Mae EBO loans for which foreclosure has been completed and for which New
Residential has made or intends to make a claim on the FHA guarantee.
(I)Includes $275.1 million of corporate loans which bear interest at a fixed
rate of 4.4%.
(J)Includes $425.1 million of MSR notes which bear interest equal to the sum of
(i) a floating rate index equal to one-month LIBOR and (ii) a margin of 4.5%;
$329.9 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 4.5%; and
$1,950.0 million of capital markets notes with fixed interest rates ranging 3.8%
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 1.2% to 1.9%. Collateral includes Servicer Advance Investments, as
well as servicer advances receivable related to the MSRs and MSR financing
receivables owned by NRM.
(L)Represents (i) a $5.7 million note payable to Mr. Cooper which includes a
$1.5 million receivable from government agency and bears interest equal to
one-month LIBOR plus 2.9%, (ii) $58.3 million of SAFT 2013-1 mortgage-backed
securities issued with fixed interest rate of 3.7% (see Note 13 for fair value
details), (iii) $150.9 million of MDST Trusts asset-backed notes held by third
parties which bear interest equal to 6.6% (see Note 13 for fair value details),
and (iv) $947.5 million of bonds held by third parties which bear interest at a
fixed rate ranging from 3.2% to 5.0%.
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(M)Includes the SpringCastle debt, which is composed of the following classes of
asset-backed notes held by third parties: $572.1 million UPB of Class A notes
with a coupon of 2.0% and a stated maturity date in September 2037 and
$53.0 million UPB of Class B notes with a coupon of 2.7% and a stated maturity
date in May 2036 .
Certain of the debt obligations included above are obligations of our consolidated subsidiaries, which own the related collateral. In some cases, such collateral is not available to other creditors of ours.
We have margin exposure on$17.6 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):
Year Ended
Outstanding
Balance at Average Daily Amount Maximum Amount Weighted Average
December 31, 2020 Outstanding(A) Outstanding Daily Interest Rate
Secured Financing Agreements
Agency RMBS $ 12,682,427 $ 8,707,956 $ 31,770,128 0.89 %
Non-Agency RMBS 818,063 2,911,348 8,235,316 3.19 %
Residential mortgage loans 3,679,978 3,649,004 6,668,812 2.31 %
Real estate owned 438 39,074 110,442 2.76 %
Secured Notes and Bonds Payable
Excess MSRs - 50,000 50,000 4.16 %
MSRs - 1,233,560 2,059,551 3.65 %
Servicer advances 882,761 748,098 1,263,003 2.71 %
Residential mortgage loans 5,744 79,747 210,877 3.37 %
Total/Weighted Average $ 18,069,411 $ 17,418,787 1.38 %
(A)Represents the average for the period the debt was outstanding.
Average Daily Amount Outstanding(A)
Three Months Ended
December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020
Secured Financing Agreements
Agency RMBS 11,391,397 6,899,998 1,175,803 15,250,971
Non-Agency RMBS 447,824 1,459,942 2,092,963 7,216,191
Residential mortgage loans 3,655,906 3,112,376 3,180,499 4,869,240
Real estate owned 2,581 3,222 76,763 75,173
Average Daily Amount Outstanding(A)
Three Months Ended
December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019
Secured Financing Agreements Agency RMBS 14,939,907 10,544,720 6,846,716 5,364,480 Non-Agency RMBS 7,403,488 7,986,868 7,675,607 7,399,226 Residential mortgage loans 2,644,559 3,432,062 2,681,220 2,155,752 Real estate owned 66,317 58,390 48,247 91,025
(A)Represents the average for the period the debt was outstanding.
On
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In August 2020 , the Company made a $51.0 million prepayment on the 2020 Term
Loan. As a result, The Company recorded a $5.7 million loss on extinguishment of
debt, representing a write-off of unamortized debt issuance costs and original
issue discount.
In 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 are exercisable in cash or on a cashless basis and
expire on May 19, 2023 and are exercisable, in whole or in part, at any time or
from time to time after September 19, 2020 at the following prices:
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.
On September 16, 2020 , the Company, as borrower, completed a private offering of
$550.0 million aggregate principal amount of 6.250%. Interest on the 2025 Senior
Notes accrue at the rate of 6.250% per annum with interest payable semi-annually
in arrears on each April 15 and October 15 , commencing on April 15, 2021 . 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 on October 15, 2025 and the Company may redeem some
or all of the 2025 Senior Notes at the Company's option, at any time from time
to time, on or after October 15, 2022 at a price equal to the following fixed
redemption prices (expressed as a percentage of principal amount of the 2025
Senior Notes to be redeemed):
Year Price
2022 103.125%
2023 101.563%
2024 and thereafter 100.000%
Prior to October 15, 2022 , the Company will be entitled at its option on one or
more occasions to redeem the 2025 Senior Notes in an aggregate principal amount
not to exceed 40% of the aggregate principal amount of the 2025 Senior Notes
originally issued prior to the applicable redemption date at a fixed redemption
price of 106.250%.
For additional information on our debt activities, see Note 12 to our Consolidated Financial Statements.
Repurchase Agreements
New Residential has outstanding repurchase agreements with terms that generally conform to the terms of the standard master repurchase agreement published by theSecurities Industry and Financial Markets Association as to repayment, margin requirements and segregation of all securities sold under any repurchase transactions. In addition, each counterparty typically requires additional terms and conditions to the standard master repurchase agreement, including changes to the margin maintenance requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement be litigated in a particular jurisdiction and cross default provisions. These provisions may differ by counterparty and are not determined until New Residential engages in a specific repurchase transaction. 113 --------------------------------------------------------------------------------
Servicer Advance Notes Payable (the "Servicer Advance Notes")
Following their revolving period, principal will be paid on the Servicer Advance Notes to the extent of available funds and in accordance with the priorities of payments set forth in the related transaction documents. The following table sets forth information regarding these revolving periods as ofDecember 31, 2020 (dollars in thousands): Servicer Advance Note Amount Revolving Period Ends(A) $ 755,801April 2021 115,118May 2021 11,842August 2021 134,026August 2022 500,000October 2022 300,000December 2022 600,000August 2023 600,000September 2023 $ 3,016,787
(A)On the earlier of this date or the occurrence of an early amortization event or a target amortization event.
Upon the occurrence of an early amortization event or a target amortization event, there is either an interest rate increase on the Servicer Advance Notes, a rapid amortization of the Servicer Advance Notes or an acceleration of principal repayment, or all of the foregoing.
The early amortization and target amortization events under the Servicer Advance
Notes include (i) the occurrence of an event of default under the transaction
documents, (ii) failure to satisfy an interest coverage test, (iii) the
occurrence of any servicer default or termination event for pooling and
servicing agreements representing 15% or more (by mortgage loan balance as of
the date of termination) of all the pooling and servicing agreements related to
the purchased basic fee subject to certain exceptions, (iv) failure to satisfy a
collateral performance test measuring the ratio of collected advance
reimbursements to the balance of advances, (v) for certain Servicer Advance
Notes, failure to satisfy minimum tangible net worth requirements for the
applicable servicer, the Buyer or New Residential, (vi) for certain Servicer
Advance Notes, failure to satisfy minimum liquidity requirements for the
applicable servicer and the Buyer, (vii) for certain Servicer Advance Notes,
failure to satisfy leverage tests for the applicable servicer, the Buyer or New
Residential, (viii) for certain Servicer Advance Notes, a change of control of
the Buyer or New Residential, (ix) for certain Servicer Advance Notes, a change
of control of the applicable servicer, (x) for certain Servicer Advance Notes,
the failure of the applicable servicer to maintain minimum servicer ratings,
(xi) for certain Servicer Advance Notes, certain judgments against the Buyer or
certain other subsidiaries of New Residential in excess of certain thresholds,
(xii) for certain Servicer Advance Notes, payment default under, or an
acceleration of, other debt of the Buyer or certain other subsidiaries of New
Residential, (xiii) failure to deliver certain reports, and (xiv) material
breaches of any of the transaction documents.
Certain of the Servicer Advance Notes accrue interest based on a floating rate
of interest. Servicer advances and deferred servicing fees are non-interest
bearing assets. The interest obligations in respect of certain of the Servicer
Advance Notes are not supported by any interest rate hedging instrument or
arrangement. If the applicable index rate for purposes of determining the
interest rates on the Servicer Advance Notes rises, there may not be sufficient
collections on the servicer advances and deferred servicing fees and a target
amortization event or an event of default could occur in respect of certain
Servicer Advance Notes. This could result in a partial or total loss on our
investment.
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--------------------------------------------------------------------------------Maturities
Our debt obligations as ofDecember 31, 2020 , as summarized in Note 12 to our Consolidated Financial Statements, had contractual maturities as follows (in thousands): Year Ending Nonrecourse(A) Recourse(B) Total 2021$ 882,761 $ 17,186,206 $ 18,068,967 2022 800,000 1,260,621 2,060,621 2023 1,200,000 302,851 1,502,851 2024 - 583,801 583,801 2025 257,468 1,888,428 2,145,896 2026 and thereafter 1,407,229 - 1,407,229$ 4,547,458 $ 21,221,907 $ 25,769,365
(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 (including amounts related to Trades Receivable) and Non-Agency RMBS repurchase agreements were 8.1% and 47.2%, respectively, and for Residential Mortgage Loans and Real Estate Owned were 9.4% and 23.6%, respectively, during the year endedDecember 31, 2020 . Borrowing Capacity The following table represents our borrowing capacity as ofDecember 31, 2020 (in thousands): Borrowing Balance Available Debt Obligations/ Collateral Capacity Outstanding Financing(A) Secured Financing Agreements Residential mortgage loans and REO $
4,913,746
6,823,000 2,797,437 4,025,563
Secured Notes and Bonds Payable
Excess MSRs 286,380 275,088 11,292
MSRs(B) 3,689,991 2,704,923 985,068
Servicer advances(A)(B) 4,365,000 3,016,787 1,348,213
$ 20,078,117 $ 10,048,433 $ 10,029,684
(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.
(B)The borrowing capacity for servicing advance and MSR capital notes is equal
to the current outstanding principal note balance at December 31,2020 .
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 ofDecember 31, 2020 .
Stockholders' Equity
Preferred Stock
Pursuant to our certificate of incorporation, we are authorized to designate and
issue up to 100.0 million shares of preferred stock, par value of
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--------------------------------------------------------------------------------The table below summarizes Preferred Shares:
Number of Shares Liquidation Preference(A) Dividends Declared per Share
December 31 , Year Ended December 31 ,
Issuance
Series 2020 2019 2020 2019 Discount Carrying Value 2020 2019 2018
Fixed-to-floating rate cumulative
redeemable preferred:
Series A, 7.50% issued July 2019 6,210 6,210 $ 155,250 $ 155,250 3.15 % $
150,026
11,300 11,300 282,500 282,500 3.15 % 273,418 1.78 0.89 -
Series C, 6.375% issued February
2020 16,100 - 402,500 - 3.15 % 389,548 1.60 - -
Total 33,610 17,510 $ 840,250 $ 437,750 $ 812,992 $ 5.26 $ 2.05 $ -
(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$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
Our certificate of incorporation authorizes 2,000,000,000 shares of common
stock, par value
Approximately 2.4 million shares of our common stock were held by Fortress,
through its affiliates, and its principals as of
InFebruary 2019 , we issued 46.0 million shares of our common stock in a public offering at a price to the public of$16.50 per share for net proceeds of approximately$751.7 million . To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 4.6 million shares of our common stock at the public offering price, which had a fair value of approximately$3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.40% risk-free rate, a 9.30% dividend yield, 19.26% volatility and a 10-year term. OnAugust 20, 2019 , we announced that our board of directors had authorized the repurchase of up to$200.0 million of our common stock throughDecember 31, 2020 . Repurchases may be made at any time and from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of our shares, trading volume, capital availability, our performance and general economic and market conditions. The share repurchase program may be suspended or discontinued at any time. No share repurchases have been made as of the filing of this report. Repurchases may impact our financial results, including fees paid to our Manager. 116 -------------------------------------------------------------------------------- As ofDecember 31, 2020 , our outstanding options had a weighted average exercise price of$16.30 . Our outstanding options as ofDecember 31, 2020 were summarized as follows: Held by the Manager
11,991,622
Issued to the Manager and subsequently assigned to certain of the Manager's employees
2,430,033
Issued to the independent directors 7,000 Total 14,428,655
Accumulated Other Comprehensive Income (Loss)
During the year ended
Total Accumulated
Other Comprehensive
Income
Balance at December 31, 2019 $ 682,151
Net unrealized gain (loss) on securities 123,855
Reclassification of net realized (gain) loss on securities into earnings
(740,309)
Balance at December 31, 2020 $ 65,697
Our GAAP equity changes as our real estate securities portfolio is marked to
market each quarter, among other factors. The primary causes of mark to market
changes are changes in interest rates and credit spreads. During the year ended
December 31, 2020 , we recorded unrealized losses on our real estate securities
primarily caused by performance, liquidity and other factors related
specifically to certain investments, coupled with a net widening of credit
spreads. We recorded credit impairment charges of $13.4 million with respect to
real estate securities and realized gains of $753.7 million on sales of real
estate securities.
See "-Market Considerations" above for a further discussion of recent trends and events affecting our unrealized gains and losses as well as our liquidity.
Common Dividends
We are organized and intend to conduct our operations to qualify as a REIT forU.S. federal income tax purposes. We intend to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly distributions of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or raise capital to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We make distributions based on a number of factors, including an estimate of taxable earnings per common share. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, other differences in method of accounting, non-deductible general and administrative expenses, taxable income arising from certain modifications of debt instruments and investments held in TRSs. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. Consistent with our intention to enhance our liquidity and strengthen our cash position in response to COVID-19, during the first quarter of 2020, our board of directors adjusted the quarterly cash dividend on our shares of common stock to$0.05 per share from$0.50 per share. During the second quarter of 2020, our board of directors adjusted the quarterly cash dividend on our shares of common stock to$0.10 per share from$0.05 per share. During the third quarter of 2020, our board of directors increased the quarterly cash dividend on our shares of common stock to$0.15 per share from$0.10 per share. During the fourth 117 --------------------------------------------------------------------------------
quarter of 2020, our board of directors increased the quarterly cash dividend on
our shares of common stock to
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.
Cash Flow
Operating Activities
Net cash flows provided by operating activities increased approximately$3.5 billion for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . Operating cash inflows for the year endedDecember 31, 2020 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of$65.2 billion , servicing fees received of$1.4 billion , net interest income received of$852.0 million , and net recoveries of servicer advances receivable of$336.6 million . Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of$3.4 billion , loan originations of$61.0 billion , incentive compensation and management fees paid to the Manager of$180.6 million , income taxes paid of$0.1 million , subservicing fees paid of$416.3 million , and other outflows of approximately$1.2 billion including general and administrative costs and loan servicing fees.
Investing Activities
Cash flows provided by (used in) investing activities were$8.6 billion , ($10.9 billion ) and ($5.2 billion ) for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Investing activities consisted primarily of the acquisition of MSRs, real estate securities, and the funding of servicer advances, net of principal repayments from Servicer Advance Investments, MSRs, real estate securities and loans as well as proceeds from the sale of real estate securities, loans and REO, and derivative cash flows.
Financing Activities
Cash flows provided by (used in) financing activities were approximately ($10.1 billion ),$12.8 billion and$6.4 billion during the years endedDecember 31, 2020 , 2019 and 2018, respectively. Financing activities consisted primarily of borrowings net of repayments under debt obligations, margin deposits net of returns, equity offerings, capital contributions net of distributions from noncontrolling interests in the equity of consolidated subsidiaries, and payment of dividends.
INTEREST RATE, CREDIT AND SPREAD RISK
We are subject to interest rate, credit and spread risk with respect to our investments. These risks are further described in "Quantitative and Qualitative Disclosures About Market Risk."
OFF-BALANCE SHEET ARRANGEMENTS
We have material off-balance sheet arrangements related to our non-consolidated securitizations of residential mortgage loans treated as sales in which we retained certain interests. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets. Our exposure to credit losses related to these non-recourse, off-balance sheet financings is limited to$1.4 billion . As ofDecember 31, 2020 , there was$14.2 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 ofDecember 31, 2020 . We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes, other than the entities described above. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment and do not intend to provide additional funding to any such entities. 118 --------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS
As ofDecember 31, 2020 , we had the following material contractual obligations: Contract Terms Debt Obligations Secured Financing Agreements Described under Note 12 to our Consolidated Financial Statements. Described under Note 12 to our Consolidated Financial Secured Notes and Bonds Payable Statements. Unsecured Senior Notes Described under Note 12 to our Consolidated Financial Statements. Other Contractual Obligations Management Agreement For its services, our Manager is entitled to management fees, incentive fees, and reimbursement for certain expenses, as defined in, and in accordance with the terms of, the Management Agreement. Such terms are described in Note 17 to our Consolidated Financial Statements. Interest Rate Swaps Described under Note 11 to our Consolidated Financial Statements. See Notes 16 and 20 to our Consolidated Financial Statements for information regarding commitments and material contracts entered into subsequent toDecember 31, 2020 , if any. As described in Note 16, we have committed to purchase certain future servicer advances. The actual amount of future advances is subject to significant uncertainty. However, we currently expect that net recoveries of servicer advances will exceed net fundings for the foreseeable future. This expectation is based on judgments, estimates and assumptions, all of which are subject to significant uncertainty as further described in "-Critical Accounting Policies and Use of Estimates-Servicer Advance Investments." In addition, the Consumer Loan Companies have invested in loans with an aggregate of$23.2 million of unfunded and available revolving credit privileges as ofDecember 31, 2020 . However, under the terms of these loans, requests for draws may be denied and unfunded availability may be terminated at management's discretion. INFLATION Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on 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
New Residential has five primary variables that impact its operating
performance: (i) the current yield earned on the Company's investments, (ii) the
interest expense under the debt incurred to finance the Company's investments,
(iii) the Company's operating expenses and taxes, (iv) the Company's realized
and unrealized gains or losses on the Company's investments, including any
impairment or reserve for expected credit losses and (v) income from its
origination and servicing businesses. "Core earnings" is a non-GAAP measure of
the Company's 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 the Company's performance
without taking into account: (i) realized and unrealized gains and losses, which
although they represent a part of the Company's recurring operations, are
subject to significant variability and are generally limited to a potential
indicator of future economic performance; (ii) incentive compensation paid to
the Company's manager; (iii) non-capitalized transaction-related expenses; and
(iv) deferred taxes, which are not representative of current operations.
The Company's definition of core earnings includes accretion on held-for-sale
loans as if they continued to be held-for-investment. Although the Company
intends 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, the Company continues to receive cash flows from such loans and
believes that it is appropriate to record a yield thereon. In addition, the
Company's definition of core earnings excludes all deferred taxes, rather than
just deferred taxes related to unrealized gains or losses, because the Company
believes deferred taxes are not representative of current operations. The
Company's definition of core earnings also limits accreted interest income on
RMBS where the Company receives par upon the exercise of associated call rights
based on the estimated value of the underlying collateral, net of related costs
including advances. The Company created this limit in order to be able to
119
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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.
The Company believes this amount represents the amount of accretion the Company
would have expected to earn on such bonds had the call rights not been
exercised.
Beginning January 1, 2020 , the Company's 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 the Company's
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
consolidation of, the debt related to the Company's investments in consumer
loans, and the consolidation of entities that own the Company's investments in
consumer loans, respectively, the Company continues to record a level yield on
those assets based on their original purchase price.
While incentive compensation paid to the Company's manager may be a material
operating expense, the Company excludes 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, the
Company notes that, as an example, in a given period, it 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, the Company 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. The Company believes
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 the Company's 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 the Company's 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 the Company acquires 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 Partners LLC
("Shellpoint") acquisition, the Company, through its 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, the Company reports
realized gains or losses on the sale of originated residential mortgage loans
and retention of mortgage servicing rights, which the Company believes 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 the
Company's operating performance, core earnings includes Shellpoint's GAAP net
income with the exception of the unrealized gains or losses due to changes in
valuation inputs and assumptions on MSRs owned by NewRez , and non-capitalized
transaction-related expenses. This change was not material to core earnings for
the quarter ended September 30, 2019 .
Management believes that the adjustments to compute "core earnings" specified
above allow investors and analysts to readily identify and track the operating
performance of the assets that form the core of the Company's activity, assist
in comparing the core operating results between periods, and enable investors to
evaluate the Company's current core performance using the same measure that
management uses to operate the business. Management also utilizes core earnings
as a measure in its decision-making process relating to improvements to the
underlying fundamental operations of the Company's 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 the Company's core operations for the reasons described herein. As
such, core earnings is not intended to reflect all of the Company's activity and
should be considered as only one of the factors used by management in assessing
the Company's performance, along with GAAP net income which is inclusive of all
of the Company's activities.
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The primary differences between core earnings and the measure the Company uses
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 the Company's incentive compensation measure
(either immediately or through amortization). In addition, the Company's
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, the Company's incentive compensation measure is intended to
reflect all realized results of operations. The Gain on Remeasurement of
Consumer Loans Investment was treated as an unrealized gain for the purposes of
calculating incentive compensation and was therefore excluded from such
calculation.
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 the Company's 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 Consolidation and
Results of Operations-Liquidity and Capital Resources." 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):
Year Ended
2020 2019 2018
Net (loss) income attributable to common stockholders
$ 550,015 $ 963,967 Adjustments for Non-Core Earnings: Impairment 123,612 35,344 90,641 Change in fair value of investments 743,239 254,335 (115,896) (Gain) loss on settlement of investments, net 947,316 (188,381) (96,319) Other (income) loss 132,741 1,756 11,425
Other income and impairment attributable to non-controlling interests
(5,585) (13,548) (22,247)
Non-capitalized transaction-related expenses 56,522 56,289 21,946
Incentive compensation to affiliate - 91,892 94,900
Preferred stock management fee to affiliate 11,439 2,642 -
Deferred taxes 15,029 38,207 (80,054)
Interest income on residential mortgage loans, held-for-sale 37,246
60,689 13,374
Limit on RMBS discount accretion related to called deals - (19,590) (58,581)
Adjust consumer loans to level yield (1,147) 5,239 (21,181)
Core earnings of equity method investees:
Excess mortgage servicing rights 11,415 11,905 13,183
Core Earnings $ 607,174 $ 886,794 $ 815,158
Net (Loss) Income Per Diluted Share $ (3.52) $ 1.34 $ 2.81 Core Earnings Per Diluted Share $ 1.46
$ 2.17 $ 2.38
Weighted Average Number of Shares of Common Stock Outstanding, Diluted 415,513,187 408,990,107 343,137,361
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