RITHM CAPITAL CORP. Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Residential. The following should be read in conjunction with the unaudited Consolidated Financial Statements and notes thereto, and with "Risk Factors."
Management's discussion and analysis of financial condition and results of operations is intended to allow readers to view our business from management's perspective by (i) providing material information relevant to an assessment of our financial condition and results of operations, including an evaluation of the amount and certainty of cash flows from operations and from outside sources, (ii) focusing the discussion on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition, including descriptions and amounts of matters that are reasonably likely, based on management's assessment, to have a material impact on future operations, and (iii) discussing the financial statements and other statistical data management believes will enhance the reader's understanding of our financial condition, changes in financial condition, cash flows and results of operations. As permitted by SEC Final Rule Release No. 33-10890, Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, this section discusses our results of operations for the current quarter endedMarch 31, 2021 compared to the immediately preceding prior quarter endedDecember 31, 2020 as well as the corresponding quarter of the prior year endedMarch 31, 2020 . In this report, we are changing the basis of comparison from the corresponding quarter of the prior year to the immediately preceding prior quarter, in order to provide readers greater insight into our quarterly performance. For our future Quarterly Reports on Form 10-Q, we will present a discussion of our results of operations for the current quarter compared to the immediately preceding prior quarter only.
GENERAL
New Residential is a publicly traded REIT primarily focused on opportunistically investing in, and actively managing, investments related to the residential real estate market. We seek to generate long-term value for our investors by using our investment expertise to identify and invest primarily in mortgage related assets, including operating companies, that offer attractive risk-adjusted returns. Our investment strategy also involves opportunistically pursuing acquisitions and seeking to establish strategic partnerships that we believe enable us to maximize the value of the mortgage loans we originate and service by offering products and services to customers, servicers, and other parties through the lifecycle of transactions that affect each mortgage loan and underlying residential property. For more information about our investment guidelines, see "Item 1. Business - Investment Guidelines" of our annual report on Form 10-K for the year endedDecember 31, 2020 .
As of
We have elected to be treated as a REIT for
OUR MANAGER
We are externally managed by an affiliate of
CAPITAL ACTIVITIES
OnFebruary 16, 2021 , we announced that our board of directors had authorized the repurchase of up to$200.0 million of our common stock throughDecember 31, 2021 . Repurchases may be made at any time and from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of our shares, trading volume, capital availability, our performance and general economic and market conditions. The share repurchase program may be suspended or discontinued at any time. No share repurchases have been made as of the filing of this report. Repurchases may impact our financial results, including fees paid to our Manager.
MARKET CONSIDERATIONS
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The COVID-19 pandemic and the measures undertaken to contain its spread
continued to affect economic activity in the U.S. and abroad during the first
quarter of 2021. Importantly, indicators of economic recovery demonstrated
progress, especially as vaccination options for Americans evolved. The U.S. real
gross domestic product ("GDP") continued to expand in the first quarter of 2021
at a faster pace than in the fourth quarter of 2020, although the level of real
GDP has likely not yet returned to the level seen before the onset of the
pandemic. Labor market conditions improved during the quarter, but employment
was still well below its level at the start of 2020. Total employment increased
solidly during the quarter after softening at the end of last year. The
unemployment rate fell to 6.0% at the end of March 2021 . This was the lowest
level since the onset of the COVID-19 pandemic and compared to 6.7% at the end
of December 2020 and a peak of 14.7% in April 2020 . Consumer price inflation-as
measured by the 12-month percentage change in the price index for personal
consumption expenditures ("PCE")-remained below 2%.
Consumer spending appeared to be increasing in the first quarter at a pace
considerably faster, on balance, than in the fourth quarter of last year. Real
PCE expanded strongly in January after declining over the preceding two months,
with spending likely boosted by federal stimulus payments sent out in early
January. The PCE pointed to a step-down in spending in February but spending in
March was boosted by additional federal stimulus payments from the $1.9 trillion
American Rescue Plan ("ARP"), which started to be distributed around the middle
of the month. In addition, the personal saving rate jumped to an even higher
level in January, and ongoing gains in labor earnings along with further fiscal
support pointed to additional increases in accumulated household savings.
Moreover, the preliminary reading of consumer sentiment moved up notably in
early March to its highest level over the past year, reflecting the growing
number of vaccinations and the enactment of the ARP, although consumer sentiment
remained below its levels from just before the onset of the pandemic.
The trend toward higher longer-term yields observed in recent months continued
to accelerate during the first quarter of 2021. Investors appeared to have
become more optimistic about an improving economic outlook against the backdrop
of progress on COVID-19 vaccinations, bolstered by passage of the ARP, signs of
stronger domestic spending, as well as accommodative monetary policy and
additional fiscal stimulus. The Treasury yield curve steepened during the first
quarter of 2021, with 5- and 10-year yields rising markedly. Measures of
inflation compensation increased moderately, on balance, continuing the trend
observed over recent months. Markets attributed the increases in longer-term
yields in part to increased investor optimism about the economic outlook and
expectations of higher Treasury debt issuance. Despite the spikes in equity
market volatility early in the quarter, spurred by heavy trading concentrated in
a few specific stocks and subsequent concerns over the rapid rise in longer-term
interest rates, broad equity price indexes rose on balance. Additionally,
consistent with the stronger economic outlook, spreads on high-yield corporate
bonds narrowed.
Financing conditions in the residential mortgage market tightened during the
quarter as mortgage rates moved off of their 2020 lows but remained
accommodative for stronger borrowers. Conventional 30-year rates moved to 3.361%
as of March 31, 2021 compared to 2.92% as of December 31, 2020 . Mortgage Bankers
Association forecasts for origination volume remained elevated relative to
historical levels. March estimates for full year 2021 production volume grew to
$3.2 trillion , up from the December estimate of $2.8 trillion but down from full
year 2020 volume of $3.8 trillion . 48% of 2021 volume is estimated to be
refinance volume compared to 63% in 2020. Credit was broadly available to
higher-score borrowers meeting standard conforming loan criteria but tightened
further for borrowers with lower credit scores. Signaling further improvement in
consumer strength was the decline in industry forbearance rates in the first
quarter to 4.9% from 5.3% at the end of 2020 as homeowners continued to
successfully find permanent solutions such as repayment plans, deferments, and
loan modifications.
Construction of single-family homes and home sales remained well above their
pre-pandemic levels. However, the incoming data for this sector were mixed.
Starts of single-family homes moved down notably during the quarter, in part
likely reflecting severe winter weather in February. Starts of multifamily units
also fell in February but by less than the strong increase seen in January.
Construction permits for single-family homes moved down, on balance, during the
quarter, pointing to some slowing in construction in coming months. Sales of
both new and existing homes increased further in January, and home prices
continued to rise briskly.
Financing conditions for businesses in capital markets remained broadly accommodative during the quarter, supported by low interest rates and high equity valuations. Gross and net corporate bond issuances were solid. Equity raised through traditional initial public offerings and seasoned equity offerings continued to be strong, and initial equity offerings by special purpose acquisition companies remained exceptionally high.
Corporate earnings continued to recover while the credit quality of corporations
improved further. Corporate bond defaults declined in December and January and
reached levels substantially below their 2019 average. In addition, the volume
of corporate credit rating upgrades modestly outpaced downgrades during the
quarter. Market indicators of future default expectations moved lower.
60
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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
mid-March 2020 by the ongoing COVID-19 pandemic. While the health of the overall
economy continued to show signs of improvement during the first quarter of 2021,
economic progress may stall due to the ongoing uncertainty regarding the
sustainability of reopening plans, fears regarding any additional COVID-19 waves
and uncertainty regarding additional federal stimulus.
The following table summarizes the
Three Months Ended
March 31, June 30, March 31,
2021 December 31, 2020 September 30, 2020 2020 2020
(Percent change from the preceding quarter)
Real GDP 6.4 % 4.3 % 33.4 % (31.4) % (5.0) %
The following table summarizes the U.S. unemployment rate according to the U.S.
Department of Labor :
March 31, September 30, June 30, March 31,
2021 December 31, 2020 2020 2020 2020
Unemployment rate 6.00 % 6.70 % 7.90 % 11.10 % 4.40 %
The following table summarizes the 10-year Treasury rate and the 30-year fixed
mortgage rates:
March 31, December 31, September 30, June 30, March 31,
2021 2020 2020 2020 2020
10-year U.S. Treasury rate 1.74 % 0.93 % 0.69 % 0.66 % 0.70 %
30-year fixed mortgage rate 3.08 % 2.68 %
2.89 % 3.16 % 3.45 %
We believe the estimates and assumptions underlying our Consolidated Financial Statements are reasonable and supportable based on the information available as ofMarch 31, 2021 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as ofMarch 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may materially differ from those estimates. The COVID-19 pandemic and its impact on the current financial, economic and capital markets environment, and future developments in these and other areas present uncertainty and risk with respect to our financial condition, results of operations, liquidity and ability to pay distributions. PROPOSED CHANGES TO LIBOR The London Interbank Offered Rate ("LIBOR") is used extensively in theU.S. and globally as a "benchmark" or "reference rate" for various commercial and financial contracts, including corporate and municipal bonds and loans, floating rate mortgages, asset-backed securities, consumer loans, and interest rate swaps and other derivatives. It is expected that a number of private-sector banks currently reporting information used to set LIBOR will stop doing so after 2021 when their current reporting commitment ends, which could either cause LIBOR to stop publication immediately or cause LIBOR's regulator to determine that its quality has degraded to the degree that it is no longer representative of its underlying market. TheU.S. and other countries are currently working to replace LIBOR with alternative reference rates. In theU.S. , the Alternative Reference Rates Committee ("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. 61 -------------------------------------------------------------------------------- In preparation for the phase-out of LIBOR, we adopted and implemented the SOFR index for our Freddie Mac and Fannie Mae adjustable-rate mortgages ("ARMs"). For debt facilities that do not mature prior to the phase-out of LIBOR, we have implemented amending terms to transition to an alternative benchmark. We continue to evaluate the transitional impact to serviced ARMs.
OUR PORTFOLIO
Our portfolio, as of
Servicing and Origination Residential Securities and Loans
MSR Related Total Servicing Real Estate Residential
Origination Servicing Investments Elimination(A) and Origination Securities Mortgage Loans Consumer Loans Corporate Total
March 31, 2021
Investments $ 3,465,886 $ - $ 5,965,350 $ - $ 9,431,236
187,233 97,057 485,627 - 769,917 210,745 17,678 8,889 31,253 1,038,482
Restricted cash 12,679 39,926 34,448 - 87,053 17,409 96 31,478 - 136,036
Other assets 987,931 167,445 4,060,339 - 5,215,715 660,267 81,295 36,644 46,286 6,040,207
Goodwill 11,836 12,540 5,092 - 29,468 - - - - 29,468
Total assets $ 4,665,565 $ 316,968 $ 10,550,856 $ - $ 15,533,389 $ 15,494,578 $ 3,362,626 $ 715,997 $ 77,539 $ 35,184,129
Debt $ 3,300,495 $ 5,391 $ 5,861,546 $ - $ 9,167,432 $ 14,356,673 $ 2,515,219 $ 591,011 $ 541,966 $ 27,172,301
Other liabilities 546,295 51,504 1,498,685 - 2,096,484 7,283 146,637 3,251 136,360 2,390,015
Total liabilities 3,846,790 56,895 7,360,231 - 11,263,916 14,363,956 2,661,856 594,262 678,326 29,562,316
Total equity 818,775 260,073 3,190,625 - 4,269,473 1,130,622 700,770 121,735 (600,787) 5,621,813Noncontrolling interests in equity of consolidated subsidiaries 17,187 - 39,834 - 57,021 - - 41,963 - 98,984 Total New Residential stockholders' equity$ 801,588 $ 260,073 $ 3,150,791 $ -$ 4,212,452 $ 1,130,622 $ 700,770 $ 79,772 $ (600,787) $ 5,522,829 Investments in equity method investees $ - $ -$ 126,095 $ -$ 126,095 $ - $ - $ - $ -$ 126,095 Operating Investments Origination For the three months endedMarch 31, 2021 ,NewRez's loan origination volume was$27.2 billion , up from$23.9 billion in the quarter prior and up from$11.4 billion in the year prior corresponding quarter. Funded volumes in Direct to Consumer, Wholesale and Correspondent all increased quarter over quarter while Joint Venture declined slightly due to seasonal factors. Additionally, 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. During the three months endedMarch 31, 2021 , the continued lower interest rate environment, increased refinance activity by borrowers, increasedNewRez recapture rates and increased market share helped drive growth.NewRez's quarterly market share grew to 2.49% from 1.89% in the quarter prior. Refinance activity remained heightened during the quarter, with refinance originations comprising 73% ofNewRez's first quarter of 2021 funded origination volume, up slightly from 71% in the prior quarter and 67% in the year prior. Gain on sale margins in the three-month period endedMarch 31, 2021 were 1.43%, 14 bps lower than 1.57% for the three-month period endedDecember 31, 2020 and 15 bps higher compared to 1.28% for same period in 2020. We continue to expect gain on sale margins to revert to historical levels, especially in third-party originated channels, as industry capacity adjusts to demand. Included in our Origination segment are the financial results of two affiliated businesses,E Street Appraisal Management LLC ("E Street") andAvenue 365 Lender Services, LLC ("Avenue 365"). E Street offers appraisal valuation services and Avenue 365 provides title insurance and settlement services toNewRez .NewRez , through its strategic relationship with Salesforce, a global leader in Customer Relationship Management (CRM), is developing a more integrated experience for customers across our origination and servicing operations.NewRez will also serve as an industry design advisor to Salesforce for its mortgage solutions platform. The partnership is a key initiative that will further the organization's focus on growing recapture volume. 62 --------------------------------------------------------------------------------
The following table provides loan production by channel and product:
Unpaid Principal Balance for the
Three Months Ended
December 31, QoQ YoY
(in millions) March 31, 2021 2020 March 31, 2020 Change Change
Production by Channel
Joint Venture $ 1,049 $ 1,210 $ 581 $ (161) $ 468
Direct to Consumer / Retention 5,674 4,276 2,115 1,398 3,559
Wholesale 2,672 2,330 1,665 342 1,007
Correspondent 17,817 16,040 7,053 1,777 10,764
Total Production by Channel $ 27,212 $ 23,856 $ 11,414 $ 3,356 $ 15,798
Production by Product
Agency $ 19,583 $ 16,107 $ 5,478 $ 3,476 $ 14,105
Government 7,474 7,570 5,367 (96) 2,107
Non-QM - - 365 - (365)
Non-Agency 138 160 190 (22) (52)
Other 17 19 14 (2) 3
Total Production by Product $ 27,212 $ 23,856 $ 11,414 $ 3,356 $ 15,798
% Purchase 27 % 29 % 33 %
% Refinance 73 % 71 % 67 %
The following table provides information regarding Gain on Originated Mortgage
Loans, Held-for-Sale, Net:
QoQ YoY
(dollars in thousands) March 31, 2021 December 31, 2020 March 31, 2020 Change Change
Gain on originated mortgage loans, held-for-sale, net(A)(B)(C)(D) $ 384,423$ 403,854 $ 158,215$ (19,431) $
226,208
Pull through adjusted lock volume $ 26,906,676$ 25,751,396 $ 12,381,939$ 1,155,280 $
14,524,737
Gain on originated mortgage loans, as a percentage of pull through adjusted lock volume, by channel: Direct to Consumer 3.24 % 3.43 % 2.01 % Joint Venture 4.40 % 4.99 % 3.11 % Wholesale 1.71 % 2.59 % 0.54 % Correspondent 0.33 % 0.42 % 0.71 % Total gain on originated mortgage loans, as a percentage of pull through adjusted lock volume 1.43 % 1.57 % 1.28 % (A)Includes realized gains on loan sales and related new MSR capitalization, changes in repurchase reserves, changes in fair value of IRLCs, changes in fair value of loans held for sale and economic hedging gains and losses. (B)Includes loan origination fees of$658.3 million ,$705.5 million , and$277.0 million for the three months endedMarch 31, 2021 ,December 31, 2020 , andMarch 31, 2020 , respectively. (C)Excludes$19.0 million ,$28.4 million , and$15.4 million of Gain on Originated Mortgage Loans, Held-for-Sale, Net for the three months endedMarch 31, 2021 ,December 31, 2020 , andMarch 31, 2020 , respectively, related to the MSR Related Investments, Servicing, and Residential Mortgage Loans segments, as well as intercompany eliminations (Note 8 to the Consolidated Financial Statements). (D)Excludes mortgage servicing rights revenue on recaptured loan volume delivered back to NRM. Total Gain on Originated Mortgage Loans, Held-for-Sale, Net decreased for the three months endedMarch 31, 2021 compared the three months endedDecember 31, 2020 primarily driven by tighter margins. Total Gain on Originated Mortgage Loans, 63 -------------------------------------------------------------------------------- Held-for-Sale, Net increased for the three months endedMarch 31, 2021 compared to the same period in 2020 primarily driven by the higher volume from all our channels. Servicing Our servicing business operates through a performing loan servicing division, NewRez Servicing and a special servicing division, Shellpoint Mortgage Servicing ("SMS"). NewRez Servicing services performing Agency and government-insured loans. SMS services delinquent Agency loans and Non-Agency loans on behalf of the owners of the underlying mortgage loans. As ofMarch 31, 2021 ,NewRez Servicing serviced$211.8 billion UPB of loans and Shellpoint Mortgage Servicing serviced$92.8 billion UPB of loans, for a total servicing portfolio of$304.6 billion UPB, representing a 2.3% increase fromDecember 31, 2020 and a 10.4% increase fromMarch 31, 2020 . The combined servicing represents 1,709,245 loans, a 1.4% decrease fromDecember 31, 2020 and a 9.1% increase fromMarch 31, 2020 . As ofMarch 31, 2021 , approximately 230,000 homeowners serviced byNewRez Servicing and SMS had indicated that since the onset of the COVID-19 pandemic they are or were impacted by COVID-19. As ofMarch 31, 2021 , only 60,000 of the forbearance plans (representing 26% of the population) remained active. Active forbearances were essentially flat relative toDecember 31, 2020 . 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 ofMarch 31, 2021 , active forbearances in theNewRez /SMS servicing portfolio was 3.5% of loans compared to 3.4% of loans as ofDecember 31, 2020 and compared to 10.5% as of 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$500 to a maximum of$1,000 per loan, subject to certain conditions, based upon the final form of the forbearance resolution. SinceMarch 2020 our cost to service has increased in connection with supporting performing homeowners as they navigate forbearance programs and due to a rise in delinquencies. Higher costs are expected to be offset by incentive and performance fees in the future as delinquencies are resolved. Higher costs are also expected to decline as COVID-19 related forbearances wane and consumer financial health improves. Direct cost to service is comprised of costs associated with administering loans and does not include corporate overhead allocations. Annualized direct cost to service per current loan increased 1% quarter-over-quarter to$74 . Annualized direct cost to service per current and delinquent loan increased 5% quarter-over-quarter to$140 . Both of these increases were related to seasonal factors. The table below provides the mix of our serviced assets portfolio between subserviced performing servicing on behalf of New Residential, NRM orNewRez (labeled as "Performing Servicing") and subserviced non-performing, or special servicing (labeled as "Special Servicing") for third parties and delinquent loans subserviced for other New Residential subsidiaries for the periods presented. 64 --------------------------------------------------------------------------------
Unpaid Principal Balance
December 31, QoQ YoY
(in millions) March 31, 2021 2020 March 31, 2020 Change Change
Performing Servicing
MSR Assets $ 205,487 $ 199,405
6,283 5,041 2,474 1,242 3,809
Total Performing Servicing 211,770 204,446 180,583 7,324 31,187
Special Servicing
MSR Assets 16,748 21,475 14,508 (4,727) 2,240
Acquired Residential Whole Loans 1,456 4,952 6,700 (3,496) (5,244)
Third Party 74,613 66,892 74,031 7,721 582
Total Special Servicing 92,817 93,319 95,239 (502) (2,422)
Total Servicing Portfolio $ 304,587 $ 297,765 $ 275,822 $ 6,822 $ 28,765
Agency Servicing
MSR Assets $ 157,598 $ 157,210
- - - - -
Third Party 14,978 15,566 11,386 (588) 3,592
Total Agency Servicing 172,576 172,776 149,565 (200) 23,011
Government Servicing
MSR Assets 57,880 57,148 53,905 732 3,975
Acquired Residential Whole Loans - - - - -
Third Party - - 1,718 - (1,718)
Total Government Servicing 57,880 57,148 55,623 732 2,257
Non-Agency (Private Label)
Servicing
MSR Assets 6,757 6,522 533 235 6,224
Acquired Residential Whole Loans 7,739 9,993 9,174 (2,254) (1,435)
Third Party 59,635 51,326 60,927 8,309 (1,292)
Total Non-Agency (Private Label)
Servicing 74,131 67,841 70,634 6,290 3,497
Total Servicing Portfolio $ 304,587 $ 297,765 $ 275,822 $ 6,822 $ 28,765
Three Months Ended
December 31, QoQ YoY
(in thousands) March 31, 2021 2020 March 31, 2020 Change Change
Base Servicing Fees
MSR Assets $ 46,440 $ 43,407
1,077 3,350 2,191 (2,273) (1,114)
Third Party 27,112 32,453 31,407 (5,341) (4,295)
Total Base Servicing Fees $ 74,629 $ 79,210 $ 60,546 $ (4,581) $ 14,083
Other Fees
Incentive fees $ 20,249 $ 23,627 $ 8,666 $ (3,378) $ 11,583
Ancillary fees 10,982 10,449 9,034 533 1,948
Boarding fees 1,936 3,438 4,889 (1,502) (2,953)
Other fees 5,719 5,667 4,111 52 1,608
Total Other Fees(A) $ 38,886 $ 43,181 $ 26,700 $ (4,295) $ 12,186
Total Servicing Fees $ 113,515 $ 122,391 $ 87,246 $ (8,876) $ 26,269
65-------------------------------------------------------------------------------- (A)Includes other fees earned from third parties of$16.3 million ,$7.0 million , and$9.8 million for the three months endedMarch 31, 2021 ,December 31, 2020 , andMarch 31, 2020 , respectively.
MSR Related Investments
MSRs and MSR Financing Receivables
As ofMarch 31, 2021 , we had$5.0 billion carrying value of MSRs and MSR Financing Receivables. As ofMarch 31, 2021 , our Full and Excess MSR portfolio decreased to$514 billion UPB from$536 billion UPB as ofDecember 31, 2020 and$645 billion as ofMarch 31, 2020 . Full MSRs as ofMarch 31, 2021 decreased to$419 billion from$435 billion UPB as ofDecember 31, 2020 and$527 billion UPB as ofMarch 31, 2020 . Excess MSRs as ofMarch 31, 2021 decreased to$95 billion UPB from$101 billion UPB as ofDecember 31, 2020 and from$118 billion UPB as ofMarch 31, 2020 . The decrease in portfolio size during the periods presented was predominantly a result of prepayments, partially offset by originations. We finance our MSRs and MSR financing receivables with short- and medium-term bank and public capital markets notes. These borrowings are primarily recourse debt and bear both fixed and variable interest rates offered by the counterparty for the term of the notes of a specified margin over LIBOR. The capital markets notes are typically issued with a collateral coverage percentage, which is a quotient expressed as a percentage equal to the aggregate note amount divided by the market value of the underlying collateral. The market value of the underlying collateral is generally updated on a quarterly basis and if the collateral coverage percentage becomes greater than or equal to a collateral trigger, generally 90%, we may be required to add funds, pay down principal on the notes, or add additional collateral to bring the collateral coverage percentage below 90%. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday."
See Note 11 to our Consolidated Financial Statements for further information regarding financing of our MSRs and MSR Financing Receivables.
We have contracted with certain subservicers and, in relation to certain MSR purchases, interim subservicers, to perform the related servicing duties on the residential mortgage loans underlying our MSRs. As ofMarch 31, 2021 , these subservicers includeLoanCare , PHH, Mr. Cooper, and Flagstar, which subservice 15.7%, 15.4%, 15.3%, and 0.6% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 53.0% of the underlying UPB of the related mortgages is subserviced byNewRez (Note 1 to our Consolidated Financial Statements). We have entered into agreements with certain subservicers pursuant to which we are entitled to receive the MSR on any refinancing by the subservicer or byNewRez of a loan in the related original portfolio. We are generally obligated to fund all future servicer advances related to the underlying pools of mortgage loans on our MSRs and MSR Financing Receivables. Generally, we will advance funds when the borrower fails to meet, including forbearances, contractual payments (e.g. principal, interest, property taxes, insurance). We will also advance funds to maintain and report foreclosed real estate properties on behalf of investors. Advances are recovered through claims to the related investor and subservicers. Pursuant to our servicing agreements, we are obligated to make certain advances on mortgage loans to be in compliance with applicable requirements. In certain instances, the subservicer is required to reimburse us for any advances that were deemed nonrecoverable or advances that were not made in accordance with the related servicing contract. We finance our servicer advances with short- and medium-term collateralized borrowings. These borrowings are non-recourse committed facilities that are not subject to margin calls and bear both fixed and variable interest rates offered by the counterparty for the term of the notes, generally less than one year, of a specified margin over LIBOR. See Note 11 to our Consolidated Financial Statements for further information regarding financing of our servicer advances.
See Note 5 to our Consolidated Financial Statements for further information regarding our MSR Financing Receivables.
66
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The table below summarizes our MSRs and MSR Financing Receivables as of
March 31, 2021 .
Weighted Average MSR
(dollars in millions) Current UPB (bps) Carrying Value
MSRs
GSE $ 290,005.8 28 bps $ 3,199.9
Non-Agency 6,124.7 52 15.4
Ginnie Mae 57,996.5 44 808.2
MSR Financing Receivables
Non-Agency 64,387.4 48 1,021.8
Total $ 418,514.4 34 bps $ 5,045.3
The following table summarizes the collateral characteristics of the loans
underlying our MSRs and MSR Financing Receivables as of March 31, 2021 (dollars
in thousands):
Collateral Characteristics
Three Month Three Month Three Month Three Month
Current Carrying Current Principal Average Loan Age Adjustable Rate Average Average Average Average
Amount Balance Number of Loans WA FICO Score(A) WA Coupon WA Maturity (months) (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
MSRs
GSE $ 3,199,914 $ 290,005,816 1,872,667 746 4.0 % 264 68 2.6 % 31.7 % 31.6 % 0.2 % 14.6 %
Non-Agency 15,409 6,124,672 126,741 667 6.7 % 196 156 3.3 % 9.4 % 6.4 % 3.2 % 52.4 %
Ginnie Mae 808,236 57,996,508 287,885 689 3.5 % 325 32 2.0 % 24.8 % 24.6 % 0.2 % 35.5 %
MSR Financing Receivables
Non-Agency 1,021,780 64,387,370 483,256 640 4.1 % 302 182 12.9 % 10.5 % 9.4 % 1.2 % 3.8 %
Total $ 5,045,339 $ 418,514,366 2,770,549 721 4.0 % 277 82 4.1 % 27.2 % 26.8 % 0.4 % 16.4 %
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 1.0 % 0.3 % 3.5 % 0.3 % - % 0.3 %
Non-Agency 2.9 % 1.1 % 4.2 % 4.0 % 0.7 % 3.0 %
Ginnie Mae 2.1 % 0.8 % 6.7 % 0.7 % - % 0.8 %
MSR financing receivables
Non-Agency 4.7 % 1.8 % 2.1 % 6.6 % 0.9 % 2.4 %
Total 1.8 % 0.6 % 3.8 % 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.
67
--------------------------------------------------------------------------------Excess MSRs
The tables below summarize the terms of our Excess MSRs:
Summary of Direct Excess MSRs as of March 31, 2021
MSR Component(A) Excess MSR
Weighted
Current UPB Weighted Average Average Excess Carrying Value
(billions) MSR (bps) MSR (bps) Interest in Excess MSR(%) (millions)
Agency $ 32.4 29 bps 21 bps 32.5% - 66.7% $ 157.6
Non-Agency(B) 36.0 35 15 33.3% - 100% 145.9
Total/Weighted Average $ 68.4 32 bps 18 bps $ 303.5
(A)The MSR is a weighted average as of March 31, 2021 , and the Excess MSR
represents the difference between the weighted average MSR and the basic fee
(which fee remains constant).
(B)Serviced by Mr. Cooper and SLS, we also invested in related Servicer advance
investments, including the basic fee component of the related MSR (Note 6 to our
Consolidated Financial Statements) on $24.4 billion UPB underlying these Excess
MSRs.
Summary of Excess MSRs Through Equity Method Investees as of March 31, 2021
MSR Component(A)
Weighted
Average New Residential Investee New Residential
Current UPB Weighted Average Excess MSR Interest in Interest in Effective Ownership Investee Carrying
(billions) MSR (bps) (bps) Investee (%) Excess MSR (%) (%) Value (millions)
Agency $ 27.0 33 bps 22 bps 50.0 % 66.7 % 33.3 % $ 177.4 (A)The MSR is a weighted average as of
The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSRs as ofMarch 31, 2021 (dollars in thousands): Collateral Characteristics Current Three Month Three Month Three Month Three Month Carrying Current Principal Average Loan Age Adjustable Rate Average Average Average Average Amount Balance Number of Loans WA FICO Score(A) WA Coupon WA Maturity (months) (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate Agency Original Pools$ 105,017 $ 21,675,754 174,031 721 4.5 % 230 134 1.6 % 25.3 % 24.8 % 0.7 % 18.3 % Recaptured Loans 52,616 10,697,644 66,735 726 4.1 % 266 49 - % 25.5 % 25.1 % 0.5 % 35.8 %$ 157,633 $ 32,373,398 240,766 722 4.4 % 243 104 1.1 % 25.4 % 24.9 % 0.6 % 24.3 % Non-Agency(F) Mr. Cooper and SLS Serviced: Original Pools$ 122,890 $ 32,428,038 187,525 666 4.3 % 270 180 9.1 % 15.8 % 13.7 % 2.4 % 11.2 % Recaptured Loans 23,045 3,565,922 17,005 736 3.9 % 274 32 0.1 % 30.3 % 30.3 % - % 38.9 %$ 145,935 $ 35,993,960 204,530 673 4.2 % 271 166 7.7 % 17.1 % 15.2 % 2.2 % 16.1 %
Total/Weighted Average(H)
445,296 696 4.3 % 258 138 4.2 % 21.0 % 19.8 % 1.5 % 21.0 %
68--------------------------------------------------------------------------------
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(G) 60 Days(G) 90+ Days(G) Foreclosure Owned Bankruptcy
Agency
Original Pools 2.1 % 0.7 % 6.3 % 0.5 % 0.1 % 0.1 %
Recaptured Loans 1.4 % 0.5 % 5.3 % 0.1 % - % 0.1 %
1.8 % 0.6 % 6.0 % 0.3 % 0.1 % 0.1 %Non-Agency(F)
Mr. Cooper and SLS Serviced:
Original Pools 10.7 % 5.9 % 4.8 % 5.3 % 0.5 % 1.4 %
Recaptured Loans 1.4 % 0.3 % 4.1 % 0.1 % - % - %
9.9 % 5.4 % 4.7 % 4.8 % 0.4 % 1.3 %
Total/Weighted Average(H) 6.2 % 3.2 % 5.3 % 2.8 % 0.3 % 0.7 %
(A)The WA FICO score is based on the weighted average of information provided by
the loan servicer on a monthly basis. The loan servicer generally updates the
FICO score when loans are refinanced or become delinquent.
(B)Adjustable rate mortgage % represents the percentage of the total principal
balance of the pool that corresponds to adjustable rate mortgages.
(C)Three-month average CPR, or the constant prepayment rate, represents the
annualized rate of the prepayments during the quarter as a percentage of the
total principal balance of the pool.
(D)Three-month average CRR, or the voluntary prepayment rate, represents the
annualized rate of the voluntary prepayments during the quarter as a percentage
of the total principal balance of the pool.
(E)Three-month average CDR, or the involuntary prepayment rate, represents the
annualized rate of the involuntary prepayments (defaults) during the quarter as
a percentage of the total principal balance of the pool.
(F)We also invested in related Servicer advance investments, including the basic
fee component of the related MSR (Note 6 to our Consolidated Financial
Statements) on $24.4 billion UPB underlying these Excess MSRs.
(G)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent
the percentage of the total principal balance of the pool that corresponds to
loans that are delinquent by 30-59 days, 60-89 days or 90 or more days,
respectively.
(H)Weighted averages exclude collateral information for which collateral data
was not available as of the report date.
The following table summarizes the collateral characteristics as of March 31,
2021 of the loans underlying Excess MSRs made through joint ventures accounted
for as equity method investees (dollars in thousands). For each of these pools,
we own a 50% interest in an entity that invested in a 66.7% interest in the
Excess MSRs.
Collateral Characteristics
Current Current New Residential Three Month Three Month Three Month Three Month
Carrying Principal Effective Ownership Number Average Loan Adjustable Rate Average Average Average Average
Amount Balance (%) of Loans WA FICO Score(A) WA Coupon WA Maturity (months) Age (months) Mortgage %(B) CPR(C) CRR(D) CDR(E) Recapture Rate
Agency
Original Pools $ 84,800 $ 14,915,283 33.3 % 159,489 703 5.1 % 221 153 1.3 % 20.9 % 19.8 % 1.4 % 20.5 %
Recaptured Loans 92,608 12,110,637 33.3 % 90,764 710 4.1 % 261 57 - % 23.9 % 23.2 % 1.1 % 40.5 %
Total/Weighted Average(G)
250,253 706 4.7 % 239 110 1.3 % 22.3 % 21.3 % 1.3 % 30.3 %
Collateral Characteristics
Delinquency Real
Loans in Estate Loans in
30 Days(F) 60 Days(F) 90+ Days(F) Foreclosure Owned BankruptcyAgency Original Pools 3.0 % 0.9 % 6.0 % 0.7 % 0.1 % 0.2 % Recaptured Loans 1.9 % 0.7 % 5.5 % 0.1 % - % 0.1 % Total/Weighted Average(G) 2.5 % 0.8 % 5.8 % 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. 69 -------------------------------------------------------------------------------- (B)Adjustable rate mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages. (C)Three-month average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool. (D)Three-month average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool. (E)Three-month average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool. (F)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively. (G)Weighted averages exclude collateral information for which collateral data was not available as of the report date.
Servicer Advance Investments
The following is a summary of our Servicer Advance Investments, including the
right to the basic fee component of the related MSRs (dollars in thousands):
March 31, 2021
Servicer Advances to
UPB of Underlying UPB of Underlying
Amortized Cost Carrying Residential Outstanding Residential Mortgage
Basis Value(A) Mortgage Loans Servicer Advances Loans
Servicer advance investments
Mr. Cooper and SLS serviced
pools $ 492,831 $ 517,557 $ 24,439,045 $ 440,306 1.8 %
(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 three months ended
Three Months
Ended
March 31, 2021 Loan-to-Value ("LTV")(A) Cost of Funds(B)
Change in Fair Face Amount of
Weighted Average Weighted Average Life Value Recorded Secured Notes and
Discount Rate (Years)(C) in Other Income Bonds Payable Gross Net(D) Gross Net
Servicer advance
investments(E) 5.2 % 6.3 $ (371) $ 403,570 88.9 % 88.2 % 1.4 % 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:
March 31, 2021
Principal and interest advances $ 79,423
Escrow advances (taxes and insurance advances) 186,275
Foreclosure advances 174,608
Total $ 440,306 MSR Related Ancillary Business
Our MSR related investments segment also includes the activity from several wholly-owned subsidiaries or minority investments in companies that perform various services in the mortgage and real estate industries. Our subsidiary Guardian is a national provider of field services and property management services. We also made a strategic minority investment in Covius,
70
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a provider of various technology-enabled services to the mortgage and real
estate industries. As of
Agency RMBS
The following table summarizes our Agency RMBS portfolio as ofMarch 31, 2021 (dollars in thousands): Gross Unrealized Percentage of Outstanding Outstanding Face Amortized Cost Total Amortized Carrying Weighted Average Repurchase Asset Type Amount Basis Cost Basis Gains Losses Value(A) Count Life (Years) 3-Month CPR(B) Agreements Agency RMBS$ 13,443,593 $ 13,956,269 100.0 %$ 9,207 $ (407,245) $ 13,558,231 59 7.4 8.5 %$ 13,641,520 (A)Fair value, which is equal to carrying value for all securities. (B)Three month average constant prepayment rate represents the annualized rate of the prepayments during the quarter as a percentage of the total amortized cost basis.
The following table summarizes the net interest spread of our Agency RMBS
portfolio for the three months ended
Net Interest Spread(A)
Weighted Average Asset Yield 2.19 %
Weighted Average Funding Cost 0.23 %
Net Interest Spread 1.96 %
(A)The Agency RMBS portfolio consists of 100.0% fixed rate securities (based on amortized cost basis). See table above for details on rate resets of the floating rate securities.
We finance our investments in Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. AtMarch 31, 2021 andDecember 31, 2020 , the Company pledged Agency RMBS with a carrying value of approximately 13.6 billion and$13.8 billion , respectively, as collateral for borrowings under repurchase agreements. To the extent available on desirable terms, we expect to continue to finance our acquisitions of Agency RMBS with repurchase agreement financing. See Note 11 to our Consolidated Financial Statements for further information regarding financing of our Agency RMBS.
Non-Agency RMBS
The following table summarizes our Non-Agency RMBS portfolio as ofMarch 31, 2021 (dollars in thousands): Gross Unrealized Outstanding Outstanding Face Amortized Cost Carrying Repurchase Asset Type Amount Basis Gains Losses Value(A) Agreements Non-Agency RMBS$ 18,045,244 $ 977,194 $ 105,302 $ (34,569) $ 1,047,926 $ 629,986
(A)Fair value, which is equal to carrying value for all securities.
71
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The following tables summarize the characteristics of our Non-Agency RMBS
portfolio and of the collateral underlying our Non-Agency RMBS as of March 31,
2021 (dollars in thousands):
Non-Agency RMBS Characteristics(A)
Percentage of
Average Minimum Outstanding Face Amortized Cost Total Amortized Weighted Average Weighted Average
Vintage(B) Rating(C) Number of Securities Amount Basis Cost Basis Carrying Value Principal Subordination(D) Excess Spread(E) Life (Years) Coupon(F)
Pre-2006 NR 95 $ 90,619 $ 16,419 1.7 % $ 16,183 - % - % 4.8 6.9 %
2006 N/A 15 91,603 - - % 1 - % - % - 0.1 %
2007 NR 16 166,986 2,815 0.3 % 4,138 - % - % 2.8 0.1 %
2008 and later BBB 445 17,682,871 944,727 98.0 % 1,013,611 23.8 % - % 3.7 2.6 %
Total/weighted average BBB 571 $ 18,032,079 $ 963,961 100.0 % $ 1,033,933 23.2 % - % 3.7 2.6 %
Collateral Characteristics(A)(G)
Cumulative Losses to
Vintage(B) Average Loan Age (years) Collateral Factor(H) 3-Month CPR(I) Delinquency(J) Date
Pre-2006 13.4 0.06 6.0 % 10.7 % 9.4 %
2006 14.6 0.20 9.2 % - % 88.9 %
2007 13.8 0.15 11.8 % 16.2 % 25.8 %
2008 and later 13.8 0.68 16.0 % 5.3 % 0.5 %
Total/weighted average 13.8 0.67 15.8 % 5.4 % 20.6 %
(A)Excludes $12.7 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 287
bonds with a carrying value of $324.5 million , which either have never been
rated or for which rating information is no longer provided. We had no assets
that were on negative watch for possible downgrade by at least one rating agency
as of March 31, 2021 .
(D)The percentage of amortized cost basis of securities and residual interests
that is subordinate to our investments. This excludes interest-only bonds.
(E)The current amount of interest received on the underlying loans in excess of
the interest paid on the securities, as a percentage of the outstanding
collateral balance for the quarter ended March 31, 2021 .
(F)Excludes residual bonds, and certain other Non-Agency bonds, with a carrying
value of $27.9 million and $2.4 million , respectively, for which no coupon
payment is expected.
(G)The weighted average loan size of the underlying collateral is $249.8
thousand .
(H)The ratio of original UPB of loans still outstanding.
(I)Three month average constant prepayment rate and default rates.
(J)The percentage of underlying loans that are 90+ days delinquent, or in
foreclosure or considered REO.
The following table summarizes the net interest spread of our Non-Agency RMBS
portfolio for the three months ended
Net Interest Spread(A)
Weighted average asset yield 3.59 %
Weighted average funding cost 3.33 %
Net interest spread 0.26 %
(A)The Non-Agency RMBS portfolio consists of 26.1% floating rate securities and 73.9% fixed rate securities (based on amortized cost basis).
We finance our investments in Non-Agency RMBS with short-term borrowings under master repurchase agreements. These borrowings generally bear interest rates offered by the counterparty for the term of the proposed repurchase transaction (e.g., 30 days, 60 days, etc.) of a specified margin over one-month LIBOR. The repurchase agreements represent uncommitted financing. AtMarch 31, 2021 andDecember 31, 2020 , the Company pledged Non-Agency RMBS with a carrying value of approximately$1.3 billion and$1.5 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements is subject to daily mark-to-market fluctuations and margin calls. In 72 -------------------------------------------------------------------------------- addition, a portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 11 to our Consolidated Financial Statements for further information regarding financing of our Non-Agency RMBS.
Call Rights
We hold a limited right to cleanup call options with respect to certain securitization trusts serviced or master serviced by Mr. Cooper whereby, when the UPB of the underlying residential mortgage loans falls below a pre-determined threshold, we can effectively purchase the underlying residential mortgage loans at par, plus unreimbursed servicer advances, resulting in the repayment of all of the outstanding securitization financing at par, in exchange for a fee of 0.75% of UPB paid to Mr. Cooper at the time of exercise. We similarly hold a limited right to cleanup call options with respect to certain securitization trusts master serviced by SLS for no fee, and also with respect to certain securitization trusts serviced or master serviced by Ocwen subject to a fee of 0.5% of UPB on loans that are current or thirty (30) days or less delinquent, paid to Ocwen at the time of exercise. The 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 securities issued by the called trusts which we owned prior to such trusts' termination. Refer to Notes 8 and 16 in our Consolidated Financial Statements for further details on these transactions.
On
Refer to Note 16 for additional discussion regarding call rights and transactions with affiliates.
Residential Mortgage Loans
In March of 2020, we began selling assets to manage and generate liquidity and de-risk our balance sheet. To realign our balance sheet in reaction to increased market risk and raise liquidity, we reduced our exposure to acquired loan pools financed using repurchase agreements. As ofMarch 31, 2021 , we had approximately$6.7 billion outstanding face amount of residential mortgage loans (see below). These investments were financed with secured financing agreements with an aggregate face amount of approximately$5.1 billion and secured notes and bonds payable with an aggregate face amount of approximately$0.7 billion . We acquired these loans through open market purchases, through loan origination, as well as through the exercise of call rights and acquisitions. 73 --------------------------------------------------------------------------------
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 $ 708,746 $ 656,752 11,806 6.0 % 5.5
Acquired reverse mortgage loans(E)(F)
28 7.6 % 4.3
Acquired performing loans(G)(I) 132,431 126,814 3,155 5.5 %
4.4
Acquired non-performing loans(H)(I) 234,527 190,590 1,536 5.5 %
3.3
Total residential mortgage loans, held-for-sale, at lower of cost or market$ 379,186 $ 323,079 4,719 5.6 %
3.7
Acquired performing loans(G)(I)$ 1,706,522 $ 1,728,490 8,569 3.7 %
10.0
Acquired non-performing loans 455,723.0 406,100 2 5.2 % 3.0 Originated loans 3,420,363 3,465,886 12,919 2.9 % 27.5 Total residential mortgage loans, held-for-sale, at fair value/lower of cost or market$ 5,582,608 $ 5,600,476 23,488 3.3 % 20.2 (A)The weighted average life is based on the expected timing of the receipt of cash flows. (B)LTV refers to the ratio comparing the loan's unpaid principal balance to the value of the collateral property. (C)Represents the percentage of the total principal balance that is 60+ days delinquent. (D)The weighted average FICO score is based on the weighted average of information updated and provided by the loan servicer on a monthly basis. (E)Represents a 70% participation interest we hold in a portfolio of reverse mortgage loans. The average loan balance outstanding based on total UPB was$0.6 million . Approximately 52% of these loans outstanding have reached a termination event. As a result of the termination event, each such loan has matured and the borrower can no longer make draws on these loans. (F)FICO scores are not used in determining how much a borrower can access via a reverse mortgage loan. (G)Performing loans are generally placed on nonaccrual status when principal or interest is 120 days or more past due. (H)As ofMarch 31, 2021 , we have placed all Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (I) below. (I)Includes$553.9 million and$289.9 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively, on accrual status as contractual cash flows are guaranteed by the FHA.
We consider the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as our credit quality indicators.
We finance a significant portion of our investments in residential mortgage loans with borrowings under repurchase agreements. These recourse borrowings bear variable interest rates offered by the counterparty for the term of the proposed repurchase transaction, generally less than one year, of a specified margin over the one-month LIBOR. AtMarch 31, 2021 andDecember 31, 2020 , the Company pledged mortgage loans with a carrying value of approximately$5.6 billion and$4.5 billion , respectively, as collateral for borrowings under repurchase agreements. A portion of collateral for borrowings under repurchase agreements are subject to daily mark-to-market fluctuations and margin calls. A portion of collateral for borrowings under repurchase agreements is not subject to daily margin calls unless the collateral coverage percentage, a quotient expressed as a percentage equal to the current carrying value of outstanding debt divided by the market value of the underlying collateral, becomes greater than or equal to a collateral trigger. The difference between the collateral coverage percentage and the collateral trigger is referred to as a "margin holiday." See Note 11 to our Consolidated Financial Statements for further information regarding financing of our mortgage loans. 74 --------------------------------------------------------------------------------
Other
Consumer Loans
The table below summarizes the collateral characteristics of the consumer loans, including those held in the Consumer Loan Companies and those acquired from the Consumer Loan Seller, as ofMarch 31, 2021 (dollars in thousands): Collateral Characteristics Weighted Average Personal Original Average Unsecured Loans Personal FICO Weighted Adjustable Rate Average Loan Age Expected Delinquency 30 Delinquency 60 Delinquency 90+ 12-Month 12-Month UPB % Homeowner Loans % Number of Loans Score(A) Average Coupon Loan % (months) Life (Years) Days(B) Days(B) Days(B) CRR(C) CDR(D) Consumer loans$ 577,124 60.3 % 39.7 % 85,468 684 17.7 % 12.4 % 193 3.4 1.4 % 0.9 % 1.4 % 20.7 % 4.9 % (A)Weighted average original FICO score represents the FICO score at the time the loan was originated. (B)Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively. (C)12-month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the three months as a percentage of the total principal balance of the pool. (D)12-month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the three months as a percentage of the total principal balance of the pool. We have financed our investments in consumer loans with securitized non-recourse long-term notes with a stated maturity date ofMay 2036 . Furthermore, the notes are non-mark-to-market and not subject to margin calls. See Note 11 to our Consolidated Financial Statements for further information regarding financing of our consumer loans. TAXES We have elected to be treated as a REIT forU.S. federal income tax purposes. As a REIT we generally pay no federal or state and local income tax on assets that qualify under the REIT requirements if we distribute out at least 90% of the current taxable income generated from these assets. We hold certain assets, including Servicer Advance Investments and MSRs, in taxable REIT subsidiaries ("TRSs") that are subject to federal, state and local income tax because these assets either do not qualify under the REIT requirements or the status of these assets is uncertain. We also operate our securitization program, servicing, origination, and ancillary businesses through TRSs.
As our operating investments continue to grow and become a larger component of our total consolidated income, we anticipate income subject to tax will increase, along with a corresponding increase in tax expense and our consolidated effective tax rate.
AtMarch 31, 2021 , our net deferred tax liability of$93.1 million was primarily composed of deferred tax liabilities generated through the deferral of gains from loans sold by our origination business with servicing retained by us, as well as, deferred tax liabilities generated from changes in fair value of MSRs, loans, and swaps held in within taxable entities. For the three months endedMarch 31, 2021 , we recognized deferred tax expense of$85.2 million primarily reflecting deferred tax expense generated from changes in the fair value of MSRs, loans, and swaps held within taxable entities as well as income in our servicing and origination business segments.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our Consolidated Financial Statements, which have been
prepared in accordance with GAAP. The preparation of financial statements in
conformity with GAAP requires the use of estimates and assumptions that could
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenue and
expenses. Actual results could differ from these estimates. We believe that the
estimates and assumptions utilized in the preparation of the Consolidated
Financial Statements are prudent and reasonable. Actual results historically
have generally been in line with our estimates and judgments used in applying
each of the accounting policies described below, as modified periodically to
reflect current market conditions.
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Our critical accounting policies as of
The outbreak of the novel coronavirus pandemic around the globe continues to adversely impact theU.S. and world economies and has contributed to significant volatility in global financial and credit markets. The impact of the outbreak has evolved rapidly. The major disruptions caused by COVID-19 significantly slowed many commercial activities in theU.S. , resulting in a rapid rise in unemployment claims, reduced business revenues and sharp reductions in liquidity and the fair value of many assets, including those in which we invest. The ultimate duration and impact of the COVID-19 pandemic and response thereto remains uncertain. We believe the estimates and assumptions underlying our Consolidated Financial Statements are reasonable and supportable based on the information available as ofMarch 31, 2021 ; however, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as ofMarch 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may materially differ from those estimates.
Recent Accounting Pronouncements
See Note 1 to our Consolidated Financial Statements.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table summarizes the changes in our results of operations for the three and three months endedMarch 31, 2021 compared to the three months endedDecember 31, 2020 andMarch 31, 2020 (dollars in thousands). Our results of operations are not necessarily indicative of future performance. Three Months Ended December 31, QoQ YoY March 31, 2021 2020 March 31, 2020 Change Change Revenues Interest income$ 253,735 $
234,118
513,548 (95,728) (289,115) 609,276 802,663
Gain on originated mortgage loans,
held-for-sale, net 403,434 432,279 173,577 (28,845) 229,857
1,170,717 570,669 286,835 600,048 883,882
Expenses
Interest expense 118,905 120,683 216,855 (1,778) (97,950)
General and administrative expenses 362,505 278,432 275,099 84,073 87,406
Management fee to affiliate 22,162 22,452 21,721 (290) 441
503,572 421,567 513,675 82,005 (10,103)
Other Income (Loss)
Change in fair value of investments (265,566) (58,706) (566,276) (206,860) 300,710
Gain (loss) on settlement of
investments, net 1,729 38,864 (799,572) (37,135) 801,301
Other income (loss), net (23,320) 27,767 (36,790) (51,087) 13,470
(287,157) 7,925 (1,402,638) (7,925) 1,115,481
Impairment
Provision (reversal) for credit losses
on securities (894) (1,762) 44,149 868 (45,043)
Valuation and credit loss provision
(reversal) on loans and real estate
owned (REO) (18,713) (8,296) 100,496 (10,417) (119,209)
(19,607) (10,058) 144,645 10,058 (164,252)
Income (Loss) Before Income Taxes 399,595 167,085 (1,774,123) 500,060 2,173,718
Income tax expense (benefit) 98,259 65,563 (166,868) 32,696 265,127
Net Income (Loss) $ 301,336 $
101,522
9,394 18,556 (16,162) (9,162) 25,556
Dividends on preferred stock 14,358 14,357 11,222 1 3,136
Net Income (Loss) Attributable to Common
Stockholders $ 277,584 $ 68,609 $ (1,602,315) $ 208,975 $ 1,879,899
Interest Income
Three months ended
Interest income increased$19.6 million primarily due to (i)$12.6 million of higher interest earned on our bond portfolio attributable to additional bond purchases during the first quarter of 2021, (ii)$4.5 million of higher interest income related to our MSRs, and (iii)$2.8 million of higher interest income related to increased funded origination volume atShellpoint .
Three months ended
Interest income decreased$148.6 million primarily due to (i)$94.2 million of lower interest earned on a significantly smaller average bond portfolio in for the first quarter of 2021 compared to the same period of the prior year, (ii) a$27.6 million decrease related to MSRs attributable to a smaller average investment portfolio, (iii)$33.0 million of lower interest income 77 -------------------------------------------------------------------------------- from residential mortgage loans and consumer loans due to a decrease in unpaid principal balances, partially offset by (iv)$6.1 million of higher interest income related to increased origination volume atShellpoint .
Servicing Revenue, Net
Servicing Revenue, Net related to MSRs consists of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Servicing fee revenue $ 263,743 $ 278,492 $ 328,122 $ (14,749) $ (64,379)
Ancillary and other fees 31,894 30,049 32,138 1,845 (244)
Servicing fee revenue and fees 295,637 308,541 360,260 (12,904) (64,623)
Change in fair value due to:
Realization of cash flows (317,716) (407,524) (191,367) 89,808 (126,349)
Change in valuation inputs and
assumptions(A) 545,379 4,971 (463,711) 540,408 1,009,090
Change in fair value of derivative
instruments (8,823) - - (8,823) (8,823)
(Gain) loss realized (929) (1,716) 5,703 787 (6,632)
Servicing revenue, net $ 513,548 $ (95,728) $ (289,115) $ 609,276 $ 802,663 (A)The following table summarizes the components of servicing revenue, net related to changes in valuation inputs and assumptions:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Changes in interest and
prepayment rates $ 521,624 $ 4,237 $ (323,699) $ 517,387 $ 845,323
Changes in discount rates - - (73,502) - 73,502
Changes in other factors 23,755 734 (66,510) 23,021 90,265
Change in valuation and
assumptions $ 545,379 $ 4,971 $ (463,711) $ 540,408 $ 1,009,090 Three months ended
Servicing revenue, net increased$609.3 million primarily driven by (i) a$540.4 million increase in positive mark-to-market adjustments, (ii) an$89.8 million decrease in realization of cash flows as a result of slower prepayments, partially offset by (iii) a$12.9 million decrease in servicing fee revenue and fees from portfolio runoff. The increase in positive mark-to-market adjustments of$540.4 million for the three months endedMarch 31, 2021 were primarily driven by slower prepayment rates and higher float earnings projections.
Three months ended
Servicing revenue, net increased$802.7 million primarily driven by (i) a$1.0 billion change from negative to positive mark-to-market adjustments as a result of slower prepayment rates, lower delinquency rates, and a decrease in discount rates. The increase was partially offset by (ii) a$126.3 million increase in realization of cash flows as a result of increase in average portfolio size from acquisitions and originations as well as transfers from investments in MSR Financing Receivables to MSRs subsequent toMarch 31, 2020 , and (iii) a$64.6 million decrease in servicing fee revenue and fees from portfolio runoff.
Gain on Originated Mortgage Loans, Held-for-Sale, Net
Three months ended
Gain on originated mortgage loans, held-for-sale, net decreased$28.8 million . For the first quarter of 2021, loan origination volume was$27.2 billion , up from$23.9 billion in the prior quarter. Funded volumes in Direct to Consumer, Wholesale and Correspondent all increased quarter over quarter while Joint Venture declined slightly due to seasonal factors. Higher loan volumes were offset by lower gain on sale margins, which was 1.43% for the first quarter of 2021, 14 bps lower than 1.57% for 78 --------------------------------------------------------------------------------
the prior quarter. We continue to expect gain on sale margins to revert to historical levels, especially in third-party originated channels, as industry capacity adjusts to demand.
Three months ended
Gain on originated mortgage loans, held-for-sale, net increased$229.9 million primarily driven by higher loan origination volume of$27.2 billion during the first quarter of 2021, up from$11.4 billion in the year prior. In additional to higher funding volumes, gain on sale margin for the first quarter of 2021 was 1.43%, 15 bps higher than 1.28% for the prior year.
Interest Expense
Three months ended
Interest expense decreased
Three months ended
Interest expense decreased$98.0 million primarily attributable to (i)$92.3 million of lower interest expense on a comparatively smaller bond portfolio for the first quarter of 2021, (ii)$13.1 million of lower interest expense related to residential mortgage loans and consumer loans driven by lower average principal balances, and (iii)$6.1 million of lower interest expense due to runoff of MSR related investments, partially offset by (iv)$4.6 million of higher interest expense on loan originations due to higher origination volume, and (v)$8.9 million of higher interest expense as a result of the$550.0 million aggregate principal amount of 6.25% senior unsecured notes entered into onSeptember 16, 2020 .
General and Administrative Expenses
General and Administrative Expenses consists of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Compensation and benefits $ 65,426 $ 50,575
108,669 61,278 24,549 71,940
Legal and professional 18,219 6,704 26,037 11,515 (7,818)
Loan origination 40,245 32,619 16,929 7,626 23,316
Occupancy 10,350 10,604 8,064 (254) 2,286
Subservicing 49,839 41,765 66,981 8,074 (17,142)
Loan servicing 4,679 (9,187) 7,853 13,866 (3,174)
Property and maintenance 12,130 15,653 7,463 (3,523) 4,667
Other miscellaneous general and
administrative 28,399 21,030 29,153 7,369 (754)
General and administrative expenses
Three months ended
General and administrative expenses increased$84.1 million primarily attributable to increases inNewRez origination (funded and pipeline) and servicing volumes. During the first quarter of 2021,NewRez funded$27.2 billion of origination volume compared to$23.9 billion of for the prior quarter. As ofMarch 31, 2021 , NewRez Servicing serviced$211.8 billion UPB of loans and Shellpoint Mortgage Servicing serviced$92.8 billion UPB of loans, for a total servicing portfolio of$304.6 billion UPB, representing a 2.3% increase fromDecember 31, 2020 . Higher origination and servicing volumes resulted in higher headcount and the associated compensation and benefits expense, loan origination expense, and subservicing expense.
Three months ended
General and administrative expenses increased$87.4 million primarily attributable to increases inNewRez origination and servicing volumes. During the first quarter of 2021,NewRez funded$27.2 billion of origination volume compared to$11.4 79 -------------------------------------------------------------------------------- billion for the prior year. As ofMarch 31, 2021 ,NewRez and Shellpoint Mortgage Servicing serviced$304.6 billion UPB, representing a 10.4% increase fromMarch 31, 2020 . The combined servicing represents 1,709,245 loans, a 9.1% increase fromMarch 31, 2020 . Higher origination and servicing volumes resulted in higher headcount and the associated compensation and benefits expense, and loan origination expense. Additionally, growth in Guardian Asset Management inspection and property management contracts resulted in an increase of expenses incurred related to performing such services, accompanied with an increase in compensation and benefits also due to higher employee headcount. These increases in headcount related servicing, origination, and property maintenance expenses were partially offset by a decrease in legal and professional fees and subservicing expenses related to our MSR portfolio as a result of transfers of servicing to NewRez Servicing and SMS.
Change in Fair Value of Investments
Change in Fair Value of Investments consists of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Excess MSRs $ (4,618) $
(4,459)
3,165 (587) (457) 3,752 3,622
MSR financing receivables (25,778) (33,262) (104,111) 7,484 78,333
Servicer advance investments (371) 332 (18,749) (703) 18,378
Real estate and other securities (498,339) 28,986 (86,792) (527,325) (411,547)
Residential mortgage loans 60,174 702 (265,244) 59,472 325,418
Consumer loans held-for-investment (6,004) 7,262 (39,917) (13,266) 33,913
Derivative instruments 206,205 (57,680) (39,982) 263,885 246,187
Change in fair value of investments $ (265,566) $
(58,706)
Change in Fair Value of Excess MSRs
Change in Fair Value of Excess MSRs consists of the following:
Three Months Ended
March 31, December 31, QoQ YoY
2021 2020 March 31, 2020 Change Change
Changes in interest rates and
prepayment rates $ 5,537 $ (293) $ 4,226
- - (4,015) - 4,015
Changes in other factors (10,155) (4,166) (11,235) (5,989) 1,080
Change in fair value of Excess MSRs
Three months ended
The negative mark-to-market fair value adjustments during the three months endedMarch 31, 2021 were mainly driven by increases in projected delinquency rates in our conventional, agency, and PLS excess mortgage servicing rights pools and reduced recapture rates. This was partially offset by favorable changes in interest rates and reduced prepayment speeds. The negative mark-to-market adjustments during the three months endedDecember 31, 2020 were mainly driven by increases in delinquency rates in our conventional, agency, and PLS excess mortgage servicing rights pools.
Three months ended
The negative mark-to-market fair value adjustments during the three months endedMarch 31, 2021 were mainly driven by increases in delinquency rates in our conventional, agency, and PLS excess mortgage servicing rights pools and reduced recapture rates. This was partially offset by favorable changes in interest rates and prepayment speeds. The negative mark-to- 80 -------------------------------------------------------------------------------- market fair value adjustments during the three months endedMarch 31, 2021 were mainly driven by increases in delinquency rates and higher discount rates. This was partially offset by increased interest rates and decreased prepayment speeds.
Change in Fair Value of Excess MSRs, Equity Method Investees
Change in Fair Value of Excess MSRs, Equity Method Investees consists of the
following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Changes in interest rates and
prepayment rates $ 1,074 $ (99) $ 686 $ 1,173 $ 388
Changes in discount rates - - (743) - 743
Changes in other factors 2,091 (488) (400) 2,579 2,491
Total $ 3,165 $ (587) $ (457) $ 3,752 $ 3,622 Three months ended
The positive mark-to-market fair value adjustments during the first quarter of 2021 were mainly driven by favorable changes in interest rates and prepayment speeds. The mark-to market adjustments during the fourth quarter of 2020 were relatively flat.
Three months ended
The positive mark-to-market fair value adjustments during the first quarter of 2021 were mainly driven by favorable changes in interest rates and prepayment speeds. The mark-to market adjustments during the first quarter of 2020 were relatively flat.
Change in Fair Value of MSR Financing Receivables
The component of changes in the fair value of MSR Financing Receivables consists
of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Realization of cash flows $ (21,954) $ (40,589) $ (68,752) $ 18,635 $ 46,798
Change in valuation inputs and
assumptions (3,554) 7,327 (33,610) (10,881) 30,056
(Gain) loss on sales (270) - (1,749) (270) 1,479
Total $ (25,778) $ (33,262) $ (104,111) $ 7,484 $ 78,333
(A)The following table summarizes the components of changes in the fair value of
MSR Financing Receivables related to changes in valuation inputs and
assumptions:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Changes in interest and
prepayment rates $ 19,163 $ 3,216 $ 81,808 $ 15,947 $ (62,645)
Changes in discount rates - - (12,744) - 12,744
Changes in other factors (22,717) 4,111 (102,674) (26,828) 79,957
Total $ (3,554) $ 7,327 $ (33,610) $ (10,881) $ 30,056 Three months ended
Change in fair value of MSR Financing Receivables increased$7.5 million primarily driven by (i) an$18.6 million decrease in realization of cash flows as a result of slower prepayments and transfer from investments in MSR Financing Receivables to 81 --------------------------------------------------------------------------------
MSRs during the first quarter of 2021, partially offset by (ii) a
Three months ended
Change in fair value of MSR Financing Receivables increased$78.3 million primarily driven by (i) a$46.8 million decrease in realization of cash flows as a result of slower prepayments and transfer from investments in MSR Financing Receivables to MSRs during the first quarter of 2021, and (ii) a$30.1 million decrease in negative mark-to-market adjustments as a result of lower delinquency rates and a decrease in discount rates, partially offset by a higher costs of financing.
Change in Fair Value of Servicer Advance Investments
Changes in Fair Value of Servicer Advance Investments consists of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Changes in interest and prepayment
rates $ 12 $ 3 $ (1,874) $ 9 $ 1,886
Changes in discount rates - - (12,744) - 12,744
Changes in other factors (383) 329 (4,131) (712) 3,748
Total $ (371) $ 332 $ (18,749) $ (703) $ 18,378 Three months ended
The negative mark-to-market adjustments during the first quarter of 2021 were driven by changes in the overall projected delinquency of the servicer advance portfolio coupled with changes in the debt fee rate for related servicer advance financing. Positive mark-to-market adjustments during the fourth quarter of 2020 were impacted by changes in the servicer advance UPB curve.
Three months ended
The negative mark-to-market adjustments during the first quarter of 2021 were driven by changes in the overall delinquency of the servicer advance portfolio coupled with changes in the debt fee rate for related servicer advance financing. Negative mark-to-market adjustments during the first quarter of 2020 were largely driven by increased discount rates.
Change in Fair Value of Real Estate and
Three months ended
Change in fair value of investments in real estate securities decreased$527.3 million primarily driven by unfavorable adjustments in Agency securities due to higher interest rates, market volatility, and changes in inputs and assumptions. This was partially offset by favorable adjustments in Non-Agency securities due to interest-only bonds increasing in value due to lower projected prepayments and overall improvement in borrower performance as more borrowers exit forbearance.
Three months ended
Change in fair value of investments in real estate securities decreased
Change in Fair Value of Residential Mortgage Loans
Three months ended
Change in fair value of investments in residential mortgage loans increased
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economic outlook and (ii) a
Three months ended
Change in fair value of investments in residential mortgage loans increased
Change in Fair Value of Consumer Loans Held-for-Investment
Three months ended
Change in fair value of consumer loans decreased$13.3 million primarily due to unfavorable changes in inputs and assumptions, including higher prepayment rates and lower recoveries.
Three months ended
Change in fair value of consumer loans increased
Change in Fair Value of Derivative Instruments
Three months ended
Change in fair value of derivative instruments increased
Three months ended
Change in fair value of derivative instruments increased
Gain (Loss) on Settlement of Investments, Net
Gain (Loss) on Settlement of Investments, Net consists of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Gain (loss) on sale of real estate
securities $ (983) $ (162) $ (754,540) $ (821) $ 753,557
Gain (loss) on sale of acquired
residential mortgage loans 30,399 2,681 35,236 27,718 (4,837)
Gain (loss) on settlement of
derivatives (27,373) 58,287 (84,712) (85,660) 57,339
Gain (loss) on liquidated residential
mortgage loans 897 2,098 (839) (1,201) 1,736
Gain (loss) on sale of REO (3,946) (24,557) 1,173 20,611 (5,119)
Gain (loss) on extinguishment of debt (6) (1,438) 1,461 1,432 (1,467)
Other gains (losses) 2,741 1,955 2,649 786 92
$ 1,729 $ 38,864 $ (799,572) $ (37,135) $ 801,301 Three months ended
Gain on settlement of investments, net decreased$37.1 million primarily due to (i) an$85.7 million change in gain (loss) on settlement of derivatives during the first quarter of 2021 and last quarter of 2020, partially offset by (ii) a$27.7 million increase 83 -------------------------------------------------------------------------------- in gain on sale of residential mortgage loans related to the 2020-NPL1 sale in the first quarter of 2021, and (iii) a$20.6 million increase in gain on sale of REO's due to a legacy REO receivable write-off during the fourth quarter of 2020.
Three months ended
Gain on settlement of investments, net increased$801.3 million primarily reflecting a reduction in our Agency RMBS portfolio during the first quarter of 2020 in order to generate liquidity and de-risk our balance sheet in response to the onset of COVID-19 related market factors. We realized significant losses due to the timing of the bond sales.
Other Income (Loss), Net
Other Income (Loss), Net consists of the following:
Three Months Ended
December 31, QoQ YoY
March 31, 2021 2020 March 31, 2020 Change Change
Unrealized gain (loss) on secured
notes and bonds payable $ (4,422) $ (1,501)
(408) (619) (1,614) 211 1,206
Unrealized gain (loss) on equity
investments (2,783) (2,042) (45,023) (741) 42,240
Gain (loss) on transfer of loans to
REO 1,321 2,935 2,595 (1,614) (1,274)
Gain (loss) on transfer of loans to
other assets (21) (166) (241) 145 220
Gain (loss) on Ocwen common stock (186) 3,014 (5,050) (3,200) 4,864
Provision for servicing losses (6,158) 4,434 (4,781) (10,592) (1,377)
Rental and ancillary revenue 5,827 7,558 6,260 (1,731) (433)
Property and maintenance revenue 19,906 25,032 13,347 (5,126) 6,559
Other income (loss) (36,396) (10,878) (19,285) (25,518) (17,111)
$ (23,320) $ 27,767 $ (36,790) $ (51,087) $ 13,470 Three months ended
As summarized in the table above, total other income decreased$51.1 million primarily due to (i) a$26.9 million increase in reserve of receivables on our whole loan portfolio andShellpoint , (ii) a$10.6 million increase in losses on provision for servicing losses, and (iii) a$5.1 million decrease in property and maintenance revenue at Guardian Asset Management.
Three months ended
As summarized in the table above, total other income increased$13.5 million primarily attributable to (i) a$42.1 million change in write down of our equity method investments due to a large write off during the first quarter of 2020, (ii) a$6.6 million increase in property and maintenance revenue at Guardian Asset Management, (iii) a$4.9 million decrease in losses on Ocwen common stock, and (iv) a$3.8 million increase in value of warrants, partially offset by (v) a$21.4 million decrease in unrealized gains on our secured notes and bonds payable, and (vi) a$22.7 million increase in reserve of loan receivables.
Provision (Reversal) for Credit Losses on Securities
Three months ended
The provision (reversal) for credit losses on securities decreased
Three months ended
The provision (reversal) for credit losses on securities increased by$45.0 million primarily due to a decline in fair values on Non-Agency RMBS purchased with existing credit impairment due to the significant deterioration in macroeconomic forecasts attributable to the onset of the COVID-19 pandemic in the first quarter of 2020.
Valuation and Credit Loss Provision (Reversal) on Loans and Real Estate Owned
84
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Three months ended
Valuation and loss provision (reversal) on loans and real estate owned decreased$10.4 million driven by (i) a$7.5 million increase in reversal of impairment on residential mortgage loans due to changes in interest rates and improved performance, and (ii) a$2.9 million increase in reversal of impairment on certain REOs with an increase in home prices.
Three months ended
Valuation and loss provision (reversal) on loans and real estate owned decreased$119.2 million driven by (i) a$114.5 million reversal of impairment on certain loans related to changes in interest rates and improved performance, and (ii) a$4.7 million increase on reversal of impairment on certain REOs with an increase in home prices. Income Tax Expense (Benefit)
Three months ended
Income tax expense increased
Three months ended
Income tax expense increased$265.1 million . The tax benefit for the prior year primarily reflected deferred tax benefits resulting from changes in the fair value of loans and MSRs, partially offset by deferred tax expense generated from income in our servicing and origination business segments.
Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries
Three months ended
NCI income decreased$9.2 million primarily due to (i)$8.0 million of negative fair value adjustments and increased servicing expenses at our Consumer Loan Companies, which are 46.5% owned by third parties, and (ii) a$1.6 million decrease from the Shelter JVs, driven by lower earnings from originations for the first quarter of 2021.
Three months ended
NCI income increased$25.6 million primarily due to higher operating income for the first quarter of 2021 relative to unfavorable earnings caused by the onset of the COVID-19 pandemic in the prior year. Lower operating income for the first quarter of 2020 was primarily the result of negative fair value adjustments.
Dividends on Preferred Stock
Three months ended
Dividends on preferred stock increased
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.
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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 Company's total cash and cash equivalents at
March 31, 2021 was $1,038.5 million .
Our ability to utilize funds generated by the MSRs held in our servicer
subsidiaries, NRM and NewRez , is subject to and limited by certain regulatory
requirements, including maintaining excess capital and related tangible net
worth. As of March 31, 2021 , approximately $744.0 million of our cash and cash
equivalents were held at NRM and NewRez , of which $587.7 million were in excess
of regulatory liquidity requirements. NRM and NewRez are expected to maintain
compliance with applicable net worth requirements throughout the year.
Currently, our primary sources of financing are secured financing agreements and
secured notes and bonds payable, although we have in the past and may in the
future also pursue one or more other sources of financing such as
securitizations and other secured and unsecured forms of borrowing. As of
March 31, 2021 , we had outstanding secured financing agreements with an
aggregate face amount of approximately $19.5 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 3.0% - 12.0% for Agency
RMBS, 12.0% - 80.0% for Non-Agency RMBS, and 0.1% - 25.0% 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 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.
While market volatility has subsided since the onset of COVID-19 in mid-March
2020 , it is possible that volatility may increase again, and our lenders may
become unwilling or unable to provide us with financing and we could be forced
to sell our assets at an inopportune time when prices are depressed. In
addition, if the regulatory capital requirements imposed on our lenders change,
they may be required to significantly increase the cost of the financing that
they provide to us. Our lenders also have revised and may continue to revise
their eligibility requirements for the types of assets they are willing to
finance or the terms of such financings, including haircuts and requiring
additional collateral in the form of cash, based on, among other factors, the
regulatory environment and their management of actual and perceived risk.
Moreover, the amount of financing we receive under our secured financing
agreements will be directly related to our lenders' valuation of our target
assets that cover the outstanding borrowings.
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With respect to the next 12 months, we expect that our cash on hand combined
with our cash flow provided by operations and our ability to roll our secured
financing agreements and servicer advance financings will be sufficient to
satisfy our anticipated liquidity needs with respect to our current investment
portfolio, including related financings, potential margin calls, mortgage loan
origination and operating expenses. Our ability to roll over short-term
borrowings is critical to our liquidity outlook. We have a significant amount of
near-term maturities, which we expect to be able to refinance. If we cannot
repay or refinance our debt on favorable terms, we will need to seek out other
sources of liquidity. While it is inherently more difficult to forecast beyond
the next 12 months, we currently expect to meet our long-term liquidity
requirements through our cash on hand and, if needed, additional borrowings,
proceeds received from secured financing agreements and other financings,
proceeds from equity offerings and the liquidation or refinancing of our assets.
These short-term and long-term expectations are forward-looking and subject to a
number of uncertainties and assumptions, including those described under
"-Market Considerations" as well as "Risk Factors." If our assumptions about our
liquidity prove to be incorrect, we could be subject to a shortfall in liquidity
in the future, and such a shortfall may occur rapidly and with little or no
notice, which could limit our ability to address the shortfall on a timely basis
and could have a material adverse effect on our business.
Our cash flow provided by operations differs from our net income due to these
primary factors (i) the difference between (a) accretion and amortization and
unrealized gains and losses recorded with respect to our investments and (b)
cash received therefrom, (ii) unrealized gains and losses on our derivatives,
and recorded impairments, if any, (iii) deferred taxes, and (iv) principal cash
flows related to held-for-sale loans, which are characterized as operating cash
flows under GAAP.
In addition to the information referenced above, the following factors could
affect our liquidity, access to capital resources and our capital obligations.
As such, if their outcomes do not fall within our expectations, changes in these
factors could negatively affect our liquidity.
•Access to Financing from Counterparties - Decisions by investors,
counterparties and lenders to enter into transactions with us will depend upon a
number of factors, such as our historical and projected financial performance,
compliance with the terms of our current credit arrangements, industry and
market trends, the availability of capital and our investors', counterparties'
and lenders' policies and rates applicable thereto, and the relative
attractiveness of alternative investment or lending opportunities. Our business
strategy is dependent upon our ability to finance certain of our investments at
rates that provide a positive net spread.
•Impact of Expected Repayment or Forecasted Sale on Cash Flows - The timing of
and proceeds from the repayment or sale of certain investments may be different
than expected or may not occur as expected. Proceeds from sales of assets are
unpredictable and may vary materially from their estimated fair value and their
carrying value. Further, the availability of investments that provide similar
returns to those repaid or sold investments is unpredictable and returns on new
investments may vary materially from those on existing investments.
87
--------------------------------------------------------------------------------Debt Obligations
The following table presents certain information regarding our debt obligations
(dollars in thousands):
March 31, 2021 December 31, 2020
Collateral
Outstanding Face Weighted Average Weighted Average Amortized Cost Weighted Average
Debt Obligations/Collateral Amount Carrying Value(A) Final Stated Maturity(B) Funding Cost Life (Years) Outstanding Face Basis Carrying Value Life (Years) Carrying Value
Secured Financing Agreements(C)
Repurchase Agreements:
Warehouse Credit Facilities-Residential
Mortgage Loans(F) $ 5,133,435 $ 5,131,682 May-21 to Dec-22 2.18 % 0.6 $ 5,539,834 $ 5,601,036 $ 5,562,750 20.0 $ 4,039,564
Agency RMBS(D) 13,641,520 13,641,520 Apr-21 to Jan-22 0.23 % 0.4 $ 13,443,593 13,956,269 13,558,231 1.0 $ 12,682,427
Non-Agency RMBS(E) 740,770 740,544 Apr-21 to Jun-21 3.33 % 0.5 15,722,106 1,247,027 1,304,584 0.7 817,209
Real Estate Owned(G)(H) 8,714 8,714 May-21 to Dec-22 2.60 % 1.8 N/A N/A 11,580 N/A 8,480
Total Secured Financing Agreements 19,524,439 19,522,460 0.86 % 0.5 17,547,680
Secured Notes and Bonds Payable Excess MSRs(I) 265,899 265,899 Aug-24 4.36 % 3.4 95,393,278 315,399 390,631 6.2 275,088 MSRs(J) 2,696,137 2,685,492 Jul-22 to Mar-26 4.25 % 3.3 385,377,861 4,240,151 4,717,694 6.2 2,691,791 Servicer Advance Investments(K) 403,570 402,691 Apr-21 to Dec-22 1.42 % 1.3 440,306 492,831 517,558 6.3 423,144 Servicer Advances(K) 2,494,763 2,487,465 Apr-21 to Sep-23 2.43 % 1.6 2,898,656 2,895,073 2,895,073 0.7 2,585,575 Residential Mortgage Loans(L) 682,847 675,317 Sep-22 to Aug-60 4.18 % 20.4 1,019,812 998,328 934,291 4.2 1,039,838 Consumer Loans(M) 583,948 591,011 Sep-37 2.03 % 3.4 575,267 584,632 637,264 3.6 628,759 Total Secured Notes and Bonds Payable 7,127,164 7,107,875 3.27 % 4.3 7,644,195 Total/ Weighted Average$ 26,651,603 $ 26,630,335 1.50 % 1.5$ 25,191,875 (A)Net of deferred financing costs. (B)All debt obligations with a stated maturity through the date of issuance were refinanced, extended or repaid. (C)These secured financing agreements had approximately$56.4 million of associated accrued interest payable as ofMarch 31, 2021 . (D)All Agency RMBS repurchase agreements have a fixed rate. (E)All Non-Agency RMBS secured financing agreements have LIBOR-based floating interest rates. This also includes repurchase agreements and related collateral of$24.1 million and$33.1 million , respectively, on retained bonds collateralized by Agency MSRs. (F)Includes$247.7 million of repurchase agreements which bear interest at a fixed rate of 4.4%. All remaining repurchase agreements have LIBOR-based floating interest rates. (G)All repurchase agreements have LIBOR-based floating interest rates. (H)Includes financing collateralized by receivables including claims from FHA on Ginnie Mae EBO loans for which foreclosure has been completed and for which New Residential has made or intends to make a claim on the FHA guarantee. (I)Includes$265.9 million of corporate loans which bear interest at a fixed rate of 4.4%. (J)Includes$373.9 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 3.3%;$394.9 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 3.9%; and$1,927.3 million of capital markets notes with fixed interest rates ranging 3.0% to 5.4%. The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the MSRs and MSR financing receivables that secure these notes. (K)$2.0 billion face amount of the notes have a fixed rate while the remaining notes bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from 1.4% to 3.9%. Collateral includes Servicer Advance Investments, as well as servicer advances receivable related to the mortgage servicing rights and MSR financing receivables owned by NRM. (L)Represents (i) a$5.8 million note payable to Mr. Cooper which includes a$1.6 million receivable from government agency and bears interest equal to one-month LIBOR plus 2.9%, (ii)$50.7 million face amount ofSAFT 2013-1 mortgage-backed securities issued with fixed interest rate of 3.7% (see Note 12 for fair value details), (iii)$139.2 million of MDST Trusts asset-backed notes held by third parties which bear interest equal to 6.6% (see Note 12 for fair value details), and (iv)$466.5 million of bonds held by third parties which bear interest at a fixed rate ranging from 3.2% to 5.0%. 88 -------------------------------------------------------------------------------- (M)Includes the SpringCastle debt, which is primarily composed of the following classes of asset-backed notes held by third parties:$530.9 million UPB of Class A notes with a coupon of 2.0% and a stated maturity date inSeptember 2037 and$53.0 million UPB of Class B notes with a coupon of 2.7% and a stated maturity date inSeptember 2037 .
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$19.5 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):
Three Months Ended
Outstanding Average Daily
Balance at Amount Maximum Amount Weighted Average
March 31, 2021 Outstanding(A) Outstanding Daily Interest Rate
Secured Financing Agreements
Agency RMBS $ 13,641,520 $ 13,833,811 $ 17,881,476 0.23 %
Non-Agency RMBS 740,770 806,260 1,300,827 3.42 %
Residential mortgage loans 4,658,639 4,552,293 5,511,488 1.96 %
Real estate owned 2,129 2,282 2,815 2.37 %
Secured Notes and Bonds Payable
Servicer advances 648,875 786,878 928,259 1.96 % Total/weighted average$ 19,691,933 $ 19,981,524 $ 25,624,865 0.82 %
(A)Represents the average for the period the debt was outstanding.
Average Daily Amount Outstanding(A)
Three Months Ended
September 30,
March 31, 2021 December 31, 2020 2020 June 30, 2020
Secured Financing Agreements
Agency RMBS $ 13,833,811 $ 11,391,397 $ 6,899,998 $ 1,175,803
Non-Agency RMBS 806,260 447,824 1,459,942 2,092,963
Residential mortgage loans 4,552,293 3,655,906 3,112,376 3,180,499
Real estate owned 2,282 2,581 3,222 76,763
(A)Represents the average for the period the debt was outstanding.
Corporate Debt
On
InAugust 2020 , the Company made a$51.0 million prepayment on the 2020 Term Loan. As a result, The Company recorded a$5.7 million loss on extinguishment of debt, representing a write-off of unamortized debt issuance costs and original issue discount. In conjunction with the issuance of the 2020 Term Loan, we issued warrants providing the lenders with the right to acquire, subject to anti-dilution adjustments, up to 43.4 million shares of the Company's common stock in the aggregate (the "2020 Warrants"). The 2020 Warrants are exercisable in cash or on a cashless basis and expire onMay 19, 2023 and are exercisable, in whole or in part, at any time or from time to time afterSeptember 19, 2020 at the following prices (subject to certain anti-dilution provisions): approximately 24.6 million shares of common stock at$6.11 per share and approximately 18.9 million shares of common stock at$7.94 per share. OnSeptember 16, 2020 , the Company, as borrower, completed a private offering of$550.0 million aggregate principal amount of 6.250% senior unsecured notes due 2020 (the "2025 Senior Notes"). Interest on the 2025 Senior Notes accrue at the rate of 89 -------------------------------------------------------------------------------- 6.250% per annum with interest payable semi-annually in arrears on eachApril 15 andOctober 15 , commencing onApril 15, 2021 . Net proceeds from the offering were approximately$544.5 million , after deducting the initial purchasers' discounts and commissions and estimated offering expenses payable by the Company. The Company used the net proceeds from the offering, together with cash on hand, to prepay and retire its then-existing 2020 Term Loan and to pay related fees and expenses. As a result, the Company recorded a$61.1 million loss on extinguishment of debt, representing a write-off of unamortized debt issuance costs and original issue discount. The 2025 Senior Notes mature onOctober 15, 2025 and the Company may redeem some or all of the 2025 Senior Notes at the Company's option, at any time from time to time, on or afterOctober 15, 2022 at a price equal to the following fixed redemption prices (expressed as a percentage of principal amount of the 2025 Senior Notes to be redeemed): Year Price 2022 103.125% 2023 101.563% 2024 and thereafter 100.000% Prior toOctober 15, 2022 , the Company will be entitled at its option on one or more occasions to redeem the 2025 Senior Notes in an aggregate principal amount not to exceed 40% of the aggregate principal amount of the 2025 Senior Notes originally issued prior to the applicable redemption date at a fixed redemption price of 106.250%.
For additional information on our debt activities, see Note 11 to our Consolidated Financial Statements.
Maturities
Our debt obligations as ofMarch 31, 2021 , as summarized in Note 11 to our Consolidated Financial Statements, had contractual maturities as follows (in thousands): Year Ending Nonrecourse(A) Recourse(B)
Total
$ 18,752,041 2022 917,384 2,327,985 3,245,369 2023 1,200,000 285,676 1,485,676 2024 - 557,251 557,251 2025 250,450 1,789,849 2,040,299 2026 and thereafter 1,010,573 110,400 1,120,973$ 4,027,289 $ 23,174,320 $ 27,201,609
(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 1% and 43%, respectively, and for residential mortgage loans and REO were 8% and 25%, respectively, during the three months endedMarch 31, 2021 . 90 --------------------------------------------------------------------------------
Borrowing Capacity
The following table represents our borrowing capacity as ofMarch 31, 2021 (in thousands): Borrowing Balance Available Debt Obligations/ Collateral Capacity Outstanding Financing(A) Secured Financing Agreements Residential mortgage loans and REO$ 4,553,745 $ 1,503,861 $ 3,049,884 New loan origination 7,823,000 3,638,280 4,184,720 Secured Notes and Bonds Payable Excess MSRs 286,380 265,899 20,481 MSRs 3,667,277 2,696,137 971,140 Servicer advances 4,315,000 2,898,333 1,416,667$ 20,645,402 $ 11,002,510 $ 9,642,892
(A)Our unused borrowing capacity is available to us if we have additional eligible collateral to pledge and meet other borrowing conditions as set forth in the applicable agreements, including any applicable advance rate.
Covenants
Certain of the debt obligations are subject to customary loan covenants and event of default provisions, including event of default provisions triggered by certain specified declines in our equity or failure to maintain a specified tangible net worth, liquidity, or indebtedness to tangible net worth ratio. We were in compliance with all of our debt covenants as ofMarch 31, 2021 .
Stockholders' Equity
Preferred Stock
Pursuant to our certificate of incorporation, we are authorized to designate and
issue up to 100.0 million shares of preferred stock, par value of
The table below summarizes Preferred Shares:
Dividends Declared per
Share
Three Months Ended
Number of Shares Liquidation Preference(A) March 31 ,
December 31, Issuance
Series March 31, 2021 December 31, 2020 March 31, 2021 2020 Discount Carrying Value 2021 2020
Fixed-to-floating rate cumulative
redeemable preferred:
Series A, 7.50% issued July 2019 6,210 6,210 $ 155,250 $ 155,250 3.15 %
11,300 11,300 282,500 282,500 3.15 % 273,418 0.45 0.45
Series C, 6.375% issued February
2020 16,100 16,100 402,500 402,500 3.15 % 389,548 0.40 0.40
Total 33,610 33,610 $ 840,250 $ 840,250 $ 812,992 $ 1.32 $ 1.32 (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 , 91 -------------------------------------------------------------------------------- at a floating rate per annum equal to the three-month LIBOR plus a spread of 5.802%, 5.640%, and 4.969% per annum, respectively. Dividends are payable quarterly in arrears on or about the 15th day of each February, May, August and November. The Preferred Series A and Preferred Series B will not be redeemable beforeAugust 15, 2024 and the Preferred Series C will not be redeemable beforeFebruary 15, 2025 , except under certain limited circumstances intended to preserve our qualification as a REIT forU.S. federal income tax purposes and except upon the occurrence of a Change of Control (as defined in the Certificate of Designations). On or afterAugust 15, 2024 for the Preferred Series A and Preferred Series B andFebruary 15, 2025 for the Preferred Series C, we may, at our option, upon not less than 30 nor more than 60 days' written notice, redeem the Preferred Series A, Preferred Series B, and Preferred Series C, in whole or in part, at any time or from time to time, for cash at a redemption price of$25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date, without interest.
Common Stock
Approximately 2.4 million shares of our common stock were held by Fortress,
through its affiliates, and its principals as of
OnFebruary 16, 2021 , we announced that our board of directors had authorized the repurchase of up to$200.0 million of our common stock throughDecember 31, 2021 . Repurchases may be made at any time and from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of our shares, trading volume, capital availability, our performance and general economic and market conditions. The share repurchase program may be suspended or discontinued at any time. No share repurchases have been made as of the filing of this report. Repurchases may impact our financial results, including fees paid to our Manager. As ofMarch 31, 2021 , our outstanding options had a weighted average exercise price of$16.12 . Our outstanding options as ofMarch 31, 2021 were summarized as follows: Held by the Manager 11,667,675
Issued to the Manager and subsequently assigned to certain of the Manager's employees
2,753,980
Issued to the independent directors 7,000 Total 14,428,655 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 three months endedMarch 31, 2021 , we recorded net unrealized losses on our real estate securities due to widening credit spreads, changes in collateral performance, and other factors related specifically to certain investments. We recorded a reversal of credit impairment charges of$0.9 million with respect to real estate securities and realized losses of$1.0 million on sales of real estate securities.
See "-Market Considerations" above for a further discussion of recent trends and events affecting our unrealized gains and losses, as well as our liquidity.
Common Dividends
We are organized and intend to conduct our operations to qualify as a REIT forU.S. federal income tax purposes. We intend to make regular quarterly distributions to holders of our common stock.U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income. We intend to make regular quarterly distributions of our taxable income to holders of our common stock out of assets legally available for this purpose, if and to the extent authorized by our board of directors. Before we pay any dividend, whether forU.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our secured financing agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or raise capital to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. 92 -------------------------------------------------------------------------------- We make distributions based on a number of factors, including an estimate of taxable earnings per common share. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, other differences in method of accounting, non-deductible general and administrative expenses, taxable income arising from certain modifications of debt instruments and investments held in TRSs. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share. We will continue to monitor market conditions and the potential impact the ongoing volatility and uncertainty may have on our business. Our board of directors will continue to evaluate the payment of dividends as market conditions evolve, and no definitive determination has been made at this time. While the terms and timing of the approval and declaration of cash dividends, if any, on shares of our capital stock is at the sole discretion of our board of directors and we cannot predict how market conditions may evolve, we intend to distribute to our stockholders an amount equal to at least 90% of our REIT taxable income determined before applying the deduction for dividends paid and by excluding net capital gains consistent with our intention to maintain our qualification as a REIT under the Code. The table below summarize common dividends declared for the periods presented: Common Dividends Declared for the Period Ended Paid/Payable Amount Per Share March 31, 2020 April 2020 $ 0.05 June 30, 2020 July 2020 $ 0.10 September 30, 2020 October 2020 $ 0.15 December 31, 2020 January 2021 $ 0.20 March 31, 2021 April 2021 $ 0.20 Cash Flow Operating Activities Net cash flows used in operating activities decreased approximately$1.8 billion for the three months endedMarch 31, 2021 as compared to the three months endedMarch 31, 2020 . Operating cash flows for the three months endedMarch 31, 2021 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of$28.6 billion , servicing fees received of$304.2 million , net recoveries of servicer advances receivable of$107.2 million , and net interest income received of$168.5 million . Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of$2.1 billion , originations of$27.0 billion , incentive compensation and management fees paid to the Manager of$22.2 million , income taxes paid of$0.1 million , subservicing fees paid of$75.9 million and other outflows of approximately$475.8 million including general and administrative costs and loan servicing fees. The$501.3 million net proceeds on residential mortgage loans, held for sale, were primarily used to pay down debt facilities classified in financing activities below.
Investing Activities
Cash flows provided by (used in) investing activities were$0.8 billion for the three months endedMarch 31, 2021 . Investing activities consisted primarily of the acquisition of MSRs, real estate securities, and the funding of servicer advances, net of proceeds from the sale of real estate securities, principal repayments from Servicer Advance Investments, MSRs, real estate securities and loans as well as proceeds from the sale of real estate securities, loan, REOs, and derivative cash flows. Financing Activities Cash flows provided by (used in) financing activities were approximately$1.4 billion during the three months endedMarch 31, 2021 . Financing activities consisted primarily of borrowings net of repayments under debt obligations, margin deposits net returns of margin under secured financing agreements and derivatives, equity offerings, capital contributions net of distributions from noncontrolling interests in the equity of consolidated subsidiaries, and payment of dividends. 93 --------------------------------------------------------------------------------
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$1.1 billion . As ofMarch 31, 2021 , there was$13.0 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 ofMarch 31, 2021 . We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate off-balance sheet arrangements or other contractually narrow or limited purposes, other than the entities described above. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment and do not intend to provide additional funding to any such entities.
CONTRACTUAL OBLIGATIONS
Our contractual obligations as ofMarch 31, 2021 included all of the material contractual obligations referred to in our annual report on Form 10-K for the year endedDecember 31, 2020 , excluding debt that was repaid as described in "-Liquidity and Capital Resources-Debt Obligations."
In addition, we executed the following material contractual obligations during
the three months ended
•Derivatives - as described in Note 10 to our Consolidated Financial Statements, we have altered the composition of our economic hedges during the period. •Debt obligations - as described in Note 11 to our Consolidated Financial Statements, we borrowed additional amounts.
See Notes 15 and 18 to our Consolidated Financial Statements included in this report for information regarding commitments and material contracts entered into subsequent toMarch 31, 2021 , if any. As described in Note 15, we have committed to purchase certain future servicer advances. The actual amount of future advances is subject to significant uncertainty. However, we currently expect that net recoveries of servicer advances will exceed net fundings for the foreseeable future. This expectation is based on judgments, estimates and assumptions, all of which are subject to significant uncertainty. In addition, the Consumer Loan Companies have invested in loans with an aggregate of$256.8 million of unfunded and available revolving credit privileges as ofMarch 31, 2021 . However, under the terms of these loans, requests for draws may be denied and unfunded availability may be terminated at management's discretion.
INFLATION
Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based our taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. See "Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk."
CORE EARNINGS
We have five primary variables that impact our operating performance: (i) the
current yield earned on our investments, (ii) the interest expense under the
debt incurred to finance our investments, (iii) our operating expenses and
taxes, (iv) our realized and unrealized gains or losses on our investments,
including any impairment or reserve for expected credit losses and (v) income
from our origination and servicing businesses. "Core earnings" is a non-GAAP
measure of our operating performance, excluding the fourth variable above and
adjusts the earnings from the consumer loan investment to a level yield basis.
Core earnings is used by management to evaluate our performance without taking
into account: (i) realized and unrealized gains and losses, which although they
represent a part of our recurring operations, are subject to significant
variability and are generally
94
--------------------------------------------------------------------------------limited to a potential indicator of future economic performance; (ii) incentive compensation paid to our Manager; (iii) non-capitalized transaction-related expenses; and (iv) deferred taxes, which are not representative of current operations.
Our definition of core earnings includes accretion on held-for-sale loans as if they continued to be held-for-investment. Although we intend to sell such loans, there is no guarantee that such loans will be sold or that they will be sold within any expected timeframe. During the period prior to sale, we continue to receive cash flows from such loans and believe that it is appropriate to record a yield thereon. In addition, our definition of core earnings excludes all deferred taxes, rather than just deferred taxes related to unrealized gains or losses, because we believe deferred taxes are not representative of current operations. Our definition of core earnings also limits accreted interest income on RMBS where we receive par upon the exercise of associated call rights based on the estimated value of the underlying collateral, net of related costs including advances. We created this limit in order to be able to accrete to the lower of par or the net value of the underlying collateral, in instances where the net value of the underlying collateral is lower than par. We believe this amount represents the amount of accretion we would have expected to earn on such bonds had the call rights not been exercised. BeginningJanuary 1, 2020 , our investments in consumer loans are accounted for under the fair value option. Core earnings adjusts earnings on the consumer loans to a level yield to present income recognition across the consumer loan portfolio in the manner in which it is economically earned, to avoid potential delays in loss recognition, and align it with our overall portfolio of mortgage-related assets which generally record income on a level yield basis. With respect to consumer loans classified as held-for-sale, the level yield is computed through the expected sale date. With respect to the gains recorded under GAAP in 2014 and 2016 as a result of a refinancing of, and the consolidation of, the Consumer Loan Companies, respectively, we continue to record a level yield on those assets based on their original purchase price. While incentive compensation paid to our Manager may be a material operating expense, we exclude it from core earnings because (i) from time to time, a component of the computation of this expense will relate to items (such as gains or losses) that are excluded from core earnings, and (ii) it is impractical to determine the portion of the expense related to core earnings and non-core earnings, and the type of earnings (loss) that created an excess (deficit) above or below, as applicable, the incentive compensation threshold. To illustrate why it is impractical to determine the portion of incentive compensation expense that should be allocated to core earnings, we note that, as an example, in a given period, we may have core earnings in excess of the incentive compensation threshold but incur losses (which are excluded from core earnings) that reduce total earnings below the incentive compensation threshold. In such case, we would either need to (a) allocate zero incentive compensation expense to core earnings, even though core earnings exceeded the incentive compensation threshold, or (b) assign a "pro forma" amount of incentive compensation expense to core earnings, even though no incentive compensation was actually incurred. We believe that neither of these allocation methodologies achieves a logical result. Accordingly, the exclusion of incentive compensation facilitates comparability between periods and avoids the distortion to our non-GAAP operating measure that would result from the inclusion of incentive compensation that relates to non-core earnings. With regard to non-capitalized transaction-related expenses, management does not view these costs as part of our core operations, as they are considered by management to be similar to realized losses incurred at acquisition. Non-capitalized transaction-related expenses are generally legal and valuation service costs, as well as other professional service fees, incurred when we acquire certain investments, as well as costs associated with the acquisition and integration of acquired businesses. Since the third quarter of 2018, as a result of the Shellpoint Acquisition, we, through our wholly owned subsidiary,NewRez , originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. In connection with the transfer of loans to the GSEs or mortgage investors, we report realized gains or losses on the sale of originated residential mortgage loans and retention of mortgage servicing rights, which we believe is an indicator of performance for the Servicing and Origination segments and therefore included in core earnings. Realized gains or losses on the sale of originated residential mortgage loans had no impact on core earnings in any prior period, but may impact core earnings in future periods. Beginning with the third quarter of 2019, as a result of the continued evaluation of howShellpoint operates its business and its impact on our operating performance, core earnings includesShellpoint's GAAP net income with the exception of the unrealized gains or losses due to changes in valuation inputs and assumptions on MSRs owned byNewRez , and non-capitalized transaction-related expenses. This change was not material to core earnings for the quarter endedSeptember 30, 2019 . Management believes that the adjustments to compute "core earnings" specified above allow investors and analysts to readily identify and track the operating performance of the assets that form the core of our activity, assist in comparing the core operating results between periods, and enable investors to evaluate our current core performance using the same measure that management uses to operate the business. Management also utilizes core earnings as a measure in its decision-making process relating to improvements to the underlying fundamental operations of our investments, as well as the allocation of resources 95 -------------------------------------------------------------------------------- between those investments, and management also relies on core earnings as an indicator of the results of such decisions. Core earnings excludes certain recurring items, such as gains and losses (including impairment and reserves, as well as derivative activities) and non-capitalized transaction-related expenses, because they are not considered by management to be part of our core operations for the reasons described herein. As such, core earnings is not intended to reflect all of our activity and should be considered as only one of the factors used by management in assessing our performance, along with GAAP net income which is inclusive of all of our activities. The primary differences between core earnings and the measure we use to calculate incentive compensation relate to (i) realized gains and losses (including impairments and reserves for expected credit losses), (ii) non-capitalized transaction-related expenses and (iii) deferred taxes (other than those related to unrealized gains and losses). Each are excluded from core earnings and included in our incentive compensation measure (either immediately or through amortization). In addition, our incentive compensation measure does not include accretion on held-for-sale loans and the timing of recognition of income from consumer loans is different. Unlike core earnings, our incentive compensation measure is intended to reflect all realized results of operations. Core earnings does not represent and should not be considered as a substitute for, or superior to, net income or as a substitute for, or superior to, cash flows from operating activities, each as determined in accordance withU.S. GAAP, and our calculation of this measure may not be comparable to similarly entitled measures reported by other companies. For a further description of the difference between cash flows provided by operations and net income, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" above. Set forth below is a reconciliation of core earnings to the most directly comparable GAAP financial measure (dollars in thousands, except share and per share data):
Three Months Ended
March 31, 2021 December 31, 2020 March 31, 2020
Net (loss) income attributable to common stockholders
$ 68,609$ (1,602,315) Adjustments for Non-Core Earnings: Impairment (19,607) (10,058) 144,645 Change in fair value of investments (275,419) 18,875 955,532 (Gain) loss on settlement of investments, net 17,628 (39,605) 811,471 Other (income) loss 38,046 21,144 43,584 Other income and impairment attributable to non-controlling interests (4,511) 1,722 (22,279) Non-capitalized transaction-related expenses 10,623 7,630 16,902 Preferred stock management fee to affiliate 3,048 3,048 2,295 Deferred taxes 85,230 57,295 (166,917) Interest income on residential mortgage loans, held-for-sale 7,570 7,100 12,143 Adjust consumer loans to level yield - - (515) Core earnings of equity method investees: Excess mortgage servicing rights 4,576 1,205 3,825 Core earnings$ 144,768 $ 136,965$ 198,371 Net income per diluted share $ 0.65 $ 0.16 $ (3.86) Core earnings per diluted share $ 0.34 $ 0.32 $ 0.48 Weighted average number of shares of common stock outstanding, diluted 429,491,379 425,127,967 415,589,155 96
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