New Residential Investment Corp. (Form: 10-K, Received: 02/20/2020 06:03:37)

Transaction

Outstanding

Note Amount

Maturity Date

February 2020^(A)

Agency MSRs Loan

July 2022^(B)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K



☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended	December 31, 2019
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 001-35777

New Residential Investment Corp.

(Exact name of registrant as specified in its charter)



Delaware			45-3449660
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

1345 Avenue of the Americas	New York	NY	10105
(Address of principal executive offices)			(Zip Code)



(212)	798-3150
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12 (b) of the Act:



Title of each class:		Name of each exchange on which registered:
Common Stock, $0.01 par value per share	NRZ	New York Stock Exchange
7.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NRZ PR A	New York Stock Exchange
7.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock	NRZ PR B	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the common stock held by non-affiliates as of June 30, 2019 (computed based on the closing price on such date as reported on the NYSE) was: $4.7 billion.

Common stock, $0.01 par value per share: 415,551,820 shares outstanding as of February 18, 2020.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, 13 and 14) will be incorporated by reference from the registrant’s Definitive Proxy Statement for its 2020 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. Such forward-looking statements relate to, among other things, the operating performance of our investments, the stability of our earnings, our financing needs and the size and attractiveness of market opportunities. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations, cash flows or financial condition or state other forward-looking information. Our ability to predict results or the actual outcome of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to:


•	reductions in the value of, or cash flows received from, our investments;


•	the quality and size of the investment pipeline and our ability to take advantage of investment opportunities at attractive risk-adjusted prices;


•	the relationship between yields on assets which are paid off and yields on assets in which such monies can be reinvested;


•	our ability to deploy capital accretively and the timing of such deployment;


•	our counterparty concentration and default risks in Nationstar Mortgage LLC (d/b/a Mr. Cooper, “Mr. Cooper”), LoanCare LLC (“LoanCare”), OneMain Holdings, Inc. (“OneMain”), PHH Mortgage Corporation (“PHH”) and other third parties;


•	events, conditions or actions that might occur at Mr. Cooper, LoanCare, OneMain, PHH and other third parties, as well as the continued effect of prior events;


•	a lack of liquidity surrounding our investments, which could impede our ability to vary our portfolio in an appropriate manner;

•

the impact that risks associated with subprime mortgage loans and consumer loans, as well as deficiencies in servicing and foreclosure practices, may have on the value of our mortgage servicing rights (“MSRs”), excess mortgage servicing rights (“Excess MSRs”), servicer advance investments, residential mortgage-backed securities (“RMBS”), residential mortgage loans and consumer loan portfolios;


•	the risks related to our acquisitions of Shellpoint Partners LLC (“Shellpoint”) and certain assets from the bankruptcy estate of Ditech Holding Company and Ditech Financial LLC (“Ditech”), as well as ownership of entities that perform origination and servicing operations;


•	the risks that default and recovery rates on our MSRs, Excess MSRs, servicer advance investments, servicer advance receivables, RMBS, residential mortgage loans and consumer loans deteriorate compared to our underwriting estimates;


•	changes in prepayment rates on the loans underlying certain of our assets, including, but not limited to, our MSRs or Excess MSRs;


•	the risk that projected recapture rates on the loan pools underlying our MSRs or Excess MSRs are not achieved;


•	servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our Servicer Advance Investments or MSRs;


•	impairments in the value of the collateral underlying our investments and the relation of any such impairments to our judgments as to whether changes in the market value of our securities or loans are temporary or not and whether circumstances bearing on the value of such assets warrant changes in carrying values;


•	the relative spreads between the yield on the assets in which we invest and the cost of financing;


•	adverse changes in the financing markets we access affecting our ability to finance our investments on attractive terms, or at all;


•	changing risk assessments by lenders that potentially lead to increased margin calls, not extending our repurchase agreements or other financings in accordance with their current terms or not entering into new financings with us;


•	changes in interest rates and/or credit spreads, as well as the success of any hedging strategy we may undertake in relation to such changes;


•	the availability and terms of capital for future investments;


•	changes in economic conditions generally and the real estate and bond markets specifically;


•	competition within the finance and real estate industries;


•	the legislative/regulatory environment, including, but not limited to, the impact of the Dodd-Frank Act, U.S. government programs intended to grow the economy, future changes to tax laws, the federal conservatorship of Fannie Mae and Freddie Mac and legislation that permits modification of the terms of residential mortgage loans;


•	the risk that the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and collectively with Fannie Mae, the Government Sponsored Enterprises (“GSEs”) or other regulatory initiatives or actions may adversely affect returns from investments in MSRs and Excess MSRs;


•	our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and the potentially onerous consequences that any failure to maintain such qualification would have on our business;


•	our ability to maintain our exclusion from registration under the Investment Company Act of 1940 (the “1940 Act”) and the fact that maintaining such exclusion imposes limits on our operations;


•	the impact of current or future legal proceedings and regulatory investigations and inquiries;


•	the impact of any material transactions with FIG LLC (the “Manager”) or one of its affiliates, including the impact of any actual, potential or perceived conflicts of interest; and


•	effects of the completed merger of Fortress Investment Group LLC with affiliates of SoftBank Group Corp.

We also direct readers to other risks and uncertainties referenced in this report, including those set forth under “Risk Factors.” We caution that you should not place undue reliance on any of our forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us. Except as required by law, we are under no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statement, whether written or oral, that we may make from time to time, whether as a result of new information, future events or otherwise.

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about New Residential Investment Corp. (the “Company,” “New Residential” or “we,” “our” and “us”) or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:


•	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements proved to be inaccurate;


•	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;


•	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and


•	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Annual Report on Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov. See “Business—Corporate Governance and Internet Address; Where Readers Can Find Additional Information.”

The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.

iii



NEW RESIDENTIAL INVESTMENT CORP.
FORM 10-K

INDEX

				Page
PART I
Item 1.	Business			1
Item 1A.	Risk Factors			13
Item 1B.	Unresolved Staff Comments			60
Item 2.	Properties			60
Item 3.	Legal Proceedings			60
Item 4.	Mine Safety Disclosures			60
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			61
Item 6.	Selected Financial Data			64
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			68
		General		68
		Market Considerations		70
		Our Portfolio		71
		Application of Critical Accounting Policies		84
		Results of Operations		90
		Liquidity and Capital Resources		101
		Interest Rate, Credit and Spread Risk		112
		Off-Balance Sheet Arrangements		112
		Contractual Obligations		112
		Inflation		113
		Core Earnings		113
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk			115
Item 8.	Financial Statements and Supplementary Data			125
	Report of Independent Registered Public Accounting Firm			126
	Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting			131
	Consolidated Balance Sheets as of December 31, 2019 and 2018			132
	Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017			132
	Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017			133
	Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017			134
	Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017			135
	Notes to Consolidated Financial Statements			138
		Note 1.	Organization and Basis of Presentation	138
		Note 2.	Summary of Significant Accounting Policies	138
		Note 3.	Business Acquisitions	147
		Note 4.	Segment Reporting	153
		Note 5.	Investments in Excess Mortgage Servicing Rights	156
		Note 6.	Investments in Mortgage Servicing Rights and MSR Financing Receivables	159
		Note 7.	Servicer Advance Investments	165
		Note 8.	Investments in Real Estate and Other Securities	167
		Note 9.	Investments in Residential Mortgage Loans and Real Estate Owned	172
		Note 10.	Investments in Consumer Loans	180
		Note 11.	Derivatives	185
		Note 12.	Debt Obligations	188
		Note 13.	Fair Value Measurement	191
		Note 14.	Variable Interest Entities	206



		Note 15.	Equity and Earnings Per Share	209
		Note 16.	Commitments and Contingencies	213
		Note 17.	Transactions with Affiliates and Affiliated Entities	214
		Note 18.	Reclassification from Accumulated Other Comprehensive Income into Net Income	214
		Note 19.	Income Taxes	215
		Note 20.	Subsequent Events	217
		Note 21.	Summary Quarterly Consolidated Financial Information (Unaudited)	218
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			220
Item 9A.	Controls and Procedures			220
	Management’s Report on Internal Control over Financial Reporting			220
Item 9B.	Other Information			220
PART III
Item 10.	Directors, Executive Officers and Corporate Governance			221
Item 11.	Executive Compensation			221
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			221
Item 13.	Certain Relationships and Related Transactions, and Director Independence			221
Item 14.	Principal Accounting Fees and Services			221
PART IV
Item 15.	Exhibits; Financial Statement Schedules			222
Item 16.	Form 10-K Summary			230
	Signatures			231

PART I

Item 1. Business.

General

New Residential Investment Corp. (“New Residential”, “we”, “us” or “our”) is a real estate investment trust (“REIT”). We were formed as a wholly owned subsidiary of Drive Shack Inc. (formerly Newcastle Investment Corp., “Drive Shack”) in September 2011 and were spun-off from Drive Shack on May 15, 2013, which we refer to as the “distribution date.” Our stock is traded on the New York Stock Exchange under the symbol “NRZ.” We are externally managed and advised by an affiliate (our “Manager”) of Fortress Investment Group LLC (“Fortress”) pursuant to a management agreement (the “Management Agreement”).

We seek to generate long-term value for our investors by using our investment expertise to identify, manage and invest in mortgage related assets, including operating companies, that offer attractive risk-adjusted returns. Our investment strategy also involves opportunistically pursuing acquisitions and seeking to establish strategic partnerships that we believe enable us to maximize the value of the mortgage loans we originate and/or service by offering products and services to customers, servicers, and other parties through the lifecycle of transactions that affect each mortgage loan and underlying residential property. For more information about our investment guidelines, see “—Investment Guidelines.”

On December 27, 2017, SoftBank Group Corp. (“SoftBank”) acquired Fortress (the “SoftBank Merger”) and Fortress operates within SoftBank as an independent business headquartered in New York.

Our portfolio is currently comprised of mortgage servicing related assets (including investments in servicing, origination, and related operating businesses), residential mortgage-backed securities and loans, consumer loans, and other opportunistic investments. For more details on our portfolio, see “-Our Portfolio” below, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Our Portfolio.” For information concerning current market trends which impact our portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Market Considerations” and “Quantitative and Qualitative Disclosures About Market Risk.”

The Residential Real Estate Market

The residential mortgage industry is transforming the way mortgages are originated, owned and serviced. We believe significant investment opportunities exist in today’s complex and dynamic mortgage market and that we are one of only a select number of non-bank market participants that have the combination of capital, infrastructure, industry expertise and key business relationships that are necessary to take advantage of these opportunities.

The U.S. residential real estate market is vast: the value of the housing market totaled approximately $33.6 trillion as of December 2019, including about $11.1 trillion of single-family mortgage debt outstanding, according to the Board of Governors of the Federal Reserve System.

Over the last few decades, the complexity of the market for residential mortgage loans in the U.S. has dramatically increased. In the past, a borrower seeking credit for a home purchase would typically have obtained financing from a financial institution, such as a bank, savings association or credit union. These institutions would generally have held a majority of their originated residential mortgage loans as interest-earning assets on their balance sheets and would have performed all activities associated with servicing the loans, including accepting principal and interest payments, making advances for real estate taxes and property and casualty insurance premiums, initiating collection actions for delinquent payments and conducting foreclosures.

Now, institutions that originate residential mortgage loans generally hold a smaller portion of such loans as assets on their balance sheets and instead sell a significant portion of the loans they originate to third parties. GSEs are currently the largest purchasers of residential mortgage loans. Under a process known as securitization, GSEs and financial institutions typically package residential mortgage loans into pools that are sold to securitization trusts. These securitization trusts fund the acquisition of residential mortgage loans by issuing securities, known as residential mortgage backed securities (“RMBS”), which entitle the owner of such securities to receive a portion of the interest and/or principal collected on the residential mortgage loans in the pool. The purchasers of the RMBS are typically large institutions, such as pension funds, mutual funds, insurance companies, hedge funds and REITs. The agreement that governs the packaging of residential mortgage loans into a pool, the servicing of such residential mortgage loans and the terms of the RMBS issued by the securitization trust is often referred to as a pooling and servicing agreement. As a result of these changes in the securitization process, non-bank originators have gained significant market share in the residential mortgage market.

In the ten years prior to the credit dislocation in 2007, the securitization market drove an increase in the number of residential mortgage loans outstanding. Since 2007, the mortgage industry has been characterized by reduced origination and securitization activities, particularly for subprime and Alt-A mortgage loans. However, origination volume in recent years has been relatively robust. In particular, non-qualifying mortgage (“Non-QM”) origination and securitization volume has grown nearly 150% from 2018 to 2019 and is projected to continue to grow incrementally in 2020. The role of private capital has increased in financing the mortgage origination process because of the GSEs’ presence as the largest purchasers of residential mortgage loans.

In connection with a securitization, a number of entities perform specific roles with respect to the residential mortgage loans in a pool, including the trustee and the mortgage servicer. The trustee holds legal title to the residential mortgage loans on behalf of the owner of the RMBS and either maintains the mortgage note and related documents itself or with a custodian. One or more other entities are appointed pursuant to the pooling and servicing agreement to service the residential mortgage loans. In some cases, the servicer is the same institution that originated the loan, and, in other cases, it may be a different institution. The duties of servicers of residential mortgage loans that have been securitized are generally required to be performed in accordance with industry-accepted servicing practices and the terms of the relevant pooling and servicing agreement, mortgage note and applicable law. A servicer generally takes actions, such as foreclosure, in the name and on behalf of the trustee. The trustee or a separate securities administrator for the trust receives the payments collected by the servicer on the residential mortgage loans and distributes them to the investors in the RMBS pursuant to the terms of the pooling and servicing agreement.

Following the credit crisis, the need for “high-touch” non-bank specialty servicers increased as loan performance declined, delinquencies rose and servicing complexities broadened. Specialty servicers have proven more willing and better equipped to perform the operationally intensive activities (e.g., collections, foreclosure avoidance and loan workouts) required to service credit-sensitive loans.

The Residential Mortgage Loan Market

Residential mortgage loans are classified based on certain payment characteristics. Performing loans are residential mortgage loans where the borrower is generally current on required payments; by contrast, non-performing loans are residential mortgage loans where the borrower is delinquent or in default. Re-performing loans were formally non-performing but became performing again, often as a result of a loan modification where the lender agrees to modified terms with the borrower rather than foreclosing on the underlying property. Reverse mortgage loans are a special type of loan under which the borrower is typically paid a monthly amount, increasing the balance of the loan, and are typically collected when the property is sold or the borrower no longer resides at the property. If a borrower defaults on a loan and the lender takes ownership of the underlying property through foreclosure, that property is referred to as real estate owned (“REO”).

The residential mortgage loan market is commonly further divided into a number of categories based on certain residential mortgage loan characteristics, including the credit quality of borrowers and the types of institutions that originate or finance such loans. While there are no universally accepted definitions, the residential mortgage loan market is commonly divided by market participants into the following categories.

•

Government-Sponsored Enterprise and Government Guaranteed Loans. This category of residential mortgage loans includes “conforming loans,” which are first lien residential mortgage loans that are secured by single-family residences that meet or “conform” to the underwriting standards established by the GSEs. The conforming loan limit is established by statute and currently is $453,100 with certain exceptions for high-priced real estate markets. This category also includes residential mortgage loans issued to borrowers that do not meet conforming loan standards, but who qualify for a loan that is insured or guaranteed by the government through the Government National Mortgage Association (“Ginnie Mae” and, collectively with the GSEs, the “Agencies” (with each of Fannie Mae, Freddie Mac and Ginnie Mae an “Agency”)), primarily through federal programs operated by the Federal Housing Administration (“FHA”) and the Department of Veterans Affairs.

•

Non-GSE or Government Guaranteed Loans. Residential mortgage loans that are not guaranteed by the GSEs or the government are generally referred to as “non-conforming loans” and fall into one of the following categories: jumbo, subprime, Alt-A, second lien or non-qualifying loans. The loans may be non-conforming due to various factors, including mortgage balances in excess of Agency underwriting guidelines, borrower characteristics, loan characteristics and level of documentation.


•	Jumbo. Jumbo mortgage loans have original principal amounts that exceed the statutory conforming limit for GSE loans. Jumbo borrowers generally have strong credit histories and provide full loan documentation, including verification of income and assets.


•	Subprime. Subprime mortgage loans are generally issued to borrowers with weak credit histories, who make low or no down payments on the properties they purchase or have limited documentation of their income or assets. Subprime borrowers generally pay higher interest rates and fees than prime borrowers.

•

Alt-A. Alt-A mortgage loans are generally issued to borrowers with risk profiles that fall between prime and subprime. These loans have one or more high-risk features, such as the borrower having a high debt-to-income ratio, limited documentation verifying the borrower’s income or assets, or the option of making monthly payments that are lower than required for a fully amortizing loan. Alt-A mortgage loans generally have interest rates that fall between the interest rates on conforming loans and subprime loans.

•

Second Lien. Second mortgages and home equity lines are often referred to as second liens and fall into a separate category of the residential mortgage market. These loans typically have higher interest rates than loans secured by first liens because the lender generally will only receive proceeds from a foreclosure of a property after the first lien holder is paid in full. In addition, these loans often feature higher loan-to-value ratios and are less secure than first lien mortgages.

•

Non-QM. Non-QM loans are loans that do not meet the Qualified Mortgage rules per the Consumer Financial Protection Bureau. These loans commonly have features including, but not limited to, debt-to-income ratios exceeding 43%, interest only payment terms, loan terms exceeding 30 years and ability to repay based on stated income and asset verification. Non-QM loans are generally issued to borrowers that are self-employed, have high debt-to-income ratio or have high net worth with liquid assets.

Operating Investments

Origination

Our origination business operates through the lending division of our subsidiary NewRez LLC (formerly New Penn Financial, LLC, “NewRez”). As a lender, NewRez provides refinance opportunities to eligible existing servicing customers, primarily through its direct-to-consumer channel, and also originates or purchases loans from brokers or originators through retail, wholesale and correspondent channels. NewRez originates or purchases residential mortgage loans conforming to the underwriting standards of the Agencies (“Agency” loans), government-insured residential mortgage loans which are insured by the FHA, VA and USDA, and non-conforming loans through its SMART Loan Series. NewRez’s SMART Loan Series is a Non-QM loan product that provides a variety of options for highly qualified borrowers who fall outside the specific requirements of Agency mortgage loans. NewRez generates revenue through sales of residential mortgage loans, including, but not limited to, gain on loans originated and sold, the settlement of mortgage loan origination derivative instruments and the value of MSRs retained on transfer of the loans. Profit margins per loan vary by channel, with correspondent typically being the lowest and retail being the highest. NewRez sells conforming loans to the GSEs and Non-QM to another subsidiary of New Residential. NewRez relies on warehouse financing to fund loans at origination through the sale date.

NewRez sells newly originated Agency MSRs to New Residential Mortgage LLC (“NRM”), a subsidiary of New Residential, under a flow agreement and may, from time to time, sell the excess MSR to another subsidiary of New Residential. These transactions are recorded at fair value with gains or losses recognized on sale in the Origination segment. Subsequent to sale, these assets are included in MSR investments and the risks and rewards related to these assets are recognized in our MSR Related Investments segment.

We also have several wholly-owned subsidiaries that perform various services in the mortgage and real estate industries. Our subsidiary Avenue 365 Lender Services, LLC (“Avenue 365”) is a title agency providing title and settlement services to mortgage lenders and servicers. Our subsidiary eStreet Appraisal Management LLC (“eStreet”) is an appraisal management company that performs appraisal and valuation services.

Servicing

Our servicing business operates through NewRez’s servicing division, which consists of its performing loans servicing division, NewRez Servicing, and its special servicing division, Shellpoint Mortgage Servicing (“SMS”). NewRez Servicing services current Agency and government-insured loans. SMS services delinquent Agency loans and non-Agency loans on behalf of the owners of the underlying mortgages. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities, negotiating workouts and modifications, conducting or managing foreclosures on behalf of investors or other servicers and otherwise administering our mortgage loan servicing portfolio.

SMS enters into market based subservicing agreements in connection with its subservicing on behalf of other New Residential subsidiaries. We recognize this subservicing income earned from other subsidiaries in Servicing revenue, net in the Servicing

segment. To the extent the subsidiary is the owner of the MSR or whole-loan, subservicing expense is recognized in the MSR Related Investments and Residential Securities and Loans segments, respectively.

As a subservicer, SMS may be obligated to make servicing advances; however, advances and other incurred costs are generally lower compared to those of the MSR owner, and recovery times are substantially faster, often within the following month. To the extent SMS makes or recovers servicing advances under its subservicing agreements with other New Residential subsidiaries, such amounts are recognized as intercompany receivables or payables with the corresponding servicing advance recognized in the MSR Related Investments or Residential Securities and Loans segment, as appropriate.

MSR Related Investments

MSRs, MSR Financing Receivables and Excess MSRs

A mortgage servicing right (“MSR”) provides a mortgage servicer with the right to service a pool of residential mortgage loans in exchange for a portion of the interest payments made on the underlying residential mortgage loans. This amount typically ranges from 25 to 50 basis points (“bps”) times the unpaid principal balance (“UPB”) of the residential mortgage loans, plus ancillary income and custodial interest. An MSR is made up of two components: a basic fee and an excess MSR (“Excess MSR”). The basic fee is the amount of compensation for the performance of servicing duties (including advance obligations), and the Excess MSR is the amount that exceeds the basic fee. Ownership of an MSR requires the owner to be a licensed mortgage servicer. An owner of an Excess MSR is not required to be licensed, and is not required to assume any servicing duties, advance obligations or liabilities associated with the loan pool underlying the MSR unless otherwise specified through agreement.

Servicer Advances Receivable and Servicer Advance Investments

Servicer advances are a customary feature of residential mortgage securitization transactions and represent one of the duties for which a servicer is compensated through the basic fee component of the related MSR, since the advances are non-interest bearing. Servicer advances are generally reimbursable payments made by a servicer (i) when the borrower fails to make scheduled payments due on a residential mortgage loan or (ii) to support the value of the collateral property. Our interests in servicer advances include the following:


•	Servicer Advances Receivable. The outstanding servicer advances related to a specified pool of mortgage loans in which we own the MSR.


•	Servicer Advance Investments. These investments are associated with specified pools of mortgage loans and include the related outstanding servicer advances, the requirement to purchase future servicer advances and the rights to the basic fee component of the related MSR. We have purchased Servicer Advance Investments on certain loan pools underlying our Excess MSRs.

Servicer advances typically fall into one of three categories:


•	Principal and Interest Advances: Cash payments made by the servicer to cover scheduled payments of principal of, and interest on, a residential mortgage loan that have not been paid on a timely basis by the borrower.


•	Escrow Advances (Taxes and Insurance Advances): Cash payments made by the servicer to third parties on behalf of the borrower for real estate taxes and insurance premiums on the property that have not been paid on a timely basis by the borrower.


•	Foreclosure Advances: Cash payments made by the servicer to third parties for the costs and expenses incurred in connection with the foreclosure, preservation and sale of the mortgaged property, including attorneys’ and other professional fees.

The purpose of the advances is to provide liquidity, rather than credit enhancement, to the underlying residential mortgage securitization transaction. Servicer advances are generally permitted to be repaid from amounts received with respect to the related residential mortgage loan, including payments from the borrower or amounts received from the liquidation of the property securing the loan, which is referred to as “loan-level recovery.”

Residential mortgage servicing agreements generally require a servicer to make advances in respect of serviced residential mortgage loans unless the servicer determines in good faith that the advance would not be ultimately recoverable from the proceeds of the related residential mortgage loan or the mortgaged property. In many cases, if the servicer determines that an advance previously made would not be recoverable from these sources, or if such advance is not recovered when the loan is repaid or related property is liquidated, then, the servicer is, most often, entitled to withdraw funds from the trustee custodial account for payments on the serviced residential mortgage loans to reimburse the applicable advance. This is what is often referred to as a “general collections

backstop.” Under certain circumstances, a servicer may also be reimbursed for an otherwise unrecoverable advance by a GSE, with respect to loans in Agency RMBS (defined below). See “Risk Factors—Risks Related to Our Business—Servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our Servicer Advance Investments or MSRs.”

The status of our interests in servicer advances for purposes of the REIT requirements is uncertain, and therefore our ability to continue to acquire Servicer Advance Investments may be limited. Because of the uncertainty we currently hold our interests in Servicer Advance Investments in taxable REIT subsidiaries.

We have also invested in rated bonds backed by securitized pools of servicer advances issued through transactions sponsored by mortgage servicers. Servicer advance securitizations are generally rated “Master Trust” structures with multiple series of notes and one or more variable funding notes sharing in the same pool of collateral. Each note class has a specific advance rate and rating. We may pursue similar investments as opportunities arise.

We also own several wholly-owned subsidiaries that perform various services in the mortgage and real estate industries. Our subsidiary DGG RE Investments LLC d/b/a Guardian Asset Management (“Guardian”) is a national provider of field services and property management services. We also made a strategic investment in Covius Holdings, Inc. (“Covius”), a leading provider of technology-enabled services to the mortgage industry.

Residential Securities and Loans

RMBS

Residential mortgage loans are often packaged into pools held in securitization entities which issue securities (RMBS) collateralized by such loans. Agency RMBS are RMBS issued or guaranteed by an Agency. “Non-Agency” RMBS are issued by either public trusts or private label securitization (“PLS”) entities. We invest in both Agency RMBS and Non-Agency RMBS.

Agency RMBS generally offer more stable cash flows and historically have been subject to lower credit risk and greater price stability than the other types of residential mortgage investments we intend to target. The Agency RMBS that we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. More information about certain types of Agency RMBS in which we have invested or may invest is set forth below.

Mortgage pass-through certificates. Mortgage pass-through certificates are securities representing interests in “pools” of residential mortgage loans secured by residential real property where payments of both interest and principal, plus pre-paid principal, on the securities are made monthly to holders of the securities, in effect “passing through” monthly payments made by the individual borrowers on the residential mortgage loans that underlie the securities, net of fees paid in connection with the issuance of the securities and the servicing of the underlying residential mortgage loans.

Interest Only Agency RMBS. This type of stripped security only entitles the holder to interest payments. The yield to maturity of interest only Agency RMBS is extremely sensitive to the rate of principal payments (particularly prepayments) on the underlying pool of residential mortgage loans. If we decide to invest in these types of securities, we anticipate doing so primarily to take advantage of particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.

To-be-announced forward contract positions (“TBAs”). We utilize TBAs in order to invest in Agency RMBS. Pursuant to these TBAs, we agree to purchase or sell, for future delivery, Agency RMBS with certain principal and interest terms and certain types of underlying collateral, but the particular Agency RMBS to be delivered would not be identified until shortly before the TBA settlement date. Our ability to purchase Agency RMBS through TBAs may be limited by the 75% income and asset tests applicable to REITs.

Specified RMBS (“Specified Pools”). Specified Pools are pools created with loans that have similar characteristics such as loan balance, FICO, coupon and prepayment protection. We invest in these securities to take advantage of particularly attractive prepayment-related or structural opportunities in the Agency RMBS markets.

The Non-Agency RMBS we may acquire could be secured by fixed-rate mortgages, adjustable-rate mortgages or hybrid adjustable-rate mortgages. The residential mortgage loan collateral may be classified as conforming or non-conforming, depending on a variety of factors.

RMBS, and in particular Non-Agency RMBS, may be subject to call rights, commonly referred to as “cleanup call rights.” Call rights permit the holder of the rights to purchase all of the residential mortgage loans which are collateralizing the related

securitization for a price generally equal to the outstanding balance of such loans plus interest and certain other amounts (such as outstanding servicer advances and unpaid servicing fees). Call rights may be subject to limitations with respect to when they may be exercised (such as specific dates or upon the reduction of the outstanding balances of the remaining residential mortgage loans to a specified level). Call rights generally become exercisable when the current principal balance of the underlying residential mortgage loans is equal to or lower than 10% of their original balance.

We believe that in many Non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the Non-Agency RMBS and the recovery value of the underlying collateral. We pursue opportunities in structured transactions that enable us to realize identified excesses of collateral value over related RMBS value, particularly through the acquisition and execution of call rights. We control the call rights on Non-Agency deals with a total UPB of approximately $101.0 billion.

We believe a call right is profitable when the aggregate underlying loan value is greater than the sum of par on the loans minus any discount from acquired bonds plus expenses, including outstanding advances, related to such exercise. Generally, profit with respect to our call rights is generated by:


•	acquiring bonds issued by the securitization at a discount, prior to initiating the call, such that the portion of the payment we make to the trust, which is returned to us as bondholders when the call is exercised, exceeds our purchase price for the bonds;


•	re-securitizing or selling performing loans for a gain; and


•	retaining distressed loans to modify or liquidate over time at a premium to our basis (which results in increases in our portfolio of residential mortgage loans and REO).

We continue to evaluate the call rights we acquired, and our ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. The timing, size and potential returns of future call transactions may be less attractive than our prior activity in this sector due to a number of factors, most of which are beyond our control. 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.”

Residential Mortgage Loans and Real Estate Owned

We believe there may be attractive opportunities to invest in portfolios of non-performing and other residential mortgage loans, along with foreclosed properties. We source non-performing residential mortgage loans primarily from two sources: call transactions (discussed above) and third-party pool purchases. In certain of these investments, we acquire the loans at a discount to their face amount, and we (either independently or with a servicing co-investor) seek to resolve the loans resulting in a substantially higher valuation. In other investments, we acquire the foreclosed property at a deep discount to market values, and we seek to monetize the discount through property improvements and sales. In addition, we may seek to employ leverage to increase returns, either through traditional financing lines or securitization.

In addition, as discussed above, our wholly owned subsidiary originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The Agencies guarantee the conventional and government -insured mortgage securitizations and nonconforming loans may be sold through the issuance of private label mortgage securitizations.

Other Investments

We may pursue other types of investments as the market evolves, such as our opportunistic investments in consumer loans. Our Manager makes decisions about our investments in accordance with broad investment guidelines adopted by our board of directors. Accordingly, we may, without a stockholder vote, change our target asset classes and acquire a variety of assets that may differ from, and are possibly riskier than, our current portfolio. For more information about our investment guidelines, see “—Investment Guidelines.”

Our Portfolio

Our current investment portfolio is comprised primarily of:


•	Servicing Related Investments


•	Operating Entities (Origination, Servicing)


•	Servicing related businesses


•	MSRs, including MSR financing receivables (consisting of MSRs owned by NRM or NewRez in which we acquired the legal interest in the MSR, but, solely for accounting purposes, the acquisition was not treated as a sale);


•	Excess MSRs;


•	Servicer Advance Investments (which include servicer advance receivables, the requirement to make future servicer advances, and the rights to receive the base fee portion of the related MSR, in each case relating to the mortgage loans underlying MSRs or Excess MSRs); and


•	Servicer advances receivable related to our MSRs investments;


•	Residential Securities and Loans


•	Real estate securities, or RMBS; and


•	Residential mortgage loans;


•	Consumer Loans


•	Corporate

For more detail, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Portfolio.” The following table summarizes our consolidated investment portfolio as of December 31, 2019 (dollars in thousands):



	Servicing and Origination								Residential Securities and Loans
	Origination		Servicing		MSR Related Investments		Total Servicing and Origination		Real Estate Securities		Residential Mortgage Loans		Consumer Loans		Corporate			Total
December 31, 2019
Investments	$	1,414,528	$	—	$	6,773,353	$	8,187,881	$	19,477,728	$	5,843,983	$	827,545	$	—		$	34,337,137
Cash and cash equivalents	77,237		32,225		318,714		428,176		87,359		1,180		6,514		5,508			528,737
Restricted cash	6,730		15,769		107,328		129,827		—		—		32,370		—			162,197
Other assets	250,709		204,723		3,420,122		3,875,554		5,590,456		174,940		78,740		85,956			9,805,646
Goodwill	11,836		12,809		5,092		29,737		—		—		—		—			29,737
Total assets	$	1,761,040	$	265,526	$	10,624,609	$	12,651,175	$	25,155,543	$	6,020,103	$	945,169	$	91,464		$	44,863,454
Debt	$	1,304,621	$	33,412	$	6,646,159	$	7,984,192	$	22,151,110	$	4,676,849	$	824,222	$	—		$	35,636,373
Other liabilities	117,328		51,264		451,629		620,221		980,415		55,121		16,795		318,269			1,990,821
Total liabilities	1,421,949		84,676		7,097,788		8,604,413		23,131,525		4,731,970		841,017		318,269			37,627,194
Total equity	339,091		180,850		3,526,821		4,046,762		2,024,018		1,288,133		104,152		(226,805		)	7,236,260
Noncontrolling interests in equity of consolidated subsidiaries	11,354		—		45,025		56,379		—		—		22,171		—			78,550
Total New Residential stockholders’ equity	327,737		180,850		3,481,796		3,990,383		2,024,018		1,288,133		81,981		(226,805		)	7,157,710
Investments in equity method investees	$	—	$	—	$	165,848	$	165,848	$	—	$	—	$	—	$	—		$	165,848

Over time, we expect to opportunistically adjust our portfolio composition in response to market conditions.

With respect to our Excess MSRs, Servicer Advance Investments, and consumer loans, we engage third party servicers to service the loans, or loans underlying the investments, as applicable. With respect to our MSRs and residential mortgage loan investments, we engage both subsidiaries and third party servicers to service the loans underlying the investments. We refer to the servicers and subservicers we engage as our “Servicing Partners”. As of December 31, 2019, our Servicing Partners include, but are not limited to, Mr. Cooper, LoanCare, LLC (“LoanCare”), Ocwen Financial Corporation (“OFC” and, together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), PHH Corporation (together with its subsidiaries, including PHH Mortgage Corporation, and together with OFC and the Ocwen entities acquired by PHH Corporation as a result of its merger with OFC, “PHH”), Flagstar Bank, FSB (“Flagstar”), NewRez, Specialized Loan Servicing LLC (“SLS”) and Fay Financial LLC (“Fay”), OneMain Holdings, Inc. (“OneMain”), and the Consumer Loan Seller (as defined in Note 10 to our Consolidated Financial Statements). In addition, NRM is referred to as a “Servicing Partner” when contextually applicable.

Investment Guidelines

Our board of directors has adopted a broad set of investment guidelines to be used by our Manager to evaluate specific investments. Our general investment guidelines prohibit any investment that would cause us to fail to qualify as a REIT, and any investment that would cause us to be regulated as an investment company. These investment guidelines may be changed by our board of directors without the approval of our stockholders. If our Board changes any of our investment guidelines, we will disclose such changes in our next required periodic report.

Financing Strategy

Our objective is to generate attractive risk-adjusted returns for our stockholders, which at times incorporates the use of leverage. The amount of leverage we deploy for a particular investment depends upon an assessment of a variety of factors, which may include the anticipated liquidity and price volatility of our assets; the gap between the duration of assets and liabilities, including hedges; the availability and cost of financing the assets; our opinion of the creditworthiness of financing counterparties; the health of the U.S. economy and the residential mortgage and housing markets; our outlook on interest rates; the credit quality of the loans underlying our investments; and our outlook for asset spreads relative to financing costs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt Obligations” for further details about our debt obligations.

Hedging Strategy

Subject to maintaining our qualification as a REIT and exclusion from registration under the 1940 Act, we may, from time to time, utilize derivative financial instruments to hedge the interest rate risk associated with our borrowings. Under the U.S. federal income tax laws applicable to REITs, we generally will be able to enter into certain transactions to hedge indebtedness that we may incur, or plan to incur, to acquire or carry real estate assets, although our total gross income from interest rate hedges that do not meet this requirement and other non-qualifying sources generally must not exceed 5% of our gross income.

Subject to maintaining our qualification as a REIT and exclusion from registration under the 1940 Act, we may also engage in a variety of interest rate management techniques that seek on the one hand to mitigate the influence of interest rate changes on the values of some of our assets and on the other hand help us achieve our risk management objectives. The U.S. federal income tax rules applicable to REITs may require us to implement certain of these techniques through a domestic taxable REIT subsidiary (“TRS”) that is fully subject to U.S. federal corporate income taxation. Our interest rate management techniques may include:


•	interest rate swap agreements, interest rate cap agreements, exchange-traded derivatives and swaptions;


•	puts and calls on securities or indices of securities;


•	U.S. Treasury securities and options on U.S. Treasury securities;


•	TBAs; and


•	other similar transactions.

Subject to maintaining our REIT qualification, we may utilize hedging instruments and techniques that we deem appropriate. We expect these instruments and techniques may allow us to reduce, but not eliminate, the impact of changing interest rates on our earnings and liquidity.

The Management Agreement

We entered into a Management Agreement with our Manager, an affiliate of Fortress, which was subsequently amended and restated on August 1, 2013, on August 5, 2014 and on May 7, 2015, pursuant to which our Manager provides for a management team and other professionals who are responsible for implementing our business strategy, subject to the supervision of our board of directors. Our Manager is responsible for, among other things, (i) setting investment criteria in accordance with broad investment guidelines adopted by our board of directors, (ii) sourcing, analyzing and executing acquisitions, (iii) providing financial and accounting management services and (iv) performing other duties as specified in the Management Agreement.

We pay our Manager an annual management fee equal to 1.5% of our gross equity. Gross equity is generally the equity that was transferred to us by Drive Shack upon spin-off on May 15, 2013, on the distribution date, plus total net proceeds from common and preferred stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock.

Our Manager is entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1)(a) the funds from operations before the incentive compensation, excluding funds from operations from investments in the Consumer Loan Companies and any unrealized gains or losses from mark-to-market valuation changes on investments and debt (and any deferred tax impact thereof), per share of common stock, plus (b) earnings (or losses) from the Consumer Loan Companies computed on a level-yield basis (such that the loans are treated as if they qualified as loans acquired with a discount for credit quality as set forth in Accounting Standards Codification (“ASC”) No. 310-30, as such codification was in effect on June 30, 2013) as if the Consumer Loan Companies had been acquired at their GAAP basis on the distribution date, plus earnings (or losses) from equity method investees invested in Excess MSRs as if such equity method investees had not made a fair value election, plus gains (or losses) from debt restructuring and gains (or losses) from sales of property, and plus non-routine items, minus amortization of non-routine items, in each case per share of common stock, exceed (2) an amount equal to

(a) the weighted average of the book value per share of the equity that was transferred to us by Drive Shack on the distribution date and the prices per share of our common stock in any offerings by us (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding.

“Funds from operations” means net income (computed in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”)), excluding gains (losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations is computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of our independent directors based on changes in, or certain applications of, GAAP. Funds from operations is determined from the date of our separation from Drive Shack and without regard to Drive Shack’s prior performance. Funds from operations does not represent and should not be considered as a substitute for, or superior to, net income, or as a substitute for, or superior to, cash flows from operating activities, each as determined in accordance with U.S. GAAP, and our calculation of this measure may not be comparable to similarly titled measures reported by other companies.

The initial term of our Management Agreement expired on May 15, 2014, and the Management Agreement was and will be renewed automatically each year for an additional one-year period unless (i) a majority consisting of at least two-thirds of our independent directors or a simple majority of the holders of outstanding shares of our common stock, agree that there has been unsatisfactory performance that is materially detrimental to us or (ii) a simple majority of our independent directors agree that the management fee payable to our Manager is unfair; provided, that we shall not have the right to terminate our Management Agreement under clause (ii) foregoing if the Manager agrees to continue to provide the services under the Management Agreement at a fee that our independent directors have determined to be fair.

If we elect not to renew our Management Agreement at the expiration of any such one-year extension term as set forth above, our Manager will be provided with 60 days’ prior notice of any such termination. In the event of such termination, we would be required to pay the termination fee. The termination fee is a fee equal to the sum of (1) the amount of the management fee during the 12 months immediately preceding the date of termination, and (2) the “Incentive Compensation Fair Value Amount.” The Incentive Compensation Fair Value Amount is an amount equal to the incentive compensation that would be paid to the Manager if our assets were sold for cash at their then current fair market value (taking into account, among other things, the expected future performance of the underlying investments).

Fortress, through its affiliates, and principals of Fortress held 2.4 million shares of our common stock, and Fortress, through its affiliates, held options relating to an additional 10.5 million shares of our common stock, representing approximately 3.0% of our common stock on a fully diluted basis, as of December 31, 2019.

Policies with Respect to Certain Other Activities

Subject to the approval of our board of directors, we have the authority to offer our common stock or other equity or debt securities in exchange for property and to repurchase or otherwise reacquire our shares or any other securities and may engage in such activities in the future.

We also may make loans to, or provide guarantees of certain obligations of, our subsidiaries.

Subject to the percentage ownership and gross income and asset tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

We may engage in the purchase and sale of investments.

Our officers and directors may change any of these policies and our investment guidelines without a vote of our stockholders. In the event that we determine to raise additional equity capital, our board of directors has the authority, without stockholder approval (subject to certain New York Stock Exchange (“NYSE”) requirements), to issue additional common stock or preferred stock in any manner and on such terms and for such consideration it deems appropriate, including in exchange for property.

Decisions regarding the form and other characteristics of the financing for our investments are made by our Manager subject to the general investment guidelines adopted by our board of directors.

Conflicts of Interest

Although we have established certain policies and procedures designed to mitigate conflicts of interest, there can be no assurance that these policies and procedures will be effective in doing so. It is possible that actual, potential or perceived conflicts of interest could give rise to investor dissatisfaction, litigation or regulatory enforcement actions.

One or more of our officers and directors have responsibilities and commitments to entities other than us. We do not have a policy that expressly prohibits our directors, officers, security holders or affiliates from engaging for their own account in business activities of the types conducted by us. Moreover, our certificate of incorporation provides that if Drive Shack or Fortress or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Drive Shack or Fortress acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of New Residential and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Drive Shack or Fortress, or their affiliates, pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us. However, subject to the terms of our certificate of incorporation, our code of business conduct and ethics prohibits the directors, officers and employees of our Manager from engaging in any transaction that involves an actual conflict of interest with us. See “Risk Factors—Risks Related to Our Manager—There are conflicts of interest in our relationship with our Manager.”

Our key agreements, including our Management Agreement, were negotiated among related parties, and their respective terms, including fees and other amounts payable, may not be as favorable to us as terms negotiated with unaffiliated parties. Our independent directors may not vigorously enforce the provisions of our Management Agreement against our Manager. For example, our independent directors may refrain from terminating our Manager because doing so could result in the loss of key personnel. The structure of the Manager’s compensation arrangement may have unintended consequences for us. We have agreed to pay our Manager a management fee that is not tied to our performance and incentive compensation that is based entirely on our performance. The management fee may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us, while the performance-based incentive compensation component may cause our Manager to place undue emphasis on the maximization of earnings, including through the use of leverage, at the expense of other objectives, such as preservation of capital, to achieve higher incentive distributions. Investments with higher yield potential are generally riskier or more speculative than investments with lower yield potential. This could result in increased risk to the value of our portfolio of assets and a stockholder’s investment in us.

We may compete with entities affiliated with our Manager or Fortress for certain target assets. From time to time, affiliates of Fortress may focus on investments in assets with a similar profile as our target assets that we may seek to acquire. These affiliates may have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. Fortress has two funds primarily focused on investing in Excess MSRs with approximately $0.7 billion in investments in aggregate. We have co-invested with these funds in Excess MSRs and may do so with similar Fortress funds in the future. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.

Our Manager may determine, in its discretion, to make a particular investment through an investment vehicle other than us. Investment allocation decisions will reflect a variety of factors, such as a particular vehicle’s availability of capital (including financing), investment objectives and concentration limits, legal, regulatory, tax and other similar considerations, the source of the investment opportunity and other factors that the Manager, in its discretion, deems appropriate. Our Manager does not have an obligation to offer us the opportunity to participate in any particular investment, even if it meets our investment objectives.

Operational and Regulatory Structure

REIT Qualification

We have elected and intend to qualify to be taxed as a REIT for U.S. federal income tax purposes. Our qualification as a REIT will depend upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of 1986, as amended, (the “Internal Revenue Code”), relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels to our stockholders and the concentration of ownership of our capital stock. We believe that, commencing with our initial taxable year ended December 31, 2013, we have been organized in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code, and that our manner of operation will enable us to meet the requirements for qualification and taxation as a REIT.

1940 Act Exclusion

We intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act. Section 3(a)(1)(A) of the 1940 Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting or trading in securities. Section 3(a)(1)(C) of the 1940 Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis (the “40% test”). Excluded from the term “investment securities,” among other things, are U.S. Government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exclusion from the definition of investment company for private funds set forth in Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

We are organized as a holding company that conducts its businesses primarily through wholly owned and majority owned subsidiaries. We intend to continue to conduct our operations so that we do not come within the definition of an investment company because less than 40% of the value of our adjusted total assets on an unconsolidated basis will consist of “investment securities” in compliance with the 40% test under Section 3(a)(1)(C) of the 1940 Act. The value of securities issued by any wholly owned or majority owned subsidiaries that we may form in the future that are excluded from the definition of “investment company” based on Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not exceed the 40% test under Section 3(a)(1)(C) of the 1940 Act. For purposes of the foregoing, we currently treat our interests in Specialized Loan Servicing LLC (“SLS”) servicer advances and our subsidiaries that hold consumer loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3(c)(7) of the 1940 Act. We will monitor our holdings to ensure continuing and ongoing compliance with the 40% test under Section 3(a)(1)(C) of the 1940 Act. In addition, we believe we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because we will not engage primarily or hold ourselves out as being engaged primarily in the business of investing, reinvesting or trading in securities. Rather, through our wholly owned subsidiaries, we will be primarily engaged in the non-investment company businesses of these subsidiaries.

If the value of securities issued by our subsidiaries that are excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds the 40% test under Section 3(a)(1)(C) of the 1940 Act (e.g., the value of our interests in the taxable REIT subsidiaries that hold Servicer Advance Investments and are not excluded from the definition of “investment company” by Section 3(c)(5)(A), (B), or (C) of the 1940 Act increases significantly in proportion to the value of our other assets), or if one or more of such subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company under the 1940 Act, either of which could have an adverse effect on us and the market price of our securities. As discussed above, for purposes of the foregoing, we currently treat our interest in SLS servicer advances and our subsidiaries that hold consumer loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3(c)(7) of the 1940 Act. If we were required to register as an investment company under the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the value of our common stock, the sustainability of our business model, and our ability to make distributions.

For purposes of the foregoing, we treat our interests in certain of our wholly owned and majority owned subsidiaries, which constitutes more than 60% of the value of our adjusted total assets on an unconsolidated basis, as non-investment securities because such subsidiaries qualify for exclusion from the definition of an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act (the “Section 3(c)(5)(C) exclusion”). The Section 3(c)(5)(C) exclusion is available for entities “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The Section 3(c)(5)(C) exclusion generally requires that at least 55% of these subsidiaries’ assets comprise qualifying real estate assets and at least 80% of each of their portfolios must comprise qualifying real estate assets and real estate-related assets under the 1940 Act. Maintenance of our exclusion under the 1940 Act generally limits the amount of our Section 3(c)(5)(C) subsidiaries’ investments in non-real estate assets to no more than 20% of our total assets.

In satisfying the 55% requirement under the Section 3(c)(5)(C) exclusion, based on guidance from the Securities and Exchange Commission (“SEC”) and its staff, we treat Agency RMBS issued with respect to an underlying pool of mortgage loans in which we hold all of the certificates issued by the pool as qualifying real estate assets. The SEC and its staff have not published guidance with respect to the treatment of whole pool Non-Agency RMBS for purposes of the Section 3(c)(5)(C) exclusion. Accordingly, based on our own judgment and analysis of the guidance from the SEC and its staff identifying Agency whole pool certificates as qualifying real estate assets under Section 3(c)(5)(C), we treat whole pool Non-Agency RMBS issued with respect to an underlying

pool of mortgage loans in which our subsidiary relying on Section 3(c)(5)(C) holds all of the certificates issued by the pool as qualifying real estate assets. We also treat whole mortgage loans that each of our subsidiaries relying on Section 3(c)(5)(C) may acquire directly as qualifying real estate assets provided that 100% of the loan is secured by real estate when such subsidiary acquires the loan and the subsidiary has the unilateral right to foreclose on the mortgage.

Based on our own judgment and analysis of the guidance from the SEC and its staff with respect to analogous assets, we treat Excess MSRs for which we do not own the related servicing rights as real estate-related assets for purposes of satisfying the 80% test under the Section 3(c)(5)(C) exclusion. We treat investments in Agency partial pool RMBS and Non-Agency partial pool RMBS as real estate-related assets for purposes of satisfying the 80% test under the Section 3(c)(5)(C) exclusion.

We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or on our analyses of guidance published with respect to other types of assets to determine which assets are qualifying real estate assets and real estate-related assets. The SEC may in the future take a view different than or contrary to our analysis with respect to the types of assets we have determined to be qualifying real estate assets or real estate-related assets. To the extent that the SEC staff publishes new or different guidance with respect to these matters, or disagrees with our analysis, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in the subsidiary holding assets we might wish to sell or selling assets we might wish to hold.

In August 2011, the SEC issued a concept release soliciting public comments on a wide range of issues relating to companies, which are typically REITs, engaged in the business of acquiring mortgages and mortgage-related instruments and that rely on Section 3(c)(5)(C) of the 1940 Act, including the nature of the assets that qualify for purposes of the Section 3(c)(5)(C) exclusion and whether such REITs should be regulated in a manner similar to investment companies. Therefore, there can be no assurance that the laws and regulations governing the 1940 Act status of REITs, or guidance from the SEC or its staff regarding the Section 3(c)(5)(C) exclusion, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the value of our common stock, the sustainability of our business model, and our ability to make distributions.

Although we monitor our portfolio periodically and prior to each investment origination or acquisition, there can be no assurance that we will be able to maintain the Section 3(c)(5)(C) exclusion from the definition of an investment company under the 1940 Act for these subsidiaries.

To the extent that the SEC staff provides more specific guidance regarding any of the matters bearing upon the exclusions or exceptions we and our subsidiaries rely on from the 1940 Act, we may be required to adjust our strategy accordingly. Any additional guidance from the SEC staff could provide additional flexibility to us, or it could further inhibit our ability to pursue the strategies we have chosen.

Qualification for an exclusion from registration under the 1940 Act will limit our ability to make certain investments. See “Risk Factors—Risks Related to Our Business—Maintenance of our 1940 Act exclusion imposes limits on our operations.”

Competition

Our success depends, in large part, on our ability to acquire target assets on terms consistent with our business and economic model. In acquiring these assets, we expect to compete with banks, REITs, independent mortgage loan servicers, private equity firms, hedge funds and other large financial services companies. Many of our anticipated competitors are significantly larger than we are, have access to greater capital and other resources and may have other advantages over us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could lead them to offer higher prices for assets that we might be interested in acquiring and cause us to lose bids for those assets. In addition, other potential purchasers of our target assets may be more attractive to sellers of such assets if the sellers believe that these potential purchasers could obtain any necessary third party approvals and consents more easily than us.

In the face of this competition, we expect to take advantage of the experience of members of our management team and their industry expertise which may provide us with a competitive advantage and help us assess potential risks and determine appropriate pricing for certain potential acquisitions of our target assets. In addition, we expect that these relationships will enable us to compete more effectively for attractive acquisition opportunities. However, we may not be able to achieve our business goals or expectations due to the competitive risks that we face.

Employees

We are managed by our Manager pursuant to the Management Agreement between our Manager and us. All of our officers are employees of our Manager or an affiliate of our Manager. As of December 31, 2019, we have 3,387 employees of which 3,384 are employees of our wholly owned subsidiary Shellpoint Partners LLC.

Legal Proceedings

For a discussion of our legal proceedings, see Part I, Item 3, “Legal Proceedings” in this report.

Corporate Governance and Internet Address; Where Readers Can Find Additional Information

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors, and the Audit, Nominating and Corporate Governance, and Compensation committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines, and codes of business conduct and ethics, which delineate our standards for our officers and directors, and employees of our Manager.

New Residential files annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’), with the SEC. Our SEC filings are available to the public from the SEC’s internet site at http://www.sec.gov.

Our internet site is http://www.newresi.com. We make available free of charge through our internet site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and any amendments to those reports filed or furnished pursuant to the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Also posted on our website in the ‘‘Investor Relations—Corporate Governance” section are charters for our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report.

Item 1A. Risk Factors

Investing in our stock involves a high degree of risk. You should carefully read and consider the following risk factors and all other information contained in this report. If any of the following risks, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, occur, our business, financial condition or results of operations could be materially and adversely affected. The risk factors summarized below are categorized as follows: (i) Risks Related to Our Business, (ii) Risks Related to Our Manager, (iii) Risks Related to the Financial Markets, (iv) Risks Related to Our Taxation as a REIT and (v) Risks Related to Our Stock. However, these categories do overlap and should not be considered exclusive.

Risks Related to Our Business

We may not be able to successfully operate our business strategy or generate sufficient revenue to make or sustain distributions to our stockholders.

We cannot assure you that we will be able to successfully operate our business or implement our operating policies and strategies. There can be no assurance that we will be able to generate sufficient returns to pay our operating expenses and make satisfactory distributions to our stockholders, or any distributions at all. Our results of operations and our ability to make or sustain distributions to our stockholders depend on several factors, including the availability of opportunities to acquire attractive assets, the level and volatility of interest rates, the availability of adequate short- and long-term financing, and conditions in the real estate market, the financial markets and economic conditions.

The value of our investments is based on various assumptions that could prove to be incorrect and could have a negative impact on our financial results.

When we make investments, we base the price we pay and, in some cases, the rate of amortization of those investments on, among other things, our projection of the cash flows from the related pool of loans. We generally record such investments on our balance sheet at fair value, and we measure their fair value on a recurring basis. Our projections of the cash flow from our investments, and the determination of the fair value thereof, are based on assumptions about various factors, including, but not limited to:


•	rates of prepayment and repayment of the underlying loans;


•	potential fluctuations in prevailing interest rates and credit spreads;


•	rates of delinquencies and defaults, and related loss severities;


•	costs of engaging a subservicer to service MSRs;


•	market discount rates;


•	in the case of MSRs and Excess MSRs, recapture rates; and


•	in the case of Servicer Advance Investments and servicer advances receivable, the amount and timing of servicer advances and recoveries.

Our assumptions could differ materially from actual results. The use of different estimates or assumptions in connection with the valuation of these investments could produce materially different fair values for such investments, which could have a material adverse effect on our consolidated financial position and results of operations. The ultimate realization of the value of our investments may be materially different than the fair values of such investments as reflected in our Consolidated Financial Statements as of any particular date.

We refer to our MSRs, MSR financing receivables, Excess MSRs, and the base fee portion of the related MSRs included in our Servicer Advance Investments, collectively, as our interests in MSRs.

With respect to our investments in interests in MSRs, residential mortgage loans and consumer loans, and a portion of our RMBS, when the related loans are prepaid as a result of a refinancing or otherwise, the related cash flows payable to us will either, in the case of interest-only RMBS, and/or interests in MSRs, cease (unless, in the case of our interests in MSRs, the loans are recaptured upon a refinancing), or we will cease to receive interest income on such investments, as applicable. Borrowers under residential mortgage loans and consumer loans are generally permitted to prepay their loans at any time without penalty. Our expectation of prepayment rates is a significant assumption underlying our cash flow projections. Prepayment rate is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. A significant increase in prepayment rates could materially reduce the ultimate cash flows and/or interest income, as applicable, we receive from our investments, and we could ultimately receive substantially less than what we paid for such assets, decreasing the fair value of our investments. If the fair value of our investment portfolio decreases, we would generally be required to record a non-cash charge, which would have a negative impact on our financial results. Consequently, the price we pay to acquire our investments may prove to be too high if there is a significant increase in prepayment rates.

The values of our investments are highly sensitive to changes in interest rates. Historically, the value of MSRs, which underpin the value of our investments, including interests in MSRs, has increased when interest rates rise and decreased when interest rates decline due to the effect of changes in interest rates on prepayment rates. Prepayment rates could increase as a result of a general economic recovery or other factors, which would reduce the value of our interests in MSRs.

Moreover, delinquency rates have a significant impact on the value of our investments. When the UPB of mortgage loans cease to be a part of the aggregate UPB of the serviced loan pool (for example, when delinquent loans are foreclosed on or repurchased, or otherwise sold, from a securitized pool), the related cash flows payable to us, as the holder of an interest in the related MSR, cease. An increase in delinquencies will generally result in lower revenue because typically we will only collect on our interests in MSRs from the Agencies or mortgage owners for performing loans. An increase in delinquencies with respect to the loans underlying our servicer advances could also result in a higher advance balance and the need to obtain additional financing, which we may not be able to do on favorable terms or at all. Additionally, in the case of residential mortgage loans, consumer loans and RMBS that we own, an increase in foreclosures could result in an acceleration of repayments, resulting in a decrease in interest income. Alternatively, increases in delinquencies and defaults could also adversely affect our investments in RMBS, residential mortgage loans and/or consumer loans if and to the extent that losses are suffered on residential mortgage loans, consumer loans or, in the case of RMBS, the residential mortgage loans underlying such RMBS. Accordingly, if delinquencies are significantly greater than expected, the estimated fair value of these investments could be diminished. As a result, we could suffer a loss, which would have a negative impact on our financial results.

We are party to several “recapture agreements” whereby our MSR or Excess MSR is retained if the applicable Servicing Partner originates a new loan the proceeds of which are used to repay a loan underlying an MSR or Excess MSR in our portfolio. We believe that such agreements will mitigate the impact on our returns in the event of a rise in voluntary prepayment rates, with respect to investments where we have such agreements. There are no assurances, however, that counterparties will enter into such arrangements with us in connection with any future investment in MSRs or Excess MSRs. We are not party to any such arrangements with respect to any of our investments other than MSRs and Excess MSRs.

If the applicable Servicing Partner does not meet anticipated recapture targets, the servicing cash flow on a given pool could be significantly lower than projected, which could have a material adverse effect on the value of our MSRs or Excess MSRs and consequently on our business, financial condition, results of operations and cash flows. Our recapture target for our current recapture agreements is stated in the table in Note 13 to our Consolidated Financial Statements.

Servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our Servicer Advance Investments or MSRs.

We are generally required to make servicer advances related to the pools of loans for which we are the named servicer. In addition, we have agreed (in the case of Mr. Cooper, together with certain third-party investors) to purchase from certain of the servicers and subservicers that we engage, which we refer to as our “Servicing Partners,” all servicer advances related to certain loan pools, as a result of which we are entitled to amounts representing repayment for such advances. During any period in which a borrower is not making payments, a servicer is generally required under the applicable servicing agreement to advance its own funds to cover the principal and interest remittances due to investors in the loans, pay property taxes and insurance premiums to third parties, and to make payments for legal expenses and other protective advances. The servicer also advances funds to maintain, repair and market real estate properties on behalf of investors in the loans.

Repayment of servicer advances and payment of deferred servicing fees are generally made from late payments and other collections and recoveries on the related residential mortgage loan (including liquidation, insurance and condemnation proceeds) or, if the related servicing agreement provides for a “general collections backstop,” from collections on other residential mortgage loans to which such servicing agreement relates. The rate and timing of payments on servicer advances and deferred servicing fees are unpredictable for several reasons, including the following:

•

payments on the servicer advances and the deferred servicing fees depend on the source of repayment, and whether and when the related servicer receives such payment (certain servicer advances are reimbursable only out of late payments and other collections and recoveries on the related residential mortgage loan, while others are also reimbursable out of principal and interest collections with respect to all residential mortgage loans serviced under the related servicing agreement, and as a consequence, the timing of such reimbursement is highly uncertain);


•	the length of time necessary to obtain liquidation proceeds may be affected by conditions in the real estate market or the financial markets generally, the availability of financing for the acquisition of the real estate and other factors, including, but not limited to, government intervention;


•	the length of time necessary to effect a foreclosure may be affected by variations in the laws of the particular jurisdiction in which the related mortgaged property is located, including whether or not foreclosure requires judicial action;


•	the requirements for judicial actions for foreclosure (which can result in substantial delays in reimbursement of servicer advances and payment of deferred servicing fees), which vary from time to time as a result of changes in applicable state law; and


•	the ability of the related servicer to sell delinquent residential mortgage loans to third parties prior to a sale of the underlying real estate, resulting in the early reimbursement of outstanding unreimbursed servicer advances in respect of such residential mortgage loans.

As home values change, the servicer may have to reconsider certain of the assumptions underlying its decisions to make advances. In certain situations, its contractual obligations may require the servicer to make certain advances for which it may not be reimbursed. In addition, when a residential mortgage loan defaults or becomes delinquent, the repayment of the advance may be delayed until the residential mortgage loan is repaid or refinanced, or a liquidation occurs. To the extent that one of our Servicing Partners fails to recover the servicer advances in which we have invested, or takes longer than we expect to recover such advances, the value of our investment could be adversely affected and we could fail to achieve our expected return and suffer losses.

Servicing agreements related to residential mortgage securitization transactions generally require a residential mortgage servicer to make servicer advances in respect of serviced residential mortgage loans unless the servicer determines in good faith that the servicer advance would not be ultimately recoverable from the proceeds of the related residential mortgage loan, mortgaged property or mortgagor. In many cases, if the servicer determines that a servicer advance previously made would not be recoverable from these sources, the servicer is entitled to withdraw funds from the related custodial account in respect of payments on the

related pool of serviced mortgages to reimburse the related servicer advance. This is what is often referred to as a “general collections backstop.” The timing of when a servicer may utilize a general collections backstop can vary (some contracts require actual liquidation of the related loan first, while others do not), and contracts vary in terms of the types of servicer advances for which reimbursement from a general collections backstop is available. Accordingly, a servicer may not ultimately be reimbursed if both (i) the payments from related loan, property or mortgagor payments are insufficient for reimbursement, and (ii) a general collections backstop is not available or is insufficient. Also, if a servicer improperly makes a servicer advance, it would not be entitled to reimbursement. While we do not expect recovery rates to vary materially during the term of our investments, there can be no assurance regarding future recovery rates related to our portfolio.

We rely heavily on our Servicing Partners to achieve our investment objective and have no direct ability to influence their performance.

The value of substantially all of our investments is dependent on the satisfactory performance of servicing obligations by the related mortgage servicer or subservicer, as applicable. The duties and obligations of mortgage servicers are defined through contractual agreements, generally referred to as Servicing Guides in the case of GSEs, the MBS Guide in the case of Ginnie Mae or pooling agreements, securitization servicing agreements, pooling and servicing agreements or other similar agreements (collectively, “PSAs”) in the case of Non-Agency RMBS (collectively, the “Servicing Guidelines”). The duties of the subservicers we engage to service the loans underlying our MSRs are contained in subservicing agreements with our subservicers. The duties of a subservicer under a subservicing agreement may not be identical to the obligations of the servicer under Servicing Guidelines. Our interests in MSRs are subject to all of the terms and conditions of the applicable Servicing Guidelines. Servicing Guidelines generally provide for the possibility of termination of the contractual rights of the servicer in the absolute discretion of the owner of the mortgages being serviced (or the required bondholders in the case of Non-Agency RMBS). Under the Agency Servicing Guidelines, the servicer may be terminated by the applicable Agency for any reason, “with” or “without” cause, for all or any portion of the loans being serviced for such Agency. In the event mortgage owners (or bondholders) terminate the servicer (regardless of whether such servicer is a subsidiary of New Residential or one of its subservicers), the related interests in MSRs would under most circumstances lose all value on a going forward basis. If the servicer is terminated as servicer for any Agency pools, the servicer’s right to service the related mortgage loans will be extinguished and our interests in related MSRs will likely lose all of their value. Any recovery in such circumstances, in the case of Non-Agency RMBS, will be highly conditioned and may require, among other things, a new servicer willing to pay for the right to service the applicable residential mortgage loans while assuming responsibility for the origination and prior servicing of the residential mortgage loans. In addition, in the case of Agency MSRs, any payment received from a successor servicer will be applied first to pay the applicable Agency for all of its claims and costs, including claims and costs against the servicer that do not relate to the residential mortgage loans for which we own interests in the MSRs. A termination could also result in an event of default under our related financings. It is expected that any termination of a servicer by mortgage owners (or bondholders) would take effect across all mortgages of such mortgage owners (or bondholders) and would not be limited to a particular vintage or other subset of mortgages. Therefore, it is possible that all investments with a given servicer would lose all their value in the event mortgage owners (or bondholders) terminate such servicer. See “—We have significant counterparty concentration risk in certain of our Servicing Partners, and are subject to other counterparty concentration and default risks.” As a result, we could be materially and adversely affected if one of our Servicing Partners is unable to adequately carry out its duties as a result of:


•	its failure to comply with applicable laws and regulations;


•	its failure to comply with contractual and financing obligations and covenants;


•	a downgrade in, or failure to maintain, any of its servicer ratings;


•	its failure to maintain sufficient liquidity or access to sources of liquidity;


•	its failure to perform its loss mitigation obligations;


•	its failure to perform adequately in its external audits;


•	a failure in or poor performance of its operational systems or infrastructure;


•	regulatory or legal scrutiny or regulatory actions regarding any aspect of a servicer’s operations, including, but not limited to, servicing practices and foreclosure processes lengthening foreclosure timelines;


•	an Agency’s or a whole-loan owner’s transfer of servicing to another party; or


•	any other reason.

In the ordinary course of business, our Servicing Partners are subject to numerous legal proceedings, federal, state or local governmental examinations, investigations or enforcement actions which could adversely affect their reputation and their liquidity, financial position and results of operations. Mortgage servicers, including certain of our Servicing Partners, have experienced heightened regulatory scrutiny and enforcement actions, and our Servicing Partners could be adversely affected by the market’s perception that they could experience, or continue to experience, regulatory issues. See “—Certain of our Servicing Partners have been and are subject to federal and state regulatory matters and other litigation, which may adversely impact us.”

Loss mitigation techniques are intended to reduce the probability that borrowers will default on their loans and to minimize losses when defaults occur, and they may include the modification of mortgage loan rates, principal balances and maturities. If any of our Servicing Partners fail to adequately perform their loss mitigation obligations, we could be required to make or purchase, as applicable, servicer advances in excess of those that we might otherwise have had to make or purchase, and the time period for collecting servicer advances may extend. Any increase in servicer advances or material increase in the time to resolution of a defaulted loan could result in increased capital requirements and financing costs for us and our co-investors and could adversely affect our liquidity and net income. In the event that one of our servicers from which we are obligated to purchase servicer advances is required by the applicable Servicing Guidelines to make advances in excess of amounts that we or, in the case of Mr. Cooper, the co-investors, are willing or able to fund, such servicer may not be able to fund these advance requests, which could result in a termination event under the applicable Servicing Guidelines, an event of default under our advance facilities and a breach of our purchase agreement with such servicer. As a result, we could experience a partial or total loss of the value of our Servicer Advance Investments.

MSRs and servicer advances are subject to numerous federal, state and local laws and regulations and may be subject to various judicial and administrative decisions. If the Servicing Partner actually or allegedly failed to comply with applicable laws, rules or regulations, it could be terminated as the servicer, and could lead to civil and criminal liability, loss of licensing, damage to our reputation and litigation, which could have a material adverse effect on our business, financial condition, results of operations or cash flows. In addition, servicer advances that are improperly made may not be eligible for financing under our facilities and may not be reimbursable by the related securitization trust or other owner of the residential mortgage loan, which could cause us to suffer losses.

Favorable servicer ratings from third-party rating agencies, such as S&P Global Ratings (“S&P”), Moody’s Investors Service (“Moody’s”) and Fitch Ratings (“Fitch”), are important to the conduct of a mortgage servicer’s loan servicing business, and a downgrade in a Servicing Partner’s servicer ratings could have an adverse effect on the value of our interests in MSRs and result in an event of default under our financings. Downgrades in a Servicing Partner’s servicer ratings could adversely affect our ability to finance our assets and maintain their status as an approved servicer by Fannie Mae and Freddie Mac. Downgrades in servicer ratings could also lead to the early termination of existing advance facilities and affect the terms and availability of financing that a Servicing Partner or we may seek in the future. A Servicing Partner’s failure to maintain favorable or specified ratings may cause their termination as a servicer and may impair their ability to consummate future servicing transactions, which could result in an event of default under our financing for servicer advances and have an adverse effect on the value of our investments because we will rely heavily on Servicing Partners to achieve our investment objectives and have no direct ability to influence their performance.

For additional information about the ways in which we may be affected by mortgage servicers, see “—The value of our interests in MSRs, servicer advances, residential mortgage loans and RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.”

A number of lawsuits, including class-actions, have been filed against mortgage servicers alleging improper servicing in connection with residential non-agency mortgage securitizations. Investors in, and counterparties to, such securitizations may commence legal action against us and responding to such claims, and any related losses, could negatively impact our business.

A number of lawsuits, including class actions, have been filed against mortgage servicers alleging improper servicing in connection with residential non-agency mortgage securitizations. Investors in, and counterparties to, such securitizations may commence legal action against us and responding to such claims, and any related losses, could negatively impact our business. The number of counterparties on behalf of which we service loans significantly increases as the size of our non-agency MSR portfolio increases and we may become subject to claims and legal proceedings, including purported class-actions, in the ordinary course of our business, challenging whether our loan servicing practices and other aspects of our business comply with applicable laws, agreements and regulatory requirements. We are unable to predict whether any such claims will be made, the ultimate outcome of any such claims, the possible loss, if any, associated with the resolution of such claims or the potential impact any such claims may have on us or our business and operations. Regardless of the merit of any such claims or lawsuits, defending any claims or lawsuits may be time consuming and costly and we may be required to expend significant internal resources and incur material expenses, and management time may be diverted from other aspects of our business, in connection therewith. Further, if our efforts to defend any such claims or lawsuits are not successful, our business could be materially and adversely affected. As a result of investor and other counterparty claims, we could also suffer reputational damage and trustees, lenders and other counterparties could cease wanting to do business with us.

Certain of our Servicing Partners have been and are subject to federal and state regulatory matters and other litigation, which may adversely impact us.

Regulatory actions or legal proceedings against certain of our Servicing Partners could increase our financing costs or operating expenses, reduce our revenues or otherwise materially adversely affect our business, financial condition, results of operations and liquidity. Such Servicing Partners may be subject to additional federal and state regulatory matters in the future that could materially and adversely affect the value of our investments to the extent we rely on them to achieve our investment objectives because we have no direct ability to influence their performance. Certain of our Servicing Partners have disclosed certain matters in their periodic reports filed with the SEC, and there can be no assurance that such events will not have a material adverse effect on them. We are currently evaluating the impact of such events and cannot assure you what impact these events may have or what actions we may take under our agreements with the servicer. In addition, any of our Servicing Partners could be removed as servicer by the related loan owner or certain other transaction counterparties, which could have a material adverse effect on our interests in the loans and MSRs serviced by such Servicing Partner.

In addition, certain of our Servicing Partners have been and continue to be subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations and threatened legal actions and proceedings. In connection with formal and informal inquiries, such Servicing Partners may receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their activities, including whether certain of their residential loan servicing and origination practices, bankruptcy practices and other aspects of their business comply with applicable laws and regulatory requirements. Such Servicing Partners cannot provide any assurance as to the outcome of any of the aforementioned actions, proceedings or inquiries, or that such outcomes will not have a material adverse effect on their reputation, business, prospects, results of operations, liquidity or financial condition.

Completion of certain pending transactions related to MSRs (the “MSR Transactions”) is subject to various closing conditions, involves significant costs, and we cannot assure you if, when or the terms on which such transactions will close. Failure to complete the pending MSR Transactions could adversely affect our future business and results of operations.

We have entered into an agreement for Ocwen to transfer its remaining interests in $110.0 billion of UPB of non-Agency MSRs (the “Ocwen Subject MSRs”) to our subsidiaries, New Residential Mortgage LLC (“NRM”) and NewRez LLC (“NewRez”). We currently hold certain interests in the Ocwen Subject MSRs (including all servicer advances) pursuant to existing agreements with Ocwen. The transfer of Ocwen’s interests in the Ocwen Subject MSRs is subject to numerous consents of third parties and certain actions by rating agencies. While certain of the Ocwen Subject MSRs have previously transferred to our subsidiaries, there is no assurance that we will be able to obtain such consents in order to transfer Ocwen’s interests in the Ocwen Subject MSRs to our subsidiaries. We have spent considerable time and resources, and incurred substantial costs, in connection with the negotiation of such transaction and we will incur such costs even if the Ocwen Subject MSRs cannot be transferred to our subsidiaries. As of December 31, 2019, MSRs representing approximately $66.7 billion UPB of underlying loans have been transferred pursuant to the Ocwen Transaction. Economics related to the remaining MSRs subject to the Ocwen Transaction were transferred pursuant to the New Ocwen Agreements (Note 6 to our Consolidated Financial Statements).

We may be unable to become the named servicer in respect of certain non-agency MSRs. If we are unable to become the named servicer in respect of any of the Ocwen Subject MSRs in accordance with the Ocwen Transaction, Ocwen has the right, in certain circumstances, to purchase from us our interests in the related MSRs. In such a situation, we will be required to sell Ocwen those assets (and will cease to receive income on those investments) and/or may be required to refinance certain indebtedness on terms that are not favorable to us.

Our ability to acquire MSRs may be subject to the approval of various third parties and such approvals may not be provided on a timely basis or at all, or may be subject to conditions, representations and warranties and indemnities.

Our ability to acquire MSRs may be subject to the approval of various third parties and such approvals may not be provided on a timely basis or at all, or may be conditioned upon our satisfaction of significant conditions which could require material expenditures and the provision of significant representations, warranties and indemnities. Such third parties may include the Agencies and the Federal Housing Finance Agency (“FHFA”) with respect to agency MSRs, and securitization trustees, master servicers, depositors, rating agencies and insurers, among others, with respect to non-agency MSRs. The process of obtaining any such approvals required for a servicing transfer, especially with respect to non-agency MSRs, may be time consuming and costly and we may be required to expend significant internal resources and incur material expenses in connection with such transactions. Further, the parties from whom approval is necessary may require that we provide significant representations and warranties and broad indemnities as a condition to their consent, which such representations and warranties and indemnities, if given, may expose us to material risks in addition to those arising under the related servicing agreements. Consenting parties may also charge a material consent fee and may require that we reimburse them for the legal expenses they incur in connection with their approval of the servicing

transfer, which such expenses may include costs relating to substantial contract due diligence and may be significant. No assurance can be given that we will be able to successfully obtain the consents required to acquire the MSRs that we have agreed to purchase.

We have significant counterparty concentration risk in certain of our Servicing Partners and are subject to other counterparty concentration and default risks.

We are not restricted from dealing with any particular counterparty or from concentrating any or all of our transactions with a few counterparties. Any loss suffered by us as a result of a counterparty defaulting, refusing to conduct business with us or imposing more onerous terms on us would also negatively affect our business, results of operations, cash flows and financial condition.

Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners. As disclosed in Notes 5, 6, and 7 of our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion of our interests in MSRs. If any of these Servicing Partners is the named servicer of the related MSR and is terminated, its servicing performance deteriorates, or in the event that any of them files for bankruptcy, our expected returns on these investments could be severely impacted. In addition, a large portion of the loans underlying our Non-Agency RMBS are serviced by certain of our Servicing Partners. We closely monitor our Servicing Partners’ mortgage servicing performance and overall operating performance, financial condition and liquidity, as well as their compliance with applicable regulations and Servicing Guidelines. We have various information, access and inspection rights in our agreements with these Servicing Partners that enable us to monitor aspects of their financial and operating performance and credit quality, which we periodically evaluate and discuss with their management. However, we have no direct ability to influence our Servicing Partners’ performance, and our diligence cannot prevent, and may not even help us anticipate, the termination of any such Servicing Partners’ servicing agreement or a severe deterioration of any of our Servicing Partners’ servicing performance on our portfolio of interests in MSRs.

Furthermore, certain of our Servicing Partners are subject to numerous legal proceedings, federal, state or local governmental examinations, investigations or enforcement actions, which could adversely affect their operations, reputation and liquidity, financial position and results of operations. See “—Certain of our Servicing Partners have been and are subject to federal and state regulatory matters and other litigation, which may adversely impact us” for more information.

None of our Servicing Partners has an obligation to offer us any future co-investment opportunity on the same terms as prior transactions, or at all, and we may not be able to find suitable counterparties from which to acquire interests in MSRs, which could impact our business strategy. See “—We rely heavily on our Servicing Partners to achieve our investment objective and have no direct ability to influence their performance.”

Repayment of the outstanding amount of servicer advances (including payment with respect to deferred servicing fees) may be subject to delay, reduction or set-off in the event that the related Servicing Partner breaches any of its obligations under the Servicing Guidelines, including, without limitation, any failure of such Servicing Partner to perform its servicing and advancing functions in accordance with the terms of such Servicing Guidelines. If any applicable Servicing Partner is terminated or resigns as servicer and the applicable successor servicer does not purchase all outstanding servicer advances at the time of transfer, collection of the servicer advances will be dependent on the performance of such successor servicer and, if applicable, reliance on such successor servicer’s compliance with the “first-in, first-out” or “FIFO” provisions of the Servicing Guidelines. In addition, such successor servicers may not agree to purchase the outstanding advances on the same terms as our current purchase arrangements and may require, as a condition of their purchase, modification to such FIFO provisions, which could further delay our repayment and adversely affect the returns from our investment.

We are subject to substantial other operational risks associated with our Servicing Partners in connection with the financing of servicer advances. In our current financing facilities for servicer advances, the failure of our Servicing Partner to satisfy various covenants and tests can result in an amortization event and/or an event of default. We have no direct ability to control our Servicing Partners’ compliance with those covenants and tests. Failure of our Servicing Partners to satisfy any such covenants or tests could result in a partial or total loss on our investment.

In addition, our Servicing Partners are party to our servicer advance financing agreements, with respect to those advances where they service or subservice the loans underlying the related MSRs. Our ability to obtain financing for these assets is dependent on our Servicing Partners’ agreement to be a party to the related financing agreements. If our Servicing Partners do not agree to be a party to these financing agreements for any reason, we may not be able to obtain financing on favorable terms or at all. Our ability to obtain financing on such assets is dependent on our Servicing Partners’ ability to satisfy various tests under such financing arrangements. Breaches and other events with respect to our Servicing Partners (which may include, without limitation, failure of a Servicing Partner to satisfy certain financial tests) could cause certain or all of the relevant servicer advance financing to become due and payable prior to maturity.

We are dependent on our Servicing Partners as the servicer or subservicer of the residential mortgage loans with respect to which we hold interests in MSRs, and their servicing practices may impact the value of certain of our assets. We may be adversely impacted:


•	By regulatory actions taken against our Servicing Partners;


•	By a default by one of our Servicing Partners under their debt agreements;


•	By downgrades in our Servicing Partners’ servicer ratings;


•	If our Servicing Partners fail to ensure their servicer advances comply with the terms of their Pooling and Servicing Agreements (“PSAs”);


•	If our Servicing Partners were terminated as servicer under certain PSAs;


•	If our Servicing Partners become subject to a bankruptcy proceeding; or


•	If our Servicing Partners fail to meet their obligations or are deemed to be in default under the indenture governing notes issued under any servicer advance facility with respect to which such Servicing Partner is the servicer.

Our interests in MSRs relate to loans serviced or subserviced, as applicable, by our Servicing Partners. As disclosed in Notes 5, 6, and 7 of our Consolidated Financial Statements, certain of our Servicing Partners service and/or subservice a substantial portion of our interests in MSRs. In addition, Mr. Cooper is currently the servicer for a significant portion of our loans, and the loans underlying our RMBS. If the servicing performance of one of our subservicers deteriorates, if one of our subservicers files for bankruptcy or if one of our subservicers is otherwise unwilling or unable to continue to subservice MSRs for us, our expected returns on these investments would be severely impacted. In addition, if a subservicer becomes subject to a regulatory consent order or similar enforcement proceeding, that regulatory action could adversely affect us in several ways. For example, the regulatory action could result in delays of transferring servicing from an interim subservicer to our designated successor subservicer or cause the subservicer’s performance to degrade. Any such development would negatively affect our expected returns on these investments, and such effect could be materially adverse to our business and results of operations. We closely monitor each subservicer’s mortgage servicing performance and overall operating performance, financial condition and liquidity, as well as its compliance with applicable regulations and GSE servicing guidelines. We have various information, access and inspection rights in our respective agreements with our subservicers that enable us to monitor their financial and operating performance and credit quality, which we periodically evaluate and discuss with each subservicer’s respective management. However, we have no direct ability to influence each subservicer’s performance, and our diligence cannot prevent, and may not even help us anticipate, a severe deterioration of each subservicer’s respective servicing performance on our MSR portfolio.

In addition, a material portion of the consumer loans in which we have invested are serviced by OneMain. If OneMain is terminated as the servicer of some or all of these portfolios, or in the event that it files for bankruptcy or is otherwise unable to continue to service such loans, our expected returns on these investments could be severely impacted.

Moreover, we are party to repurchase agreements with a limited number of counterparties. If any of our counterparties elected not to renew our repurchase agreements, we may not be able to find a replacement counterparty, which would have a material adverse effect on our financial condition.

Our risk-management processes may not accurately anticipate the impact of market stress or counterparty financial condition, and as a result, we may not take sufficient action to reduce our risks effectively. Although we will monitor our credit exposures, default risk may arise from events or circumstances that are difficult to detect, foresee or evaluate. In addition, concerns about, or a default by, one large participant could lead to significant liquidity problems for other participants, which may in turn expose us to significant losses.

In the event of a counterparty default, particularly a default by a major investment bank or Servicing Partner, we could incur material losses rapidly, and the resulting market impact of a major counterparty default could seriously harm our business, results of operations, cash flows and financial condition. In the event that one of our counterparties becomes insolvent or files for bankruptcy, our ability to eventually recover any losses suffered as a result of that counterparty’s default may be limited by the liquidity of the counterparty or the applicable legal regime governing the bankruptcy proceeding.

A bankruptcy of any of our Servicing Partners could materially and adversely affect us.

If any of our Servicing Partners becomes subject to a bankruptcy proceeding, we could be materially and adversely affected, and you could suffer losses, as discussed below.

A sale of MSRs or interests in MSRs and servicer advances or other assets, including loans, could be re-characterized as a pledge of such assets in a bankruptcy proceeding.

We believe that a mortgage servicer’s transfer to us of MSRs or interests in MSRs and servicer advances or any other asset transferred pursuant to a related purchase agreement, including loans, constitutes a sale of such assets, in which case such assets would not be part of such servicer’s bankruptcy estate. The servicer (as debtor-in-possession in the bankruptcy proceeding), a bankruptcy trustee appointed in such servicer’s bankruptcy proceeding, or any other party in interest, however, might assert in a bankruptcy proceeding MSRs or interests in MSRs and servicer advances or any other assets transferred to us pursuant to the related purchase agreement were not sold to us but were instead pledged to us as security for such servicer’s obligation to repay amounts paid by us to the servicer pursuant to the related purchase agreement. We generally create and perfect security interests with respect to the MSRs that we acquire, though we do not do so in all instances. If such assertion were successful, all or part of the MSRs or interests in MSRs and servicer advances or any other asset transferred to us pursuant to the related purchase agreement would constitute property of the bankruptcy estate of such servicer, and our rights against the servicer could be those of a secured creditor with a lien on such present and future assets. Under such circumstances, cash proceeds generated from our collateral would constitute “cash collateral” under the provisions of the U.S. bankruptcy laws. Under U.S. bankruptcy laws, the servicer could not use our cash collateral without either (a) our consent or (b) approval by the bankruptcy court, subject to providing us with “adequate protection” under the U.S. bankruptcy laws. In addition, under such circumstances, an issue could arise as to whether certain of these assets generated after the commencement of the bankruptcy proceeding would constitute after-acquired property excluded from our entitlement pursuant to the U.S. bankruptcy laws.

If such a recharacterization occurs, the validity or priority of our security interest in the MSRs or interests in MSRs and servicer advances or other assets could be challenged in a bankruptcy proceeding of such servicer.

If the purchases pursuant to the related purchase agreement are recharacterized as secured financings as set forth above, we nevertheless created and perfected security interests with respect to the MSRs or interests in MSRs and servicer advances and other assets that we may have purchased from such servicer by including a pledge of collateral in the related purchase agreement and filing financing statements in appropriate jurisdictions. Nonetheless, to the extent we have created and perfected a security interest, our security interests may be challenged and ruled unenforceable, ineffective or subordinated by a bankruptcy court, and the amount of our claims may be disputed so as not to include all MSRs or interests in MSRs and servicer advances to be collected. If this were to occur, or if we have not created a security interest, then the servicer’s obligations to us with respect to purchased MSRs or interests in MSRs and servicer advances or other assets would be deemed unsecured obligations, payable from unencumbered assets to be shared among all of such servicer’s unsecured creditors. In addition, even if the security interests are found to be valid and enforceable, if a bankruptcy court determines that the value of the collateral is less than such servicer’s underlying obligations to us, the difference between such value and the total amount of such obligations will be deemed an unsecured “deficiency” claim and the same result will occur with respect to such unsecured claim. In addition, even if the security interest is found to be valid and enforceable, such servicer would have the right to use the proceeds of our collateral subject to either (a) our consent or (b) approval by the bankruptcy court, subject to providing us with “adequate protection” under U.S. bankruptcy laws. Such servicer also would have the ability to confirm a chapter 11 plan over our objections if the plan complied with the “cramdown” requirements under U.S. bankruptcy laws.

Payments made by a servicer to us could be voided by a court under federal or state preference laws.

If one of our Servicing Partners were to file, or to become the subject of, a bankruptcy proceeding under the United States Bankruptcy Code or similar state insolvency laws, and our security interest (if any) is declared unenforceable, ineffective or subordinated, payments previously made by a servicer to us pursuant to the related purchase agreement may be recoverable on behalf of the bankruptcy estate as preferential transfers. Among other reasons, a payment could constitute a preferential transfer if a court were to find that the payment was a transfer of an interest of property of such servicer that:


•	Was made to or for the benefit of a creditor;


•	Was for or on account of an antecedent debt owed by such servicer before that transfer was made;


•	Was made while such servicer was insolvent (a company is presumed to have been insolvent on and during the 90 days preceding the date the company’s bankruptcy petition was filed);


•	Was made on or within 90 days (or if we are determined to be a statutory insider, on or within one year) before such servicer’s bankruptcy filing;


•	Permitted us to receive more than we would have received in a Chapter 7 liquidation case of such servicer under U.S. bankruptcy laws; and


•	Was a payment as to which none of the statutory defenses to a preference action apply.

If the court were to determine that any payments were avoidable as preferential transfers, we would be required to return such payments to such servicer’s bankruptcy estate and would have an unsecured claim against such servicer with respect to such returned amounts.

Payments made to us by such servicer, or obligations incurred by it, could be voided by a court under federal or state fraudulent conveyance laws.

The mortgage servicer (as debtor-in-possession in the bankruptcy proceeding), a bankruptcy trustee appointed in such servicer’s bankruptcy proceeding, or another party in interest could also claim that such servicer’s transfer to us of MSRs or interests in MSRs and servicer advances or other assets or such servicer’s agreement to incur obligations to us under the related purchase agreement was a fraudulent conveyance. Under U.S. bankruptcy laws and similar state insolvency laws, transfers made or obligations incurred could be voided if, among other reasons, such servicer, at the time it made such transfers or incurred such obligations: (a) received less than reasonably equivalent value or fair consideration for such transfer or incurrence and (b) either (i) was insolvent at the time of, or was rendered insolvent by reason of, such transfer or incurrence; (ii) was engaged in, or was about to engage in, a business or transaction for which the assets remaining with such servicer were an unreasonably small capital; or (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature. If any transfer or incurrence is determined to be a fraudulent conveyance, our Servicing Partner, as applicable (as debtor-in-possession in the bankruptcy proceeding), or a bankruptcy trustee on such Servicing Partner’s behalf would be entitled to recover such transfer or to avoid the obligation previously incurred.

Any purchase agreement pursuant to which we purchase interests in MSRs, servicer advances or other assets, including loans, or any subservicing agreement between us and a subservicer on our behalf could be rejected in a bankruptcy proceeding of one of our Servicing Partners or counterparties.

A mortgage servicer (as debtor-in-possession in the bankruptcy proceeding) or a bankruptcy trustee appointed in such servicer’s or counterparty’s bankruptcy proceeding could seek to reject the related purchase agreement or subservicing agreement with a counterparty and thereby terminate such servicer’s or counterparty’s obligation to service the MSRs or interests in MSRs and servicer advances or any other asset transferred pursuant to such purchase agreement, and terminate our right to acquire additional assets under such purchase agreement and our right to require such servicer to use commercially reasonable efforts to transfer servicing. If the bankruptcy court approved the rejection, we would have a claim against such servicer or counterparty for any damages from the rejection, and the resulting transfer of our interests in MSRs or servicing of the MSRs relating to our Excess MSRs to another subservicer may result in significant cost and may negatively impact the value of our interests in MSRs.

A bankruptcy court could stay a transfer of servicing to another servicer.

Our ability to terminate a subservicer or to require a mortgage servicer to use commercially reasonable efforts to transfer servicing rights to a new servicer would be subject to the automatic stay in such servicer’s bankruptcy proceeding. To enforce this right, we would have to seek relief from the bankruptcy court to lift such stay, and there is no assurance that the bankruptcy court would grant this relief.

Any Subservicing Agreement could be rejected in a bankruptcy proceeding.

If one of our Servicing Partners were to file, or to become the subject of, a bankruptcy proceeding under the United States Bankruptcy Code or similar state insolvency laws, such Servicing Partner (as debtor-in-possession in the bankruptcy proceeding) or the bankruptcy trustee could reject its subservicing agreement with us and terminate such Servicing Partner’s obligation to service the MSRs, servicer advances or loans in which we have an investment. Any claim we have for damages arising from the rejection of a subservicing agreement would be treated as a general unsecured claim for purposes of distributions from such Servicing Partner’s bankruptcy estate.

Our Servicing Partners could discontinue servicing.

If one of our Servicing Partners were to file, or to become the subject of, a bankruptcy proceeding under the United States Bankruptcy Code, such Servicing Partner could be terminated as servicer (with bankruptcy court approval) or could discontinue servicing, in which case there is no assurance that we would be able to continue receiving payments and transfers in respect of the interests in MSRs, servicer advances and other assets purchased under the related purchase agreement or subserviced under the related subservicing agreement. Even if we were able to obtain the servicing rights or terminate the related subservicer, we may need to engage an alternate subservicer (which may not be readily available on acceptable terms or at all) or negotiate a new subservicing agreement with such servicer, which presumably would be on less favorable terms to us. Any engagement of an alternate subservicer by us would require the approval of the related RMBS trustees or the Agencies, as applicable.

An automatic stay under the United States Bankruptcy Code may prevent the ongoing receipt of servicing fees or other amounts due.

Even if we are successful in arguing that we own the interests in MSRs, servicer advances and other assets, including loans, purchased under the related purchase agreement, we may need to seek relief in the bankruptcy court to obtain turnover and payment of amounts relating to such assets, and there may be difficulty in recovering payments in respect of such assets that may have been commingled with other funds of such servicer.

A bankruptcy of any of our Servicing Partners may default our MSR, Excess MSR and servicer advance financing facilities and negatively impact our ability to continue to purchase interests in MSRs.

If any of our Servicing Partners were to file for bankruptcy or become the subject of a bankruptcy proceeding, it could result in an event of default under certain of our financing facilities that would require the immediate paydown of such facilities. In this scenario, we may not be able to comply with our obligations to purchase interests in MSRs and servicer advances under the related purchase agreements. Notwithstanding this inability to purchase, the related seller may try to force us to continue making such purchases. If it is determined that we are in breach of our obligations under our purchase agreements, any claims that we may have against such related seller may be subject to offset against claims such seller may have against us by reason of this breach.

Certain of our subsidiaries originate and service residential mortgage loans, which subject us to various operational risks that could have a negative impact on our financial results.

As a result of our previously disclosed acquisitions of Shellpoint Partners LLC and assets from the bankruptcy estate of Ditech, among others, certain subsidiaries of New Residential perform various mortgage and real estate related services, and have origination and servicing operations, which entail borrower-facing activities and employing personnel. Prior to such acquisitions, neither we nor any of our subsidiaries have previously originated or serviced loans directly, and owning entities that perform these and other operations could expose us to risks similar to those of our Servicing Partners, as well as various other risks, including, but not limited to those pertaining to:


•	risks related to compliance with applicable laws, regulations and other requirements;


•	significant increases in delinquencies for the loans;


•	compliance with the terms of related servicing agreements;


•	financing related servicer advances and the origination business;


•	expenses related to servicing high risk loans;


•	unrecovered or delayed recovery of servicing advances;


•	a general risk in foreclosure rates, which may ultimately reduce the number of mortgages that we service (also see-“The residential mortgage loans underlying the securities we invest in and the loans we directly invest in are subject to delinquency, foreclosure and loss, which could result in losses to us.”);


•	maintaining the size of the related servicing portfolio and the volume of the origination business;


•	compliance with FHA underwriting guidelines; and


•	termination of government mortgage refinancing programs.

Any of the foregoing risks, among others, could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Our subsidiaries that perform mortgage lending and servicing activities are subject to extensive regulation by federal, state and local governmental and regulatory authorities, and our subsidiaries' business results may be significantly impacted by the existing and future laws and regulations to which they are subject. If our subsidiaries performing mortgage lending and servicing activities fail to operate in compliance with both existing and future statutory, regulatory and other

requirements, our business, financial condition, liquidity and/or results of operations could be materially and adversely affected.

Our subsidiaries that perform mortgage lending and servicing activities are subject to extensive regulation by federal, state and local governmental and regulatory authorities, including the CFPB, the Federal Trade Commission, the U.S. Department of Housing and Urban Development (“HUD”), the U.S. Department of Veterans Affairs (“VA”), the SEC and various state agencies that license, audit, investigate and conduct examinations of such subsidiaries’ mortgage servicing, origination, debt collection, and other activities. In the current regulatory environment, the policies, laws, rules and regulations applicable to our subsidiaries’ mortgage origination and servicing businesses have been rapidly evolving. Federal, state or local governmental authorities may continue to enact laws, rules or regulations that will result in changes in our and our subsidiaries’ business practices and may materially increase the costs of compliance. We are unable to predict whether any such changes will adversely affect our business.

We and our subsidiaries must comply with a large number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, Real Estate Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act, the Servicemembers Civil Relief Act, the Homeowners Protection Act, the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Equal Credit Opportunity Act, as well as individual state licensing and foreclosure laws and federal and local bankruptcy rules. These statutes apply to many facets of our subsidiaries’ businesses, including loan origination, default servicing and collections, use of credit reports, safeguarding of non-public personally identifiable information about customers, foreclosure and claims handling, investment of and interest payments on escrow balances and escrow payment features, and such statutes mandate certain disclosures and notices to borrowers. These requirements can and will change as statutes and regulations are enacted, promulgated, amended, interpreted and enforced.

In addition, the GSEs, Ginnie Mae and other business counterparties subject our subsidiaries’ mortgage origination and servicing businesses to periodic examinations, reviews and audits, and we routinely conduct our own internal examinations, reviews and audits. These various examinations, reviews and audits of our subsidiaries’ businesses and related activities may reveal deficiencies in such subsidiaries’ compliance with our policies and other requirements to which they are subject. While we strive to investigate and remediate such deficiencies, there can be no assurance that our internal investigations will reveal any deficiencies or that any remedial measures that we implement, which could involve material expense, will ensure compliance with applicable policies, laws, regulations and other requirements or be deemed sufficient by the GSEs, Ginnie Mae, federal and local governmental authorities or other interested parties.

We and our subsidiaries devote substantial resources to regulatory compliance and regulatory inquiries, and we incur, and expect to continue to incur, significant costs in connection therewith. Our business, financial condition, liquidity and/or results of operations could be materially and adversely affected by the substantial resources we devote to, and the significant compliance costs we incur in connection with, regulatory compliance and regulatory inquiries, including any fines, penalties, restitution or similar payments we may be required to make in connection with resolving such matters.

The actual or alleged failure of our mortgage origination and servicing subsidiaries to comply with applicable federal, state and local laws and regulations and GSE, Ginnie Mae and other business counterparty requirements, or to implement and adhere to adequate remedial measures designed to address any identified compliance deficiencies, could lead to:


•	the loss or suspension of licenses and approvals necessary to operate our or our subsidiaries’ business;


•	limitations, restrictions or complete bans on our or our subsidiaries’ business or various segments of our business;


•	our or our subsidiaries’ disqualification from participation in governmental programs, including GSE, Ginnie Mae, and VA programs;


•	breaches of covenants and representations under our servicing, debt, or other agreements;


•	negative publicity and damage to our reputation;


•	governmental investigations and enforcement actions;


•	administrative fines and financial penalties;


•	litigation, including class action lawsuits;


•	civil and criminal liability;


•	termination of our servicing and subservicing agreements or other contracts;


•	demands for us to repurchase loans;


•	loss of personnel who are targeted by prosecutions, investigations, enforcement actions or litigation;


•	a significant increase in compliance costs;


•	a significant increase in the resources we and our subsidiaries devote to regulatory compliance and regulatory inquiries;


•	an inability to access new, or a default under or other loss of current, liquidity and funding sources necessary to operate our business;


•	restrictions on our or our subsidiaries’ business activities;


•	impairment of assets; and


•	an inability to execute on our business strategy.

Any of these outcomes could materially and adversely affect our reputation, business, financial condition, prospects, liquidity and/or results of operations.

We cannot guarantee that any such scrutiny and investigations will not materially adversely affect us. Additionally, in recent years, the general trend among federal, state and local lawmakers and regulators has been toward increasing laws, regulations and investigative proceedings with regard to residential mortgage lenders and servicers. The CFPB continues to take an active role in supervising the mortgage industry, and its rule-making and regulatory agenda relating to loan servicing and origination continues to evolve. Individual states have also been increasingly active in supervising non-bank mortgage lenders and servicers such as NewRez, and certain regulators have communicated recommendations, expectations or demands with respect to areas such as corporate governance, safety and soundness, risk and compliance management, and cybersecurity, in addition to their focus on traditional licensing and examination matters.

Following the 2018 Congressional elections, a level of heightened uncertainty exists with respect to the future of regulation of mortgage lending and servicing, including the future of the Dodd-Frank Act and CFPB. We cannot predict the specific legislative or executive actions that may result or what actions federal or state regulators might take in response to potential changes to the Dodd-Frank Act or to the federal regulatory environment generally. Such actions could impact the mortgage industry generally or us specifically, could impact our relationships with other regulators, and could adversely impact our business.

The CFPB and certain state regulators have increasingly focused on the use, and adequacy, of technology in the mortgage servicing industry. For example, in 2016, the CFPB issued a special edition supervision report that stressed the need for mortgage servicers to assess and make necessary improvements to their information technology systems in order to ensure compliance with the CFPB’s mortgage servicing requirements. The New York Department of Financial Services (“NY DFS”) also issued Cybersecurity Requirements for Financial Services Companies, effective in 2017, which requires banks, insurance companies, and other financial services institutions regulated by the NY DFS to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of New York State’s financial services industry. In addition, the California Consumer Privacy Act (“CCPA”), effective as of January 2020, requires businesses that maintain personal information of California residents, including certain mortgage lenders and servicers, to notify certain consumers when collecting their data, respond to consumer requests relating to the uses of their data, verify the identities of consumers who make requests, disclose details regarding transactions involving their data, and maintain records of consumer’ requests relating to their data, among various other obligations, and to create procedures designed to comply with CCPA requirements. The impact of the CCPA and its implementing regulations on our mortgage origination and servicing businesses remains uncertain, and may result in an increase in legal and compliance costs.

New regulatory and legislative measures, or changes in enforcement practices, including those related to the technology we use, could, either individually or in the aggregate, require significant changes to our business practices, impose additional costs on us, limit our product offerings, limit our ability to efficiently pursue business opportunities, negatively impact asset values or reduce our revenues. Accordingly, any of the foregoing could materially and adversely affect our business and our financial condition, liquidity and results of operations.

A failure to maintain minimum servicer ratings could have an adverse effect on our business, financing activities, financial condition or results of operations.

S&P, Moody’s and Fitch rates NewRez as a residential loan servicer, and a downgrade, or failure to maintain, any of our servicer ratings could:


•	adversely affect NewRez’s ability to maintain our status as an approved servicer by Fannie Mae and Freddie Mac;


•	adversely affect NewRez’s and/or New Residential’s ability to finance servicing advance receivables and certain other assets;


•	lead to the early termination of existing advance facilities and affect the terms and availability of advance facilities that we may seek in the future;


•	cause NewRez’s termination as servicer in our servicing agreements that require NewRez to maintain specified servicer ratings; and


•	further impair NewRez’s ability to consummate future servicing transactions.

Any of the above could adversely affect our business, financial condition and results of operations.

GSE initiatives and other actions, including changes to the minimum servicing amount for GSE loans, could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.

The Federal Housing Finance Agency (“FHFA”) and other industry stakeholders or regulators may implement or require changes to current mortgage servicing practices and compensation that could have a material adverse effect on the economics or performance of our investments in MSRs.

Currently, when a loan is sold into the secondary market for Fannie Mae or Freddie Mac loans, the servicer is generally required to retain a minimum servicing amount (“MSA”) of 25 basis points of the UPB for fixed rate mortgages. As has been widely publicized, in September 2011, the FHFA announced that a Joint Initiative on Mortgage Servicing Compensation was seeking public comment on two alternative mortgage servicing compensation structures detailed in a discussion paper. Changes to the MSA structure could significantly impact our business in negative ways that we cannot predict or protect against. For example, the elimination of a MSA could radically change the mortgage servicing industry and could severely limit the supply of interests in MSRs available for sale. In addition, a removal of, or reduction in, the MSA could significantly reduce the recapture rate on the affected loan portfolio, which would negatively affect the investment return on our interests in MSRs. We cannot predict whether any changes to current MSA rules will occur or what impact any changes will have on our business, results of operations, liquidity or financial condition.

Our interests in MSRs may involve complex or novel structures.

Interests in MSRs may entail new types of transactions and may involve complex or novel structures. Accordingly, the risks associated with the transactions and structures are not fully known to buyers and sellers. In the case of interests in MSRs on Agency pools, Agencies may require that we submit to costly or burdensome conditions as a prerequisite to their consent to an investment in, or our financing of, interests in MSRs on Agency pools. Agency conditions, including capital requirements, may diminish or eliminate the investment potential of interests in MSRs on Agency pools by making such investments too expensive for us or by severely limiting the potential returns available from interests in MSRs on Agency pools.

It is possible that an Agency’s views on whether any such acquisition structure is appropriate or acceptable may not be known to us when we make an investment and may change from time to time for any reason or for no reason, even with respect to a completed investment. An Agency’s evolving posture toward an acquisition or disposition structure through which we invest in or dispose of interests in MSRs on Agency pools may cause such Agency to impose new conditions on our existing interests in MSRs on Agency pools, including the owner’s ability to hold such interests in MSRs on Agency pools directly or indirectly through a grantor trust or other means. Such new conditions may be costly or burdensome and may diminish or eliminate the investment potential of the interests in MSRs on Agency pools that are already owned by us. Moreover, obtaining such consent may require us or our co-investment counterparties to agree to material structural or economic changes, as well as agree to indemnification or other terms that expose us to risks to which we have not previously been exposed and that could negatively affect our returns from our investments.

Our ability to finance the MSRs and servicer advance receivables acquired in the MSR Transactions may depend on the related Servicing Partner’s cooperation with our financing sources and compliance with certain covenants.

We have in the past and intend to continue to finance some or all of the MSRs or servicer advance receivables acquired in the MSR Transactions, and as a result, we will be subject to substantial operational risks associated with the related Servicing Partners. In our current financing facilities for interests in MSRs and servicer advance receivables, the failure of the related Servicing Partner to satisfy various covenants and tests can result in an amortization event and/or an event of default. Our financing sources may require us to include similar provisions in any financing we obtain relating to the MSRs and servicer advances acquired in the MSR Transactions. If we decide to finance such assets, we will not have the direct ability to control any party’s compliance with any such covenants and tests and the failure of any party to satisfy any such covenants or tests could result in a partial or total loss on our investment. Some financing sources may be unwilling to finance any assets acquired in the MSR Transactions.

In addition, any financing for the MSRs and servicer advances acquired in the MSR Transactions may be subject to regulatory approval and the agreement of the relevant Servicing Partner to be party to such financing agreements. If we cannot get regulatory approval or these parties do not agree to be a party to such financing agreements, we may not be able to obtain financing on favorable terms or at all.

Mortgage servicing is heavily regulated at the U.S. federal, state and local levels, and each transfer of MSRs to our subservicer of such MSRs may not be approved by the requisite regulators.

Mortgage servicers must comply with U.S. federal, state and local laws and regulations. These laws and regulations cover topics such as licensing; allowable fees and loan terms; permissible servicing and debt collection practices; limitations on forced-placed insurance; special consumer protections in connection with default and foreclosure; and protection of confidential, nonpublic consumer information. The volume of new or modified laws and regulations has increased in recent years, and states and individual cities and counties continue to enact laws that either restrict or impose additional obligations in connection with certain loan origination, acquisition and servicing activities in those cities and counties. The laws and regulations are complex and vary greatly among the states and localities, and in some cases, these laws are in conflict with each other or with U.S. federal law. In connection with the MSR Transactions, there is no assurance that each transfer of MSRs to our selected subservicer will be approved by the requisite regulators. If regulatory approval for each such transfer is not obtained, we may incur additional costs and expenses in connection with the approval of another replacement subservicer.

We do not have legal title to the MSRs underlying our Excess MSRs or certain of our Servicer Advance Investments.

We do not have legal title to the MSRs underlying our Excess MSRs or certain of the MSRs related to the transactions contemplated by the purchase agreements pursuant to which we acquire Servicer Advance Investments or MSR financing receivables from Ocwen, SLS and Mr. Cooper, and are subject to increased risks as a result of the related servicer continuing to own the mortgage servicing rights. The validity or priority of our interest in the underlying mortgage servicing could be challenged in a bankruptcy proceeding of the servicer, and the related purchase agreement could be rejected in such proceeding. Any of the foregoing events might have a material adverse effect on our business, financial condition, results of operations and liquidity. As part of the Ocwen Transaction, we and Ocwen have agreed to cooperate to obtain any third party consents required to transfer Ocwen’s remaining interest in the Ocwen Subject MSRs to us. As noted above, however, there is no assurance that we will be successful in obtaining those consents.

Many of our investments may be illiquid, and this lack of liquidity could significantly impede our ability to vary our portfolio in response to changes in economic and other conditions or to realize the value at which such investments are carried if we are required to dispose of them.

Many of our investments are illiquid. Illiquidity may result from the absence of an established market for the investments, as well as legal or contractual restrictions on their resale, refinancing or other disposition. Dispositions of investments may be subject to contractual and other limitations on transfer or other restrictions that would interfere with subsequent sales of such investments or adversely affect the terms that could be obtained upon any disposition thereof.

Interests in MSRs are highly illiquid and may be subject to numerous restrictions on transfers, including without limitation the receipt of third-party consents. For example, the Servicing Guidelines of a mortgage owner may require that holders of Excess MSRs obtain the mortgage owner’s prior approval of any change of direct ownership of such Excess MSRs. Such approval may be withheld for any reason or no reason in the discretion of the mortgage owner. Moreover, we have not received and do not expect to receive any assurances from any GSEs that their conditions for the sale by us of any interests in MSRs will not change. Therefore, the potential costs, issues or restrictions associated with receiving such GSEs’ consent for any such dispositions by us cannot be determined with any certainty. Additionally, interests in MSRs may entail complex transaction structures and the risks associated with the transactions and structures are not fully known to buyers or sellers. As a result of the foregoing, we may be unable to locate a buyer at the time we wish to sell interests in MSRs. There is some risk that we will be required to dispose of interests in MSRs either through an in-kind distribution or other liquidation vehicle, which will, in either case, provide little or no economic benefit to us, or a sale to a co-investor in the interests in MSRs, which may be an affiliate. Accordingly, we cannot provide any assurance that we will obtain any return or any benefit of any kind from any disposition of interests in MSRs. We may not benefit from the full term of the assets and for the aforementioned reasons may not receive any benefits from the disposition, if any, of such assets.

In addition, some of our real estate and other securities may not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. There are also no established trading markets for a majority of our intended investments. Moreover, certain of our investments, including our investments in consumer loans and certain of our interests in MSRs, are made indirectly through a vehicle that owns the underlying assets. Our ability to sell our interest may be contractually limited or prohibited. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be limited.

Our real estate and other securities have historically been valued based primarily on third-party quotations, which are subject to significant variability based on the liquidity and price transparency created by market trading activity. A disruption in these trading markets could reduce the trading for many real estate and other securities, resulting in less transparent prices for those securities, which would make selling such assets more difficult. Moreover, a decline in market demand for the types of assets that we hold would make it more difficult to sell our assets. If we are required to liquidate all or a portion of our illiquid investments quickly, we may realize significantly less than the amount at which we have previously valued these investments.

Market conditions could negatively impact our business, results of operations, cash flows and financial condition.

The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on us. These factors include, among other things:


•	interest rates and credit spreads;


•	the availability of credit, including the price, terms and conditions under which it can be obtained;


•	the quality, pricing and availability of suitable investments;


•	the ability to obtain accurate market-based valuations;


•	the ability of securities dealers to make markets in relevant securities and loans;


•	loan values relative to the value of the underlying real estate assets;


•	default rates on the loans underlying our investments and the amount of the related losses, and credit losses with respect to our investments;


•	prepayment and repayment rates, delinquency rates and legislative/regulatory changes with respect to our investments, and the timing and amount of servicer advances;


•	the availability and cost of quality Servicing Partners, and advance, recovery and recapture rates;


•	competition;


•	the actual and perceived state of the real estate markets, bond markets, market for dividend-paying stocks and public capital markets generally;


•	unemployment rates; and


•	the attractiveness of other types of investments relative to investments in real estate or REITs generally.

Changes in these factors are difficult to predict, and a change in one factor can affect other factors. For example, at various points in time, increased default rates in the subprime mortgage market played a role in causing credit spreads to widen, reducing availability of credit on favorable terms, reducing liquidity and price transparency of real estate related assets, resulting in difficulty in obtaining accurate mark-to-market valuations, and causing a negative perception of the state of the real estate markets and of REITs generally. Market conditions could be volatile or could deteriorate as a result of a variety of factors beyond our control with adverse effects to our financial condition.

The geographic distribution of the loans underlying, and collateral securing, certain of our investments subjects us to geographic real estate market risks, which could adversely affect the performance of our investments, our results of operations and financial condition.

The geographic distribution of the loans underlying, and collateral securing, our investments, including our interests in MSRs, servicer advances, Non-Agency RMBS and loans, exposes us to risks associated with the real estate and commercial lending industry in general within the states and regions in which we hold significant investments. These risks include, without limitation: possible declines in the value of real estate; risks related to general and local economic conditions; possible lack of availability of mortgage funds; overbuilding; extended vacancies of properties; increases in competition, property taxes and operating expenses; changes in zoning laws; increased energy costs; unemployment; costs resulting from the clean-up of, and liability to third parties for damages resulting from, environmental problems; casualty or condemnation losses; uninsured damages from floods, hurricanes, earthquakes or other natural disasters; and changes in interest rates.

As of December 31, 2019, 24.9% and 21.9% of the total UPB of the residential mortgage loans underlying our Excess MSRs and MSRs, respectively, was secured by properties located in California, which are particularly susceptible to natural disasters such as fires, earthquakes and mudslides. 7.6% and 6.9% of the total UPB of the residential mortgage loans underlying our Excess MSRs and MSRs, respectively, was secured by properties located in Florida, which are particularly susceptible to natural disasters such as hurricanes and floods. As of December 31, 2019, 36.6% of the collateral securing our Non-Agency RMBS was located in the Western U.S., 24.2% was located in the Southeastern U.S., 21.9% was located in the Northeastern U.S., 10.4% was located in the Midwestern U.S. and 5.8% was located in the Southwestern U.S. We were unable to obtain geographical information for 1.1% of the collateral. As a result of this concentration, we may be more susceptible to adverse developments in those markets than if we owned a more geographically diverse portfolio. To the extent any of the foregoing risks arise in states and regions where

we hold significant investments, the performance of our investments, our results of operations, cash flows and financial condition could suffer a material adverse effect.

The value of our interests in MSRs, servicer advances, residential mortgage loans and RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process.

Allegations of deficiencies in servicing and foreclosure practices among several large sellers and servicers of residential mortgage loans that surfaced in 2010 raised various concerns relating to such practices, including the improper execution of the documents used in foreclosure proceedings (so-called “robo signing”), inadequate documentation of transfers and registrations of mortgages and assignments of loans, improper modifications of loans, violations of representations and warranties at the date of securitization and failure to enforce put-backs.

As a result of alleged deficiencies in foreclosure practices, a number of servicers temporarily suspended foreclosure proceedings beginning in the second half of 2010 while they evaluated their foreclosure practices. In late 2010, a group of state attorneys general and state bank and mortgage regulators representing nearly all 50 states and the District of Columbia, along with the U.S. Justice Department and HUD, began an investigation into foreclosure practices of banks and servicers. The investigations and lawsuits by several state attorneys general led to a settlement agreement in early February 2012 with five of the nation’s largest banks, pursuant to which the banks agreed to pay more than $25.0 billion to settle claims relating to improper foreclosure practices. The settlement does not prohibit the states, the federal government, individuals or investors from pursuing additional actions against the banks and servicers in the future.

Under the terms of the agreements governing our Servicer Advance Investments and MSRs, we (in certain cases, together with third-party co-investors) are required to make or purchase from certain of our Servicing Partners, servicer advances on certain loan pools. While a residential mortgage loan is in foreclosure, servicers are generally required to continue to advance delinquent principal and interest and to also make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent it determines that such amounts are recoverable. Servicer advances are generally recovered when the delinquency is resolved.

Foreclosure moratoria or other actions that lengthen the foreclosure process increase the amount of servicer advances we or our Servicing Partners are required to make and we are required to purchase, lengthen the time it takes for us to be repaid for such advances and increase the costs incurred during the foreclosure process. In addition, servicer advance financing facilities contain provisions that modify the advance rates for, and limit the eligibility of, servicer advances to be financed based on the length of time that servicer advances are outstanding, and, as a result, an increase in foreclosure timelines could further increase the amount of servicer advances that we need to fund with our own capital. Such increases in foreclosure timelines could increase our need for capital to fund servicer advances (which do not bear interest), which would increase our interest expense, reduce the value of our investment and potentially reduce the cash that we have available to pay our operating expenses or to pay dividends.

Even in states where servicers have not suspended foreclosure proceedings or have lifted (or will soon lift) any such delayed foreclosures, servicers, including our Servicing Partners, have faced, and may continue to face, increased delays and costs in the foreclosure process. For example, the current legislative and regulatory climate could lead borrowers to contest foreclosures that they would not otherwise have contested under ordinary circumstances, and servicers may incur increased litigation costs if the validity of a foreclosure action is challenged by a borrower. In general, regulatory developments with respect to foreclosure practices could result in increases in the amount of servicer advances and the length of time to recover servicer advances, fines or increases in operating expenses, and decreases in the advance rate and availability of financing for servicer advances. This would lead to increased borrowings, reduced cash and higher interest expense which could negatively impact our liquidity and profitability. Although the terms of our Servicer Advance Investments contain adjustment mechanisms that would reduce the amount of performance fees payable to the related Servicing Partner if servicer advances exceed pre-determined amounts, those fee reductions may not be sufficient to cover the expenses resulting from longer foreclosure timelines.

The integrity of the servicing and foreclosure processes is critical to the value of the residential mortgage loans in which we invest and of the portfolios of loans underlying our interests in MSRs and RMBS, and our financial results could be adversely affected by deficiencies in the conduct of those processes. For example, delays in the foreclosure process that have resulted from investigations into improper servicing practices may adversely affect the values of, and result in losses on, these investments. Foreclosure delays may also increase the administrative expenses of the securitization trusts for the RMBS, thereby reducing the amount of funds available for distribution to investors.

In addition, the subordinate classes of securities issued by the securitization trusts may continue to receive interest payments while the defaulted loans remain in the trusts, rather than absorbing the default losses. This may reduce the amount of credit support available for senior classes of RMBS that we may own, thus possibly adversely affecting these securities. Additionally, a substantial

portion of the $25.0 billion settlement is a “credit” to the banks and servicers for principal write-downs or reductions they may make to certain mortgages underlying RMBS. There remains uncertainty as to how these principal reductions will work and what effect they will have on the value of related RMBS. As a result, there can be no assurance that any such principal reductions will not adversely affect the value of our interests in MSRs and RMBS.

While we believe that the sellers and servicers would be in violation of the applicable Servicing Guidelines to the extent that they have improperly serviced mortgage loans or improperly executed documents in foreclosure or bankruptcy proceedings, or do not comply with the terms of servicing contracts when deciding whether to apply principal reductions, it may be difficult, expensive, time consuming and, ultimately, uneconomic for us to enforce our contractual rights. While we cannot predict exactly how the servicing and foreclosure matters or the resulting litigation or settlement agreements will affect our business, there can be no assurance that these matters will not have an adverse impact on our results of operations, cash flows and financial condition.

A failure by any or all of the members of Buyer to make capital contributions for amounts required to fund servicer advances could result in an event of default under our advance facilities and a complete loss of our investment.

New Residential and third-party co-investors, through a joint venture entity (Advance Purchaser LLC, the “Buyer”) have agreed to purchase all future arising servicer advances from Mr. Cooper under certain residential mortgage servicing agreements. Buyer relies, in part, on its members to make committed capital contributions in order to pay the purchase price for future servicer advances. A failure by any or all of the members to make such capital contributions for amounts required to fund servicer advances could result in an event of default under our advance facilities and a complete loss of our investment.

The residential mortgage loans underlying the securities we invest in and the loans we directly invest in are subject to delinquency, foreclosure and loss, which could result in losses to us.

The ability of a borrower to repay a loan secured by a residential property is dependent upon the income or assets of the borrower. A number of factors may impair borrowers’ abilities to repay their loans, including, among other things, changes in the borrower’s employment status, changes in national, regional or local economic conditions, changes in interest rates or the availability of credit on favorable terms, changes in regional or local real estate values, changes in regional or local rental rates and changes in real estate taxes.

Our mortgage backed securities are securities backed by mortgage loans. Many of the RMBS in which we invest are backed by collateral pools of subprime residential mortgage loans. “Subprime” mortgage loans refer to mortgage loans that have been originated using underwriting standards that are less restrictive than the underwriting requirements used as standards for other first and junior lien mortgage loan purchase programs, such as the programs of Fannie Mae and Freddie Mac. These lower standards include mortgage loans made to borrowers having imperfect or impaired credit histories (including outstanding judgments or prior bankruptcies), mortgage loans where the amount of the loan at origination is 80% or more of the value of the mortgage property, mortgage loans made to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified. Subprime mortgage loans may experience delinquency, foreclosure, bankruptcy and loss rates that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more traditional manner. To the extent losses are realized on the loans underlying the securities in which we invest, we may not recover the amount invested in, or, in extreme cases, any of our investment in such securities.

Residential mortgage loans, including manufactured housing loans and subprime mortgage loans are secured by single-family residential property and are also subject to risks of delinquency and foreclosure, and risks of loss. A significant portion of the residential mortgage loans that we acquire are, or may become, sub-performing loans, non-performing loans or REO assets where the borrower has failed to make timely payments of principal and/or interest. As part of the residential mortgage loan portfolios we purchase, we also may acquire performing loans that are or subsequently become sub-performing or non-performing, meaning the borrowers fail to timely pay some or all of the required payments of principal and/or interest. Under current market conditions, it is likely that some of these loans will have current loan-to-value ratios in excess of 100%, meaning the amount owed on the loan exceeds the value of the underlying real estate.

In the event of default under a residential mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the outstanding principal and accrued but unpaid interest of the loan. Even though we typically pay less than the amount owed on these loans to acquire them, if actual results differ from our assumptions in determining the price we paid to acquire such loans, we may incur significant losses. In addition, we may acquire REO assets directly, which involves the same risks. Any loss we incur may be significant and could materially and adversely affect us.

Our investments in real estate and other securities are subject to changes in credit spreads as well as available market liquidity, which could adversely affect our ability to realize gains on the sale of such investments.

Real estate and other securities are subject to changes in credit spreads. Credit spreads measure the yield demanded on securities by the market based on their credit relative to a specific benchmark.

Fixed rate securities are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. Floating rate securities are valued based on a market credit spread over LIBOR and are affected similarly by changes in LIBOR spreads. As of December 31, 2019, 74.9% of our Non-Agency RMBS Portfolio consisted of floating rate securities and 25.1% consisted of fixed rate securities, and 100.0% of our Agency RMBS portfolio consisted of fixed rate securities, based on the amortized cost basis of all securities (including the amortized cost basis of interest-only and residual classes). Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher, or “wider,” spread over the benchmark rate to value such securities. Under such conditions, the value of our real estate and other securities portfolios would tend to decline. Conversely, if the spread used to value such securities were to decrease, or “tighten,” the value of our real estate and other securities portfolio would tend to increase. Such changes in the market value of our real estate securities portfolios may affect our net equity, net income or cash flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital. Widening credit spreads could cause the net unrealized gains on our securities and derivatives, recorded in accumulated other comprehensive income or retained earnings, and therefore our book value per share, to decrease and result in net losses.

Prepayment rates on our residential mortgage loans and those underlying our real estate and other securities may adversely affect our profitability.

In general, residential mortgage loans may be prepaid at any time without penalty. Prepayments result when homeowners/mortgagors satisfy (i.e., pay off) the mortgage upon selling or refinancing their mortgaged property. When we acquire a particular loan or security, we anticipate that the loan or underlying residential mortgage loans will prepay at a projected rate which, together with expected coupon income, provides us with an expected yield on such investments. If we purchase assets at a premium to par value, and borrowers prepay their mortgage loans faster than expected, the corresponding prepayments on our assets may reduce the expected yield on such assets because we will have to amortize the related premium on an accelerated basis. Conversely, if we purchase assets at a discount to par value, when borrowers prepay their mortgage loans slower than expected, the decrease in corresponding prepayments on our assets may reduce the expected yield on such assets because we will not be able to accrete the related discount as quickly as originally anticipated.

Prepayment rates on loans are influenced by changes in mortgage and market interest rates and a variety of economic, geographic, political and other factors, all of which are beyond our control. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment or other such risks. In periods of declining interest rates, prepayment rates on mortgage loans generally increase. If general interest rates decline at the same time, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. In addition, the market value of our loans and real estate and other securities may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates.

We may purchase assets that have a higher or lower coupon rate than the prevailing market interest rates. In exchange for a higher coupon rate, we would then pay a premium over par value to acquire these securities. In accordance with GAAP, we would amortize the premiums over the life of the related assets. If the mortgage loans securing these assets prepay at a more rapid rate than anticipated, we would have to amortize our premiums on an accelerated basis which may adversely affect our profitability. As compensation for a lower coupon rate, we would then pay a discount to par value to acquire these assets. In accordance with GAAP, we would accrete any discounts over the life of the related assets. If the mortgage loans securing these assets prepay at a slower rate than anticipated, we would have to accrete our discounts on an extended basis which may adversely affect our profitability. Defaults on the mortgage loans underlying Agency RMBS typically have the same effect as prepayments because of the underlying Agency guarantee.

Prepayments, which are the primary feature of mortgage backed securities that distinguish them from other types of bonds, are difficult to predict and can vary significantly over time. As the holder of the security, on a monthly basis, we receive a payment equal to a portion of our investment principal in a particular security as the underlying mortgages are prepaid. In general, on the date each month that principal prepayments are announced (i.e., factor day), the value of our real estate related security pledged as collateral under our repurchase agreements is reduced by the amount of the prepaid principal and, as a result, our lenders will typically initiate a margin call requiring the pledge of additional collateral or cash, in an amount equal to such prepaid principal, in order to re-establish the required ratio of borrowing to collateral value under such repurchase agreements. Accordingly, with

respect to our Agency RMBS, the announcement on factor day of principal prepayments is in advance of our receipt of the related scheduled payment, thereby creating a short-term receivable for us in the amount of any such principal prepayments. However, under our repurchase agreements, we may receive a margin call relating to the related reduction in value of our Agency RMBS and, prior to receipt of this short-term receivable, be required to post additional collateral or cash in the amount of the principal prepayment on or about factor day, which would reduce our liquidity during the period in which the short-term receivable is outstanding. As a result, in order to meet any such margin calls, we could be forced to sell assets in order to maintain liquidity. Forced sales under adverse market conditions may result in lower sales prices than ordinary market sales made in the normal course of business. If our real estate and other securities were liquidated at prices below our amortized cost (i.e., the cost basis) of such assets, we would incur losses, which could adversely affect our earnings. In addition, in order to continue to earn a return on this prepaid principal, we must reinvest it in additional real estate and other securities or other assets; however, if interest rates decline, we may earn a lower return on our new investments as compared to the real estate and other securities that prepay.

Prepayments may have a negative impact on our financial results, the effects of which depend on, among other things, the timing and amount of the prepayment delay on our Agency RMBS, the amount of unamortized premium or discount on our loans and real estate and other securities, the rate at which prepayments are made on our Non-Agency RMBS, the reinvestment lag and the availability of suitable reinvestment opportunities.

Our investments in residential mortgage loans, REO and RMBS may be subject to significant impairment charges, which would adversely affect our results of operations.

We are required to periodically evaluate our investments for impairment indicators. The judgment regarding the existence of impairment indicators is based on a variety of factors depending upon the nature of the investment and the manner in which the income related to such investment was calculated for purposes of our financial statements. If we determine that an impairment has occurred, we are required to make an adjustment to the net carrying value of the investment, which would adversely affect our results of operations in the applicable period and thereby adversely affect our ability to pay dividends to our stockholders.

The lenders under our financing agreements may elect not to extend financing to us, which could quickly and seriously impair our liquidity.

We finance a meaningful portion of our investments with repurchase agreements and other short-term financing arrangements. Under the terms of repurchase agreements, we will sell an asset to the lending counterparty for a specified price and concurrently agree to repurchase the same asset from our counterparty at a later date for a higher specified price. During the term of the repurchase agreement—which can be as short as 30 days—the counterparty will make funds available to us and hold the asset as collateral. Our counterparties can also require us to post additional margin as collateral at any time during the term of the agreement. When the term of a repurchase agreement ends, we will be required to repurchase the asset for the specified repurchase price, with the difference between the sale and repurchase prices serving as the equivalent of paying interest to the counterparty in return for extending financing to us. If we want to continue to finance the asset with a repurchase agreement, we ask the counterparty to extend—or “roll”—the repurchase agreement for another term.

Our counterparties are not required to roll our repurchase agreements or other financing agreements upon the expiration of their stated terms, which subjects us to a number of risks. Counterparties electing to roll our financing agreements may charge higher spread and impose more onerous terms upon us, including the requirement that we post additional margin as collateral. More significantly, if a financing agreement counterparty elects not to extend our financing, we would be required to pay the counterparty in full on the maturity date and find an alternate source of financing. Alternate sources of financing may be more expensive, contain more onerous terms or simply may not be available. If we were unable to pay the repurchase price for any asset financed with a repurchase agreement, the counterparty has the right to sell the asset being held as collateral and require us to compensate it for any shortfall between the value of our obligation to the counterparty and the amount for which the collateral was sold (which may be a significantly discounted price). Moreover, our financing agreement obligations are currently with a limited number of counterparties. If any of our counterparties elected not to roll our financing agreements, we may not be able to find a replacement counterparty in a timely manner. Finally, some of our financing agreements contain covenants and our failure to comply with such covenants could result in a loss of our investment.

The financing sources under our servicer advance financing facilities may elect not to extend financing to us or may have or take positions adverse to us, which could quickly and seriously impair our liquidity.

We finance a meaningful portion of our Servicer Advance Investments and servicer advance receivables with structured financing arrangements. These arrangements are commonly of a short-term nature. These arrangements are generally accomplished by having the named servicer, if the named servicer is a subsidiary of the Company, or the purchaser of such Servicer Advance Investments (which is a subsidiary of the Company) transfer our right to repayment for certain servicer advances that we have as

servicer under the relevant Servicing Guidelines or that we have acquired from one of our Servicing Partners, as applicable, to one of our wholly owned bankruptcy remote subsidiaries (a “Depositor”). We are generally required to continue to transfer to the related Depositor all of our rights to repayment for any particular pool of servicer advances as they arise (and, if applicable, are transferred from one of our Servicing Partners) until the related financing arrangement is paid in full and is terminated. The related Depositor then transfers such rights to an “Issuer.” The Issuer then issues limited recourse notes to the financing sources backed by such rights to repayment.

The outstanding balance of servicer advance receivables securing these arrangements is not likely to be repaid on or before the maturity date of such financing arrangements. Accordingly, we rely heavily on our financing sources to extend or refinance the terms of such financing arrangements. Our financing sources are not required to extend the arrangements upon the expiration of their stated terms, which subjects us to a number of risks. Financing sources electing to extend may charge higher interest rates and impose more onerous terms upon us, including without limitation, lowering the amount of financing that can be extended against any particular pool of servicer advances.

If a financing source is unable or unwilling to extend financing, including, but not limited to, due to legal or regulatory matters applicable to us or our Servicing Partners, the related Issuer will be required to repay the outstanding balance of the financing on the related maturity date. Additionally, there may be substantial increases in the interest rates under a financing arrangement if the related notes are not repaid, extended or refinanced prior to the expected repayment dated, which may be before the related maturity date. If an Issuer is unable to pay the outstanding balance of the notes, the financing sources generally have the right to foreclose on the servicer advances pledged as collateral.

Currently, certain of the notes issued under our structured servicer advance financing arrangements accrue interest at a floating rate of interest. Servicer advance receivables are non-interest bearing assets. Accordingly, if there is an increase in prevailing interest rates and/or our financing sources increase the interest rate “margins” or “spreads.” the amount of financing that we could obtain against any particular pool of servicer advances may decrease substantially and/or we may be required to obtain interest rate hedging arrangements. There is no assurance that we will be able to obtain any such interest rate hedging arrangements.

Alternate sources of financing may be more expensive, contain more onerous terms or simply may not be available. Moreover, our structured servicer advance financing arrangements are currently with a limited number of counterparties. If any of our sources are unable to or elected not to extend or refinance such arrangements, we may not be able to find a replacement counterparty in a timely manner.

Many of our servicer advance financing arrangements are provided by financial institutions with whom we have substantial relationships. Some of our servicer advance financing arrangements entail the issuance of term notes to capital markets investors with whom we have little or no relationships or the identities of which we may not be aware and, therefore, we have no ability to control or monitor the identity of the holders of such term notes. Holders of such term notes may have or may take positions - for example, “short” positions in our stock or the stock of our servicers - that could be benefited by adverse events with respect to us or our Servicing Partners. If any holders of term notes allege or assert noncompliance by us or the related Servicing Partner under our servicer advance financing arrangements in order to realize such benefits, we or our Servicing Partners, or our ability to maintain servicer advance financing on favorable terms, could be materially and adversely affected.

We may not be able to finance our investments on attractive terms or at all, and financing for interests in MSRs or servicer advance receivables may be particularly difficult to obtain.

The ability to finance investments with securitizations or other long-term non-recourse financing not subject to margin requirements has been challenging as a result of market conditions. These conditions may result in having to use less efficient forms of financing for any new investments, or the refinancing of current investments, which will likely require a larger portion of our cash flows to be put toward making the investment and thereby reduce the amount of cash available for distribution to our stockholders and funds available for operations and investments, and which will also likely require us to assume higher levels of risk when financing our investments. In addition, there is a limited market for financing of interests in MSRs, and it is possible that one will not develop for a variety of reasons, such as the challenges with perfecting security interests in the underlying collateral.

Certain of our advance facilities may mature in the short term, and there can be no assurance that we will be able to renew these facilities on favorable terms or at all. Moreover, an increase in delinquencies with respect to the loans underlying our servicer advance receivables could result in the need for additional financing, which may not be available to us on favorable terms or at all. If we are not able to obtain adequate financing to purchase servicer advance receivables from our Servicing Partners or fund servicer advances under our MSRs in accordance with the applicable Servicing Guidelines, we or any such Servicing Partner, as applicable, could default on its obligation to fund such advances, which could result in its termination of us or any applicable

Servicing Partner, as applicable, as servicer under the applicable Servicing Guidelines, and a partial or total loss of our interests in MSRs and servicer advances, as applicable.

The non-recourse long-term financing structures we use expose us to risks, which could result in losses to us.

We use structured finance and other non-recourse long-term financing for our investments to the extent available and appropriate. In such structures, our financing sources typically have only a claim against the assets included in the securitizations rather than a general claim against us as an entity. Prior to any such financing, we would seek to finance our investments with relatively short-term facilities until a sufficient portfolio is accumulated. As a result, we would be subject to the risk that we would not be able to acquire, during the period that any short-term facilities are available, sufficient eligible assets or securities to maximize the efficiency of a securitization. We also bear the risk that we would not be able to obtain new short-term facilities or would not be able to renew any short-term facilities after they expire should we need more time to seek and acquire sufficient eligible assets or securities for a securitization. In addition, conditions in the capital markets may make the issuance of any such securitization less attractive to us even when we do have sufficient eligible assets or securities. While we would generally intend to retain a portion of the interests issued under such securitizations and, therefore, still have exposure to any investments included in such securitizations, our inability to enter into such securitizations may increase our overall exposure to risks associated with direct ownership of such investments, including the risk of default. Our inability to refinance any short-term facilities would also increase our risk because borrowings thereunder would likely be recourse to us as an entity. If we are unable to obtain and renew short-term facilities or to consummate securitizations to finance our investments on a long-term basis, we may be required to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price.

The final Basel FRTB Ruling, which raised capital charges for bank holders of ABS, CMBS and Non-Agency MBS beginning in 2019, could adversely impact available trading liquidity and access to financing.

In January 2006, the Basel Committee on Banking Supervision released a finalized framework for calculating minimum capital requirements for market risk, which became effective in January 2019. In the final proposal, capital requirements would overall be meaningfully higher than current requirements, but are less punitive than the previous December 2014 proposal. However, each country’s specific regulator may codify the rules differently. Under the framework, capital charges on a bond are calculated based on three components: default, market and residual risk. Implementation of the final proposal could impose meaningfully higher capital charges on dealers compared with current requirements, and could reduce liquidity in the securitized products market.

Risks associated with our investment in the consumer loan sector could have a material adverse effect on our business and financial results.

Our portfolio includes an investment in the consumer loan sector. Although many of the risks applicable to consumer loans are also applicable to residential mortgage loans, and thus the type of risks that we have experience managing, there are nevertheless substantial risks and uncertainties associated with engaging in a different category of investment.

The ability of borrowers to repay the consumer loans we invest in may be adversely affected by numerous personal factors, including unemployment, divorce, major medical expenses or personal bankruptcy. General factors, including an economic downturn, high energy costs or acts of God or terrorism, may also affect the financial stability of borrowers and impair their ability or willingness to repay the consumer loans in our investment portfolio. Furthermore, our returns on our consumer loan investments are dependent on the interest we receive exceeding any losses we may incur from defaults or delinquencies. The relatively higher interest rates paid by consumer loan borrowers could lead to increased delinquencies and defaults, or could lead to financially stronger borrowers prepaying their loans, thereby reducing the interest we receive from them, while financially weaker borrowers become delinquent or default, either of which would reduce the return on our investment or could cause losses.

In the event of any default under a loan in the consumer loan portfolio in which we have invested, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral securing the loan, if any, and the principal and accrued interest of the loan. In addition, our investments in consumer loans may entail greater risk than our investments in residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. Further, repossessing personal property securing a consumer loan can present additional challenges, including locating the collateral and taking possession of it. In addition, borrowers under consumer loans may have lower credit scores. There can be no guarantee that we will not suffer unexpected losses on our investments as a result of the factors set out above, which could have a negative impact on our financial results.

In addition, a portion of our investment in consumer loans is secured by second and third liens on real estate. When we hold the second or third lien, another creditor or creditors, as applicable, holds the first and/or second, as applicable, lien on the real estate that is the subject of the security. In these situations our second or third lien is subordinate in right of payment to the first and/or second, as applicable, holder’s right to receive payment. Moreover, as the servicer of the loans underlying our consumer loan portfolio is not able to track the default status of a senior lien loan in instances where we do not hold the related first mortgage, the value of the second or third lien loans in our portfolio may be lower than our estimates indicate.

Finally, one of our consumer loan investments is held through LoanCo, in which we hold a minority, non-controlling interest. We do not control LoanCo and, as a result, LoanCo may make decisions, or take risks, that we would otherwise not make, and LoanCo may not have access to the same management and financing expertise that we have. Failure to successfully manage these risks could have a material adverse effect on our business and financial results.

The consumer loan investment sector is subject to various initiatives on the part of advocacy groups and extensive regulation and supervision under federal, state and local laws, ordinances and regulations, which could have a negative impact on our financial results.

In recent years consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on the types of short-term consumer loans in which we have invested. Such consumer advocacy groups and media reports generally focus on the annual percentage rate to a consumer for this type of loan, which is compared unfavorably to the interest typically charged by banks to consumers with top-tier credit histories.

The fees charged on the consumer loans in the portfolio in which we have invested may be perceived as controversial by those who do not focus on the credit risk and high transaction costs typically associated with this type of investment. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for the consumer loan products in which we have invested could significantly decrease. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations in the area.

In addition, we are, or may become, subject to federal, state and local laws, regulations, or regulatory policies and practices, including the Dodd-Frank Act (which, among other things, established the CFPB with broad authority to regulate and examine financial institutions), which may, amongst other things, limit the amount of interest or fees allowed to be charged on the consumer loans we invest in, or the number of consumer loans that customers may receive or have outstanding. The operation of existing or future laws, ordinances and regulations could interfere with the focus of our investments which could have a negative impact on our financial results.

Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans and/or MSRs, and we may not be able to obtain and/or maintain such licenses.

Certain jurisdictions require a license to purchase, hold, enforce or sell residential mortgage loans and/or MSRs. In the event that any licensing requirement is applicable to us, and we do not hold such licenses, there can be no assurance that we will obtain such licenses or, if obtained, that we will be able to maintain them. Our failure to obtain or maintain such licenses could restrict our ability to invest in loans in these jurisdictions if such licensing requirements are applicable. With respect to mortgage loans, in lieu of obtaining such licenses, we may contribute our acquired residential mortgage loans to one or more wholly owned trusts whose trustee is a national bank, which may be exempt from state licensing requirements. We have formed one or more subsidiaries to apply for certain state licenses. If these subsidiaries obtain the required licenses, any trust holding loans in the applicable jurisdictions may transfer such loans to such subsidiaries, resulting in these loans being held by a state-licensed entity. There can be no assurance that we will be able to obtain the requisite licenses in a timely manner or at all or in all necessary jurisdictions, or that the use of the trusts will reduce the requirement for licensing. In addition, even if we obtain necessary licenses, we may not be able to maintain them. Any of these circumstances could limit our ability to invest in residential mortgage loans or MSRs in the future and have a material adverse effect on us.

Our determination of how much leverage to apply to our investments may adversely affect our return on our investments and may reduce cash available for distribution.

We leverage certain of our assets through a variety of borrowings. Our investment guidelines do not limit the amount of leverage we may incur with respect to any specific asset or pool of assets. The return we are able to earn on our investments and cash available for distribution to our stockholders may be significantly reduced due to changes in market conditions, which may cause the cost of our financing to increase relative to the income that can be derived from our assets.

A significant portion of our investments are not match funded, which may increase the risks associated with these investments.

When available, a match funding strategy mitigates the risk of not being able to refinance an investment on favorable terms or at all. However, our Manager may elect for us to bear a level of refinancing risk on a short-term or longer-term basis, as in the case of investments financed with repurchase agreements, when, based on its analysis, our Manager determines that bearing such risk is advisable or unavoidable. In addition, we may be unable, as a result of conditions in the credit markets, to match fund our investments. For example, non-recourse term financing not subject to margin requirements has been more difficult to obtain, which impairs our ability to match fund our investments. Moreover, we may not be able to enter into interest rate swaps. A decision not to, or the inability to, match fund certain investments exposes us to additional risks.

Furthermore, we anticipate that, in most cases, for any period during which our floating rate assets are not match funded with respect to maturity, the income from such assets may respond more slowly to interest rate fluctuations than the cost of our borrowings. Because of this dynamic, interest income from such investments may rise more slowly than the related interest expense, with a consequent decrease in our net income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses for us from these investments.

Accordingly, to the extent our investments are not match funded with respect to maturities and interest rates, we are exposed to the risk that we may not be able to finance or refinance our investments on economically favorable terms, or at all, or may have to liquidate assets at a loss.

Interest rate fluctuations and shifts in the yield curve may cause losses.

Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our primary interest rate exposures relate to our interests in MSRs, RMBS, loans, derivatives and any floating rate debt obligations that we may incur. Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our business in a number of ways. Changes in the general level of interest rates can affect our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense incurred in connection with our interest-bearing liabilities and hedges. Changes in the level of interest rates also can affect, among other things, our ability to acquire real estate and other securities and loans at attractive prices, the value of our real estate and other securities, loans and derivatives and our ability to realize gains from the sale of such assets. We may wish to use hedging transactions to protect certain positions from interest rate fluctuations, but we may not be able to do so as a result of market conditions, REIT rules or other reasons. In such event, interest rate fluctuations could adversely affect our financial condition, cash flows and results of operations.

Recently, the Federal Reserve has increased the benchmark interest rate and indicated that there may be further increases in the future. In the event of a significant rising interest rate environment and/or economic downturn, loan and collateral defaults may increase and result in credit losses that would adversely affect our liquidity and operating results.

Our ability to execute our business strategy, particularly the growth of our investment portfolio, depends to a significant degree on our ability to obtain additional capital. Our financing strategy is dependent on our ability to place the debt we use to finance our investments at rates that provide a positive net spread. If spreads for such liabilities widen or if demand for such liabilities ceases to exist, then our ability to execute future financings will be severely restricted.

Interest rate changes may also impact our net book value as most of our investments are marked to market each quarter. Debt obligations are not marked to market. Generally, as interest rates increase, the value of our fixed rate securities decreases, which will decrease the book value of our equity.

Furthermore, shifts in the U.S. Treasury yield curve reflecting an increase in interest rates would also affect the yield required on our investments and therefore their value. For example, increasing interest rates would reduce the value of the fixed rate assets we hold at the time because the higher yields required by increased interest rates result in lower market prices on existing fixed rate assets in order to adjust the yield upward to meet the market, and vice versa. This would have similar effects on our real estate and other securities and loan portfolio and our financial position and operations to a change in interest rates generally.

Changes in banks’ inter-bank lending rate reporting practices or the method pursuant to which LIBOR is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.

LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform. Some of these reforms are already effective while others are still to be implemented. These

reforms may cause such benchmarks to perform differently than in the past, or have other consequences which cannot be predicted. In particular, regulators and law enforcement agencies in the U.K. and elsewhere conducted criminal and civil investigations into whether the banks that contributed information to the British Bankers’ Association (“BBA”) in connection with the daily calculation of LIBOR may have been under-reporting or otherwise manipulating or attempting to manipulate LIBOR. A number of BBA member banks have entered into settlements with their regulators and law enforcement agencies with respect to this alleged manipulation of LIBOR. LIBOR is calculated by reference to a market for interbank lending that continues to shrink, as it is based on increasingly fewer actual transactions. This increases the subjectivity of the LIBOR calculation process and increases the risk of manipulation. Actions by the regulators or law enforcement agencies, as well as ICE Benchmark Administration (the current administrator of LIBOR), may result in changes to the manner in which LIBOR is determined or the establishment of alternative reference rates. For example, on July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.

It is likely that, over time, U.S. Dollar LIBOR will be replaced by the Secured Overnight Financing Rate (“SOFR”) published by the Federal Reserve Bank of New York. However, the manner and timing of this shift is currently unknown. SOFR is an overnight rate instead of a term rate, making SOFR an inexact replacement for LIBOR. There is currently no perfect way to create robust, forward-looking, SOFR term rates. Market participants are still considering how various types of financial instruments and securitization vehicles should react to a discontinuation of LIBOR. It is possible that not all of our assets and liabilities will transition away from LIBOR at the same time, and it is possible that not all of our assets and liabilities will transition to the same alternative reference rate, in each case increasing the difficulty of hedging. Switching existing financial instruments and hedging transactions from LIBOR to SOFR requires calculations of a spread. Industry organizations are attempting to structure the spread calculation in a manner that minimizes the possibility of value transfer between counterparties, borrowers, and lenders by virtue of the transition, but there is no assurance that the calculated spread will be fair and accurate or that all asset types and all types of securitization vehicles will use the same spread. We and other market participants have less experience understanding and modeling SOFR-based assets and liabilities than LIBOR-based assets and liabilities, increasing the difficulty of investing, hedging, and risk management. The process of transition involves operational risks. It is also possible that no transition will occur for many financial instruments, meaning that those instruments would continue to be subject to the weaknesses of the LIBOR calculation process. At this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or any other reforms to LIBOR that may be implemented. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the market for or value of any securities on which the interest or dividend is determined by reference to LIBOR, loans, derivatives and other financial obligations or on our overall financial condition or results of operations. More generally, any of the above changes or any other consequential changes to LIBOR or any other “benchmark” as a result of international, national or other proposals for reform or other initiatives or investigations, or any further uncertainty in relation to the timing and manner of implementation of such changes, could have a material adverse effect on the value of and return on any securities based on or linked to a “benchmark.”

Any hedging transactions that we enter into may limit our gains or result in losses.

We may use, when feasible and appropriate, derivatives to hedge a portion of our interest rate exposure, and this approach has certain risks, including the risk that losses on a hedge position will reduce the cash available for distribution to stockholders and that such losses may exceed the amount invested in such instruments. We have adopted a general policy with respect to the use of derivatives, which generally allows us to use derivatives where appropriate, but does not set forth specific policies and procedures or require that we hedge any specific amount of risk. From time to time, we may use derivative instruments, including forwards, futures, swaps and options, in our risk management strategy to limit the effects of changes in interest rates on our operations. A hedge may not be effective in eliminating all of the risks inherent in any particular position. Our profitability may be adversely affected during any period as a result of the use of derivatives.

There are limits to the ability of any hedging strategy to protect us completely against interest rate risks. When rates change, we expect the gain or loss on derivatives to be offset by a related but inverse change in the value of any items that we hedge. We cannot assure you, however, that our use of derivatives will offset the risks related to changes in interest rates. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses. In addition, our hedging strategy may limit our flexibility by causing us to refrain from taking certain actions that would be potentially profitable but would cause adverse consequences under the terms of our hedging arrangements. The REIT provisions of the Internal Revenue Code limit our ability to hedge. In managing our hedge instruments, we consider the effect of the expected hedging income on the REIT qualification tests that limit the amount of gross income that a REIT may receive from hedging. We need to carefully monitor, and may have to limit, our hedging strategy to assure that we do not realize hedging income, or hold hedges having a value, in excess of the amounts that would cause us to fail the REIT gross income and asset tests. See “—Risks Related to Our Taxation as a REIT—Complying with the REIT requirements may limit our ability to hedge effectively.”

Accounting for derivatives under GAAP is extremely complicated. Any failure by us to account for our derivatives properly in accordance with GAAP in our financial statements could adversely affect us. In addition, under applicable accounting standards, we may be required to treat some of our investments as derivatives, which could adversely affect our results of operations.

Cybersecurity incidents and technology disruptions or failures could damage our business operations and reputation, increase our costs and subject us to potential liability.

As our reliance on rapidly changing technology has increased, so have the risks that threaten the confidentiality, integrity or availability of our information systems, both internal and those provided to us by third-party service providers (including, but not limited to, our Servicing Partners). Cybersecurity incidents may involve gaining authorized or unauthorized access to our information systems for purposes of theft of certain personally identifiable information of consumers, misappropriating assets, stealing confidential information, corrupting data or causing operational disruption. Disruptions and failures of our systems or those of our third-party vendors could result from these incidents or be caused by fire, power outages, natural disasters and other similar events and may interrupt or delay our ability to provide services to our customers, expose us to remedial costs and reputational damage, and otherwise adversely affect our operations.

Despite our efforts to ensure the integrity of our systems, there can be no assurance that any such cyber incidents will not occur or, if they do occur, that they will be adequately addressed. We also may not be able to anticipate or implement effective preventive measures against all security breaches, especially because the methods and sources of breaches change frequently or may not be immediately detected.

In addition, we are subject to various privacy and data protection laws and regulations, and any changes to laws or regulations, including new restrictions or requirements applicable to our business, could impose additional costs and liability on us and could limit our use and disclosure of such information. For example, the New York State Department of Financial Services requires certain financial services companies, such as NRM and NewRez, to establish a detailed cybersecurity program and comply with other requirements, and the CCPA creates new compliance regulations on businesses that collect information from California residents.

Any of the foregoing events could result in violations of applicable privacy and other laws, financial loss to us or to our customers, loss of confidence in our security measures, customer dissatisfaction, additional regulatory scrutiny, significant litigation exposure and harm to our reputation, any of which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We depend on counterparties and vendors to provide certain services, which subjects us to various risks.

We have a number of counterparties and vendors, who provide us with financial, technology and other services that support our businesses. If our current counterparties and vendors were to stop providing services to us on acceptable terms, we may be unable to procure alternative services from other counterparties or vendors in a timely and efficient manner and on similarly acceptable terms, or at all. With respect to vendors engaged to perform certain servicing activities, we are required to assess their compliance with various regulations and establish procedures to provide reasonable assurance that the vendor’s activities comply in all material respects with such regulations. In the event that a vendor’s activities are not in compliance, it could negatively impact our relationships with our regulators, as well as our business and operations. Accordingly, we may incur significant costs to resolve any such disruptions in service which could have a material adverse effect on our business, financial condition, liquidity and results of operations.

We are subject to risks related to securitization of any loans originated and/or serviced by our subsidiaries.

The securitization of any loans that we originate and/or service subject us to various risks that may increase our compliance costs and adversely impact our financial results, including:


•	compliance with the terms of the agreements governing the securitized pools of loans, including any indemnification and repurchase provisions;

•

reliance on programs administered by the GSEs and Ginnie Mae that facilitate the issuance of mortgage-backed securities in the secondary market and the effect of any changes or modifications thereto (see-“GSE initiatives and other actions, including changes to the minimum servicing amount for GSE loans, could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against” and -“The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business”); and


•	federal and state legislation in securitizations, such as the risk retention requirements under the Dodd-Frank Act, could result in higher costs of certain lending operations and impose on us additional compliance requirements to meet servicing and origination criteria for securitized mortgage loans.

Maintenance of our 1940 Act exclusion imposes limits on our operations.

We intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the 1940 Act. We believe we will not be considered an investment company under Section 3(a)(1)(A) of the 1940 Act because we will not engage primarily, or hold ourselves out as being engaged primarily, in the business of investing, reinvesting or trading in securities. However, under Section 3(a)(1)(C) of the 1940 Act, because we are a holding company that will conduct its businesses primarily through wholly owned and majority owned subsidiaries, the securities issued by our subsidiaries that are excluded from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets (exclusive of U.S. Government securities and cash items) on an unconsolidated basis, unless another exclusion from the definition of “investment company” is available to us. For purposes of the foregoing, we currently treat our interest in our SLS Servicer Advance Investment and our subsidiaries that hold consumer loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3(c)(7) of the 1940 Act. The 40% test under Section 3(a)(1)(C) of the 1940 Act limits the types of businesses in which we may engage through our subsidiaries. In addition, the assets we and our subsidiaries may originate or acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated under the 1940 Act, which may adversely affect our business.

If the value of securities issued by our subsidiaries that are excluded from the definition of “investment company” by Section 3(c)(1) or 3(c)(7) of the 1940 Act, together with any other investment securities we own, exceeds the 40% test under Section 3(a)(1)(C) of the 1940 Act (e.g., the value of our interests in the taxable REIT subsidiaries that hold Servicer Advance Investments and are not excluded from the definition of “investment company” by Section 3(c)(5)(A), (B) or (C) of the 1940 Act increases significantly in proportion to the value of our other assets), or if one or more of such subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company under the 1940 Act, either of which could have an adverse effect on us and the market price of our securities. As discussed above, for purposes of the foregoing, we generally treat our interests in our SLS Servicer Advance Investment and our subsidiaries that hold consumer loans as investment securities because these subsidiaries presently rely on the exclusion provided by Section 3(c)(7) of the 1940 Act. If we or any of our subsidiaries were required to register as an investment company under the 1940 Act, the registered entity would become subject to substantial regulation with respect to capital structure (including the ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

Failure to maintain an exclusion would require us to significantly restructure our investment strategy. For example, because affiliate transactions are generally prohibited under the 1940 Act, we would not be able to enter into transactions with any of our affiliates if we are required to register as an investment company, and we might be required to terminate our Management Agreement and any other agreements with affiliates, which could have a material adverse effect on our ability to operate our business and pay distributions. If we were required to register us as an investment company but failed to do so, we would be prohibited from engaging in our business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court required enforcement, and a court could appoint a receiver to take control of us and liquidate our business.

For purposes of the foregoing, we treat our interests in certain of our wholly owned and majority owned subsidiaries, which constitute more than 60% of the value of our adjusted total assets on an unconsolidated basis, as non-investment securities because such subsidiaries qualify for exclusion from the definition of an investment company under the 1940 Act pursuant to Section 3(c)(5)(C) of the 1940 Act. The Section 3(c)(5)(C) exclusion is available for entities “primarily engaged” in the business of “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.” The Section 3(c)(5)(C) exclusion generally requires that at least 55% of these subsidiaries’ assets must comprise qualifying real estate assets and at least 80% of each of their portfolios must comprise qualifying real estate assets and real estate-related assets under the 1940 Act. We expect each of our subsidiaries relying on Section 3(c)(5)(C) to rely on guidance published by the SEC staff or on our analyses of such guidance to determine which assets are qualifying real estate assets and real estate-related assets. However, the SEC’s guidance was issued in accordance with factual situations that may be substantially different from the factual situations each of our subsidiaries may face, and much of the guidance was issued more than 20 years ago. No assurance can be given that the SEC staff will concur with the classification of each of our subsidiaries’ assets. In addition, the SEC staff may, in the future, issue further guidance that may require us to re-classify some of our subsidiaries’ assets for purposes of qualifying for an exclusion from regulation under the 1940 Act. For example, the SEC and its staff have not published guidance with respect to the treatment of whole pool Non-Agency

RMBS for purposes of the Section 3(c)(5)(C) exclusion. Accordingly, based on our own judgment and analysis of the guidance from the SEC and its staff identifying Agency whole pool certificates as qualifying real estate assets under Section 3(c)(5)(C), we treat whole pool Non-Agency RMBS issued with respect to an underlying pool of mortgage loans in which our subsidiary relying on Section 3(c)(5)(C) holds all of the certificates issued by the pool as qualifying real estate assets. Based on our own judgment and analysis of the guidance from the SEC and its staff with respect to analogous assets, we treat Excess MSRs for which we do not own the related servicing rights as real estate-related assets for purposes of satisfying the 80% test under the Section 3(c)(5)(C) exclusion. If we are required to re-classify any of our subsidiaries’ assets, including those subsidiaries holding whole pool Non-Agency RMBS and/or Excess MSRs, such subsidiaries may no longer be in compliance with the exclusion from the definition of an “investment company” provided by Section 3(c)(5)(C) of the 1940 Act, and in turn, we may not satisfy the requirements to avoid falling within the definition of an “investment company” provided by Section 3(a)(1)(C). To the extent that the SEC staff publishes new or different guidance or disagrees with our analysis with respect to any assets of our subsidiaries we have determined to be qualifying real estate assets or real estate-related assets, we may be required to adjust our strategy accordingly. In addition, we may be limited in our ability to make certain investments and these limitations could result in a subsidiary holding assets we might wish to sell or selling assets we might wish to hold.

In August 2011, the SEC issued a concept release soliciting public comments on a wide range of issues relating to companies engaged in the business of acquiring mortgages and mortgage-related instruments and that rely on Section 3(c)(5)(C) of the 1940 Act. Therefore, there can be no assurance that the laws and regulations governing the 1940 Act status of REITs, or guidance from the SEC or its staff regarding the Section 3(c)(5)(C) exclusion, will not change in a manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exclusion or exception from the 1940 Act, we could, among other things, be required either to (a) change the manner in which we conduct our operations to avoid being required to register as an investment company, (b) effect sales of our assets in a manner that, or at a time when, we would not otherwise choose to do so, or (c) register as an investment company, any of which could negatively affect the value of our common stock, the sustainability of our business model, and our ability to make distributions. In addition, if we or any of our subsidiaries were required to register as an investment company under the 1940 Act, the registered entity would become subject to substantial regulation with respect to capital structure (including the ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), portfolio composition, including restrictions with respect to diversification and industry concentration, compliance with reporting, record keeping, voting, proxy disclosure and other rules and regulations that would significantly change our operations.

Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion from the 1940 Act.

If the market value or income potential of qualifying assets for purposes of our qualification as a REIT or our exclusion from registration as an investment company under the 1940 Act declines as a result of increased interest rates, changes in prepayment rates or other factors, or the market value or income from non-qualifying assets increases, we may need to increase our investments in qualifying assets and/or liquidate our non-qualifying assets to maintain our REIT qualification or our exclusion from registration under the 1940 Act. If the change in market values or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets we may own. We may have to make investment decisions that we otherwise would not make absent the intent to maintain our qualification as a REIT and exclusion from registration under the 1940 Act.

We are subject to significant competition, and we may not compete successfully.

We are subject to significant competition in seeking investments. We compete with other companies, including other REITs, insurance companies and other investors, including funds and companies affiliated with our Manager. Some of our competitors have greater resources than we possess or have greater access to capital or various types of financing structures than are available to us, and we may not be able to compete successfully for investments or provide attractive investment returns relative to our competitors. These competitors may be willing to accept lower returns on their investments and, as a result, our profit margins could be adversely affected. Furthermore, competition for investments that are suitable for us, including, but not limited to, interests in MSRs, may lead to decreased availability, higher market prices and decreased returns available from such investments, which may further limit our ability to generate our desired returns. We cannot assure you that other companies will not be formed that compete with us for investments or otherwise pursue investment strategies similar to ours or that we will be able to compete successfully against any such companies.

Our business could suffer if we fail to attract and retain highly skilled personnel.

Our future success will depend on our ability to identify, hire, develop, motivate and retain highly qualified personnel for all areas of the Company, in particular skilled managers, loan officers, underwriters, loan servicers, debt default specialists and other personnel specialized in finance, risk and compliance. Trained and experienced personnel are in high demand and may be in short

supply in some areas. We may not be able to attract, develop and maintain an adequate skilled workforce necessary to operate our businesses and labor expenses may increase as a result of a shortage in the supply of qualified personnel. If we are unable to attract and retain such personnel, we may not be able to take advantage of acquisitions and other growth opportunities that may be presented to us and this could have a material adverse effect on our business, financial condition, liquidity and results of operations.

The valuations of our assets are subject to uncertainty because most of our assets are not traded in an active market.

There is not anticipated to be an active market for most of the assets in which we will invest. In the absence of market comparisons, we will use other pricing methodologies, including, for example, models based on assumptions regarding expected trends, historical trends following market conditions believed to be comparable to the then current market conditions and other factors believed at the time to be likely to influence the potential resale price of, or the potential cash flows derived from, an investment. Such methodologies may not prove to be accurate and any inability to accurately price assets may result in adverse consequences for us. A valuation is only an estimate of value and is not a precise measure of realizable value. Ultimate realization of the market value of a private asset depends to a great extent on economic and other conditions beyond our control. Further, valuations do not necessarily represent the price at which a private investment would sell since market prices of private investments can only be determined by negotiation between a willing buyer and seller. If we were to liquidate a particular private investment, the realized value may be more than or less than the valuation of such asset as carried on our books.

Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are unable to predict or protect against.

As has been widely publicized, the SEC, the Financial Accounting Standards Board (the “FASB”) and other regulatory bodies that establish the accounting rules applicable to us have recently proposed or enacted a wide array of changes to accounting rules. Moreover, in the future these regulators may propose additional changes that we do not currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported financial performance in negative ways that we cannot predict or protect against. We cannot predict whether any changes to current accounting rules will occur or what impact any codified changes will have on our business, results of operations, liquidity or financial condition, directly or through their impact on our Servicing Partners or counterparties.

A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations.

We believe the risks associated with our business are more severe during periods in which an economic slowdown or recession is accompanied by declining real estate values, as was the case in 2008. Declining real estate values generally reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of, or investment in, additional properties. Borrowers may also be less able to pay principal and interest on our loans or the loans underlying our securities, interests in MSRs and servicer advances, if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our investments in the event of default because the value of our collateral may be insufficient to cover our basis. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect our net interest income from the assets in our portfolio, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to our stockholders.

Compliance with changing regulation of corporate governance and public disclosure has and will continue to result in increased compliance costs and pose challenges for our management team.

Certain aspects of the Dodd-Frank Act remain subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on us and, more generally, the financial services and mortgage industries. Additionally, we cannot predict whether there will be additional proposed laws or reforms that would affect us, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material effect on our financial condition and results of operations.

We have engaged and may in the future engage in a number of acquisitions and we may be unable to successfully integrate the acquired assets and assumed liabilities in connection with such acquisitions.

As part of our business strategy, we regularly evaluate acquisitions of what we believe are complementary assets. Identifying and achieving the anticipated benefits of such acquisitions is subject to a number of uncertainties, including, without limitation, whether we are able to acquire the assets, within our parameters, integrate the acquired assets and manage the assumed liabilities efficiently. It is possible that the integration process could take longer than anticipated and could result in additional and unforeseen expenses, the disruption of our ongoing business, processes and systems, or inconsistencies in standards, controls, procedures, practices and

policies, any of which could adversely affect our ability to achieve the anticipated benefits of such acquisitions. There may be increased risk due to integrating the assets into our financial reporting and internal control systems. Difficulties in adding the assets into our business could also result in the loss of contract counterparties or other persons with whom we conduct business and potential disputes or litigation with contract counterparties or other persons with whom we or such counterparties conduct business. We could also be adversely affected by any issues attributable to the related seller’s operations that arise or are based on events or actions that occurred prior to the closing of such acquisitions. Completion of the integration process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized in their entirety or at all or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect our future business, financial condition, operating results and cash flows. Due to the costs of engaging in a number of acquisitions, we may also have difficulty completing more acquisitions in the future.

There may be difficulties with integrating the loans underlying MSR acquisitions involving servicing transfers into the successor servicer’s servicing platform, which could have a material adverse effect on our results of operations, financial condition and liquidity.

In connection with certain MSR acquisitions, servicing is transferred from the seller to a subservicer appointed by us. The ability to integrate and service the assets acquired will depend in large part on the success of our subservicer’s integration of expanded servicing capabilities with its current operations. We may fail to realize some or all of the anticipated benefits of these transactions if the integration process takes longer, or is more costly, than expected. Potential difficulties we may encounter during the integration process with the assets acquired in MSR acquisitions involving servicing transfers include, but are not limited to, the following:


•	the integration of the portfolio into our applicable subservicer’s information technology platforms and servicing systems;


•	the quality of servicing during any interim servicing period after we purchase the portfolio but before our applicable subservicer assumes servicing obligations from the seller or its agents;


•	the disruption to our ongoing businesses and distraction of our management teams from ongoing business concerns;


•	incomplete or inaccurate files and records;


•	the retention of existing customers;


•	the creation of uniform standards, controls, procedures, policies and information systems;


•	the occurrence of unanticipated expenses; and


•	potential unknown liabilities associated with the transactions, including legal liability related to origination and servicing prior to the acquisition.

Our failure to meet the challenges involved in successfully integrating the assets acquired in MSR acquisitions involving servicing transfers with our current business could impair our operations. For example, it is possible that the data our applicable subservicer acquires upon assuming the direct servicing obligations for the loans may not transfer from the seller’s platform to its systems properly. This may result in data being lost, key information not being locatable on our applicable subservicer’s systems, or the complete failure of the transfer. If our employees are unable to access customer information easily, or is unable to produce originals or copies of documents or accurate information about the loans, collections could be affected significantly, and our subservicer may not be able to enforce its right to collect in some cases. Similarly, collections could be affected by any changes to our applicable subservicer’s collections practices, the restructuring of any key servicing functions, transfer of files and other changes that occur as a result of the transfer of servicing obligations from the seller to our subservicer.

We are responsible for certain of HLSS’s contingent and other corporate liabilities.

Under the HLSS acquisition agreement, we have assumed and are responsible for the payment of HLSS’s contingent and other liabilities, including: (i) liabilities for litigation relating to, arising out of or resulting from certain lawsuits in which HLSS is named as the defendant, (ii) HLSS’s tax liabilities, (iii) HLSS’s corporate liabilities, (iv) generally any actions with respect to the HLSS Acquisition brought by any third party and (v) payments under contracts. We currently cannot estimate the amount we may ultimately be responsible for as a result of assuming substantially all of HLSS’s contingent and other corporate liabilities. The amount for which we are ultimately responsible may be material and have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition, certain claims and lawsuits may require significant costs to defend and resolve and may divert management’s attention away from other aspects of operating and managing our business, each of which could materially and adversely affect our business, financial condition, results of operations and liquidity.

We cannot guarantee that we will not receive further regulatory inquiries or be subject to litigation regarding the subject matter of the subpoenas or matters relating thereto, or that existing inquires, or, should they occur, any future regulatory inquiries or litigation, will not consume internal resources, result in additional legal and consulting costs or negatively impact our stock price.

We could be materially and adversely affected by past events, conditions or actions with respect to HLSS or Ocwen.

HLSS acquired assets and assumed liabilities could be adversely affected as a result of events or conditions that occurred or existed before the closing of the HLSS Acquisition. Adverse changes in the assets or liabilities we have acquired or assumed, respectively, as part of the HLSS Acquisition, could occur or arise as a result of actions by HLSS or Ocwen, legal or regulatory developments, including the emergence or unfavorable resolution of pre-acquisition loss contingencies, deteriorating general business, market, industry or economic conditions, and other factors both within and beyond the control of HLSS or Ocwen. We are subject to a variety of risks as a result of our dependence on Servicing Partners, including, without limitation, the potential loss of all of the value of our Excess MSRs in the event that the servicer of the underlying loans is terminated by the mortgage loan owner or RMBS bondholders. A significant decline in the value of HLSS assets or a significant increase in HLSS liabilities we have acquired could adversely affect our future business, financial condition, cash flows and results of operations. HLSS is subject to a number of other risks and uncertainties, including regulatory investigations and legal proceedings against HLSS, and others with whom HLSS conducted business. Moreover, any insurance proceeds received with respect to such matters may be inadequate to cover the associated losses. Adverse developments at Ocwen, including liquidity issues, ratings downgrades, defaults under debt agreements, servicer rating downgrades, failure to comply with the terms of PSAs, termination under PSAs, Ocwen bankruptcy proceedings and additional regulatory issues and settlements, including those described above, could have a material adverse effect on us. See “—We rely heavily on our Servicing Partners to achieve our investment objective and have no direct ability to influence their performance.”

Our ability to borrow may be adversely affected by the suspension or delay of the rating of the notes issued under certain of our financing facilities by the credit agency providing the ratings.

Certain of our financing facilities are rated by one rating agency and we may sponsor financing facilities in the future that are rated by credit agencies. The related agency or rating agencies may suspend rating notes backed by servicer advances, MSRs, Excess MSRs and our other investments at any time. Rating agency delays may result in our inability to obtain timely ratings on new notes, or amend or modify other financing facilities which could adversely impact the availability of borrowings or the interest rates, advance rates or other financing terms and adversely affect our results of operations and liquidity. Further, if we are unable to secure ratings from other agencies, limited investor demand for unrated notes could result in further adverse changes to our liquidity and profitability.

A downgrade of certain of the notes issued under our financing facilities could cause such notes to become due and payable prior to their expected repayment date/maturity date, which could have a material adverse effect on our business, financial condition, results of operations and liquidity.

Regulatory scrutiny regarding foreclosure processes could lengthen foreclosure timelines, which could increase advances and materially and adversely affect our business, financial condition, results of operations and liquidity.

When a residential mortgage loan is in foreclosure, the servicer is generally required to continue to advance delinquent principal and interest to the securitization trust and to also make advances for delinquent taxes and insurance and foreclosure costs and the upkeep of vacant property in foreclosure to the extent it determines that such amounts are recoverable. These servicer advances are generally recovered when the delinquency is resolved. Foreclosure moratoria or other actions that lengthen the foreclosure process increase the amount of servicer advances, lengthen the time it takes for reimbursement of such advances and increase the costs incurred during the foreclosure process. In addition, servicer advance financing facilities generally contain provisions that limit the eligibility of servicer advances to be financed based on the length of time that servicer advances are outstanding, and, as a result, an increase in foreclosure timelines could further increase the amount of servicer advances that need to be funded from the related servicer’s own capital. Such increases in foreclosure timelines could increase the need for capital to fund servicer advances, which would increase our interest expense, delay the collection of interest income or servicing revenue until the foreclosure has been resolved and, therefore, reduce the cash that we have available to pay our operating expenses or to pay dividends. For more information, see “—We could be materially and adversely affected by past events, conditions or actions with respect to HLSS or Ocwen” above.

Certain of our Servicing Partners have triggered termination events or events of default under some PSAs underlying the MSRs with respect to which we are entitled to the basic fee component or Excess MSRs.

In certain of these circumstances, the related Servicing Partner may be terminated without any right to compensation for its loss, other than the right to be reimbursed for any outstanding servicer advances as the related loans are brought current, modified, liquidated or charged off. So long as we are in compliance with our obligations under our servicing agreements and purchase agreements, if we or one of our Servicing Partners is terminated as servicer, we may have the right to receive an indemnification payment from the applicable Servicing Partner, even if such termination related to servicer termination events or events of default

existing at the time of any transaction with such Servicing Partner. If one of our Servicing Partners is terminated as servicer under a PSA, we will lose any investment related to such Servicing Partner’s MSRs. If we or such Servicing Partner is terminated as servicer with respect to a PSA and we are unable to enforce our contractual rights against such Servicing Partner, or if such Servicing Partner is unable to make any resulting indemnification payments to us, if any such payment is due and payable, it may have a material adverse effect on our financial condition, results of operations, ability to make distributions, liquidity and financing arrangements, including our servicer advance financing facilities, and may make it more difficult for us to acquire additional interests in MSRs in the future.

Representations and warranties made by us in our collateralized borrowings and loan sale agreements may subject us to liability.

Our financing facilities require us to make certain representations and warranties regarding the assets that collateralize the borrowings. Although we perform due diligence on the assets that we acquire, certain representations and warranties that we make in respect of such assets may ultimately be determined to be inaccurate. In addition, our loan sale agreements require us to make representations and warranties to the purchaser regarding the loans that were sold. Such representations and warranties may include, but are not limited to, issues such as the validity of the lien; the absence of delinquent taxes or other liens; the loans’ compliance with all local, state and federal laws and the delivery of all documents required to perfect title to the lien.

In the event of a breach of a representation or warranty, we may be required to repurchase affected loans, make indemnification payments to certain indemnified parties or address any claims associated with such breach. Further, we may have limited or no recourse against the seller from whom we purchased the loans. Such recourse may be limited due to a variety of factors, including the absence of a representation or warranty from the seller corresponding to the representation provided by us or the contractual expiration thereof. A breach of a representation or warranty could adversely affect our results of operations and liquidity.

Our ability to exercise our cleanup call rights may be limited or delayed if a third party contests our ability to exercise our cleanup call rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings.

Certain servicing contracts permit more than one party to exercise a cleanup call-meaning the right of a party to collapse a securitization trust by purchasing all of the remaining loans held by the securitization trust pursuant to the terms set forth in the applicable servicing agreement. While the servicers from which we acquired our cleanup call rights (or other servicers from which these servicers acquired MSRs) may be named as the party entitled to exercise such rights, certain third parties may also be permitted to exercise such rights. If any such third party exercises a cleanup call, we could lose our ability to exercise our cleanup call right and, as a result, lose the ability to generate positive returns with respect to the related securitization transaction. In addition, another party could impair our ability to exercise our cleanup call rights by contesting our rights (for example, by claiming that they hold the exclusive cleanup call right with respect to the applicable securitization trust). Moreover, because the ability to exercise a cleanup call right is governed by the terms of the applicable servicing agreement, any ambiguous or conflicting language regarding the exercise of such rights in the agreement may make it more difficult and costly to exercise a cleanup call right. Finally, many of our call rights are not currently exercisable and may not become exercisable for a period of years. As a result, our ability to realize the benefits from these rights will depend on a number of factors at the time they become exercisable many of which are outside our control, including interest rates, conditions in the capital markets and conditions in the residential mortgage market.

The exercise of cleanup calls could negatively impact our interests in MSRs.

The exercise of cleanup call rights results in the termination of the MSRs on the loans held within the related securitization trusts. To the extent we own interests in MSRs with respect to loans held within securitization trusts where cleanup call rights are exercised, whether they are exercised by us or a third party, the value of our interests in those MSRs will likely be reduced to zero and we could incur losses and reduced cash flows from any such interests.

New Residential’s subsidiaries, NRM and NewRez, are or may become subject to significant state and federal regulations.

Subsidiaries of New Residential, NRM and NewRez, have obtained applicable qualifications, licenses and approvals to own Non-Agency and certain Agency MSRs in the United States and certain other jurisdictions. As a result of NRM and NewRez’s current and expected approvals, NRM and NewRez are subject to extensive and comprehensive regulation under federal, state and local laws in the United States. These laws and regulations do, and may in the future, significantly affect the way that NRM and NewRez do business, and subject NRM, NewRez and New Residential to additional costs and regulatory obligations, which could impact our financial results.

NRM’s and NewRez’s business may become subject to increasing regulatory oversight and scrutiny in the future as they continues seeking and obtaining additional approvals to hold MSRs, which may lead to regulatory investigations or enforcement, including both formal and informal inquiries, from various state and federal agencies as part of those agencies’ oversight of the mortgage servicing business. An adverse result in governmental investigations or examinations or private lawsuits, including purported class action lawsuits, may adversely affect NRM, NewRez and our financial results or result in serious reputational harm. In addition, a number of participants in the mortgage servicing industry have been the subject of purported class action lawsuits and regulatory actions by state or federal regulators, and other industry participants have been the subject of actions by state Attorneys General.

Failure of New Residential’s subsidiaries, NRM and NewRez, to obtain or maintain certain licenses and approvals required for NRM or NewRez to purchase and own MSRs could prevent us from purchasing or owning MSRs, which could limit our potential business activities.

State and federal laws require a business to hold certain state licenses prior to acquiring MSRs. NRM and NewRez are currently licensed or otherwise eligible to hold MSRs in each applicable state. As licensees in such states, NRM and NewRez may become subject to administrative actions in those states for failing to satisfy ongoing license requirements or for other state law violations, the consequences of which could include fines or suspensions or revocations of NRM or NewRez licenses by applicable state regulatory authorities, which could in turn result in NRM or NewRez becoming ineligible to hold MSRs in the related jurisdictions. We could be delayed or prohibited from conducting certain business activities if we do not maintain necessary licenses in certain jurisdictions. We cannot assure you that we will be able to maintain all of the required state licenses.

Additionally, both NRM and NewRez have received approval from FHA to hold MSRs associated with FHA-insured mortgage loans, from Fannie Mae to hold MSRs associated with loans owned by Fannie Mae, and from Freddie Mac to hold MSRs associated with loans owned by Freddie Mac. As approved Fannie Mae Servicers, Freddie Mac Servicers and FHA Lenders, NRM and NewRez are required to conduct aspects of its operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals. Should NRM or NewRez fail to maintain FHA, Fannie Mae or Freddie Mac approval, NRM or NewRez may be unable to purchase or hold MSRs associated with FHA-insured, Fannie Mae and/or Freddie Mac loans, which could limit our potential business activities.

In addition, NewRez has received approval to issue securities guaranteed by Ginnie Mae and service the mortgage loans related to such securities (“Ginnie Mae Issuer”). As an approved Ginnie Mae Issuer, NewRez is required to conduct aspects of its operations in accordance with applicable policies and guidelines published by Ginnie Mae in order to maintain its approvals. Should NewRez fail to maintain Ginnie Mae approval, we may be unable to purchase or hold MSRs associated with Ginnie Mae loans, which could limit our potential business activities.

NRM and NewRez are currently subject to various, and may become subject to additional information reporting and other regulatory requirements, and there is no assurance that we will be able to satisfy those requirements or other ongoing requirements applicable to mortgage loan servicers under applicable state and federal laws. Any failure by NRM or NewRez to comply with such state or federal regulatory requirements may expose us to administrative or enforcement actions, license or approval suspensions or revocations or other penalties that may restrict our business and investment options, any of which could adversely impact our business and financial results and damage our reputation.

We may become subject to fines or other penalties based on the conduct of mortgage loan originators and brokers that originate residential mortgage loans related to MSRs that we acquire, and the third-party servicers we may engage to subservice the loans underlying MSRs we acquire.

We have acquired MSRs and may in the future acquire additional MSRs from third-party mortgage loan originators, brokers or other sellers, and we therefore are or will become dependent on such third parties for the related mortgage loans’ compliance with applicable law, and on third-party mortgage servicers, including our Servicing Partners, to perform the day-to-day servicing on the mortgage loans underlying any such MSRs. Mortgage loan originators and brokers are subject to strict and evolving consumer protection laws and other legal obligations with respect to the origination of residential mortgage loans. These laws and regulations include the residential mortgage servicing standards, “ability-to-repay” and “qualified mortgage” regulations promulgated by the CFPB, which became effective in 2014. In addition, there are various other federal, state, and local laws and regulations that are intended to discourage predatory lending practices by residential mortgage loan originators. These laws may be highly subjective and open to interpretation and, as a result, a regulator or court may determine that that there has been a violation where an originator or servicer of mortgage loans reasonably believed that the law or requirement had been satisfied. Failure or alleged failure by originators or servicers to comply with these laws and regulations could subject us to state or CFPB administrative proceedings, which could result in monetary penalties, license suspensions or revocations, or restrictions to our business, all of which could adversely impact our business and financial results and damage our reputation.

The final servicing rules promulgated by the CFPB to implement certain sections of the Dodd-Frank Act include provisions relating to, among other things, periodic billing statements and disclosures, responding to borrower inquiries and complaints, force-placed insurance, and adjustable rate mortgage interest rate adjustment notices. Further, the mortgage servicing rules require servicers to, among other things, make good faith early intervention efforts to notify delinquent borrowers of loss mitigation options, to implement specified loss mitigation procedures, and if feasible, exhaust all loss mitigation options before proceeding to foreclosure. Proposed updates to further refine these rules have been published and will likely lead to further changes in requirements applicable to servicing mortgage loans.

In addition to NewRez d/b/a Shellpoint Mortgage Servicing, we engage third-party servicers to subservice mortgage loans relating to any MSRs we acquire. It is therefore possible that a third-party servicer’s failure to comply with the new and evolving servicing protocols could adversely affect the value of the MSRs we acquire. Additionally, we may become subject to fines, penalties or civil liability based upon the conduct of any third-party servicer who services mortgage loans related to MSRs that we have acquired or will acquire in the future.

Investments in MSRs may expose us to additional risks.

We hold investments in MSRs. Our investments in MSRs may subject us to certain additional risks, including the following:

•

We have limited experience acquiring MSRs and operating a servicer. Although ownership of MSRs and the operation of a servicer includes many of the same risks as our other target assets and business activities, including risks related to prepayments, borrower credit, defaults, interest rates, hedging, and regulatory changes, there can be no assurance that we will be able to successfully operate a servicer subsidiary and integrate MSR investments into our business operations.

•

As of today, we rely on subservicers to subservice the mortgage loans underlying our MSRs on our behalf. We are generally responsible under the applicable Servicing Guidelines for any subservicer’s non-compliance with any such applicable Servicing Guideline. In addition, there is a risk that our current subservicers will be unwilling or unable to continue subservicing on our behalf on terms favorable to us in the future. In such a situation, we may be unable to locate a replacement subservicer on favorable terms.

•

NRM’s and NewRez’s existing approvals from government-related entities or federal agencies are subject to compliance with their respective servicing guidelines, minimum capital requirements, reporting requirements and other conditions that they may impose from time to time at their discretion. Failure to satisfy such guidelines or conditions could result in the unilateral termination of NRM’s or NewRez’s existing approvals or pending applications by one or more entities or agencies.


•	NRM and NewRez are presently licensed, approved, or otherwise eligible to hold MSRs in all states within the United States and the District of Columbia. Such state licenses may be suspended or revoked by a state regulatory authority, and we may as a result lose the ability to own MSRs under the regulatory jurisdiction of such state regulatory authority.


•	Changes in minimum servicing compensation for Agency loans could occur at any time and could negatively impact the value of the income derived from any MSRs that we hold or may acquire in the future.


•	Investments in MSRs are highly illiquid and subject to numerous restrictions on transfer and, as a result, there is risk that we would be unable to locate a willing buyer or get approval to sell any MSRs in the future should we desire to do so.

Our business, results of operations, financial condition and reputation could be adversely impacted if we are not able to successfully manage these or other risks related to investing and managing MSR investments.

Risks Related to Our Manager

We are dependent on our Manager and may not find a suitable replacement if our Manager terminates the Management Agreement.

None of our officers or other senior individuals who perform services for us (other than three part-time employees of NRM), is an employee of New Residential. Instead, these individuals are employees of our Manager. Accordingly, we are completely reliant on our Manager, which has significant discretion as to the implementation of our operating policies and strategies, to conduct our business. We are subject to the risk that our Manager will terminate the Management Agreement and that we will not be able to find a suitable replacement for our Manager in a timely manner, at a reasonable cost or at all. Furthermore, we are dependent on the services of certain key employees of our Manager whose compensation is partially or entirely dependent upon the amount of incentive or management compensation earned by our Manager and whose continued service is not guaranteed, and the loss of such services could adversely affect our operations.

On December 27, 2017, SoftBank Group Corp. (“SoftBank”) acquired Fortress (the “SoftBank Merger”) and Fortress now operates within SoftBank as an independent business headquartered in New York. There can be no assurance that the SoftBank Merger will not have an impact on us or our relationship with the Manager.

There are conflicts of interest in our relationship with our Manager.

Our Management Agreement with our Manager was not negotiated between unaffiliated parties, and its terms, including fees payable, although approved by the independent directors of New Residential as fair, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

There are conflicts of interest inherent in our relationship with our Manager insofar as our Manager and its affiliates—including investment funds, private investment funds, or businesses managed by our Manager—invest in real estate and other securities and loans, consumer loans and interests in MSRs and whose investment objectives overlap with our investment objectives. Certain investments appropriate for us may also be appropriate for one or more of these other investment vehicles. Certain members of our board of directors and employees of our Manager who are our officers also serve as officers and/or directors of these other entities. Although we have the same Manager, we may compete with entities affiliated with our Manager or Fortress for certain target assets. From time to time, affiliates of Fortress focus on investments in assets with a similar profile as our target assets that we may seek to acquire. These affiliates may have meaningful purchasing capacity, which may change over time depending upon a variety of factors, including, but not limited to, available equity capital and debt financing, market conditions and cash on hand. Fortress has two funds primarily focused on investing in Excess MSRs with approximately $0.7 billion in investments in aggregate. We have broad investment guidelines, and we have co-invested and may co-invest with Fortress funds or portfolio companies of private equity funds managed by our Manager (or an affiliate thereof) in a variety of investments. We also may invest in securities that are senior or junior to securities owned by funds managed by our Manager. Fortress funds generally have a fee structure similar to ours, but the fees actually paid will vary depending on the size, terms and performance of each fund.

Our Management Agreement with our Manager generally does not limit or restrict our Manager or its affiliates from engaging in any business or managing other pooled investment vehicles that invest in investments that meet our investment objectives. Our Manager intends to engage in additional real estate related management and real estate and other investment opportunities in the future, which may compete with us for investments or result in a change in our current investment strategy. In addition, our certificate of incorporation provides that if Fortress or an affiliate or any of their officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates. In the event that any of our directors and officers who is also a director, officer or employee of Fortress or its affiliates acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as a director or officer of New Residential and such person acts in good faith, then to the fullest extent permitted by law such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us if Fortress or its affiliates pursues or acquires the corporate opportunity or if such person did not present the corporate opportunity to us.

The ability of our Manager and its officers and employees to engage in other business activities, subject to the terms of our Management Agreement with our Manager, may reduce the amount of time our Manager, its officers or other employees spend managing us. In addition, we may engage (subject to our investment guidelines) in material transactions with our Manager or another entity managed by our Manager or one of its affiliates, which may include, but are not limited to, certain financing arrangements, purchases of debt, co-investments in interests in MSRs, consumer loans, and other assets that present an actual, potential or perceived conflict of interest. It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction, litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult, and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential, actual or perceived conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially adversely affect our business in a number of ways, including causing an inability to raise additional funds, a reluctance of counterparties to do business with us, a decrease in the prices of our equity securities and a resulting increased risk of litigation and regulatory enforcement actions.

The management compensation structure that we have agreed to with our Manager, as well as compensation arrangements that we may enter into with our Manager in the future (in connection with new lines of business or other activities), may incentivize our Manager to invest in high risk investments. In addition to its management fee, our Manager is currently entitled to receive incentive compensation. In evaluating investments and other management strategies, the opportunity to earn incentive compensation may lead our Manager to place undue emphasis on the maximization of earnings, including through the use of leverage, at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation. Investments with higher yield potential are generally riskier or more speculative than lower-yielding investments. Moreover, because our Manager receives compensation in the form of options in connection with the completion of our common equity offerings, our Manager may be incentivized to cause us to issue additional common stock, which could be dilutive to existing stockholders. In addition, our Manager’s management fee is not tied to our performance and may not sufficiently incentivize our Manager to generate attractive risk-adjusted returns for us.

It would be difficult and costly to terminate our Management Agreement with our Manager.

It would be difficult and costly for us to terminate our Management Agreement with our Manager. The Management Agreement may only be terminated annually upon (i) the affirmative vote of at least two-thirds of our independent directors, or by a vote of the holders of a simple majority of the outstanding shares of our common stock, that there has been unsatisfactory performance by our Manager that is materially detrimental to us or (ii) a determination by a simple majority of our independent directors that the management fee payable to our Manager is not fair, subject to our Manager’s right to prevent such a termination by accepting a mutually acceptable reduction of fees. Our Manager will be provided 60 days’ prior notice of any termination and will be paid a termination fee equal to the amount of the management fee earned by the Manager during the 12-month period preceding such termination. In addition, following any termination of the Management Agreement, our Manager may require us to purchase its right to receive incentive compensation at a price determined as if our assets were sold for their fair market value (as determined by an appraisal, taking into account, among other things, the expected future performance of the underlying investments) or otherwise we may continue to pay the incentive compensation to our Manager. These provisions may increase the effective cost to us of terminating the Management Agreement, thereby adversely affecting our ability to terminate our Manager without cause.

Our directors have approved broad investment guidelines for our Manager and do not approve each investment decision made by our Manager. In addition, we may change our investment strategy without a stockholder vote, which may result in our making investments that are different, riskier or less profitable than our current investments.

Our Manager is authorized to follow broad investment guidelines. Consequently, our Manager has great latitude in determining the types and categories of assets it may decide are proper investments for us, including the latitude to invest in types and categories of assets that may differ from those in which we currently invest. Our directors will periodically review our investment guidelines and our investment portfolio. However, our board does not review or pre-approve each proposed investment or our related financing arrangements. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our Manager. Furthermore, transactions entered into by our Manager may be difficult or impossible to unwind by the time they are reviewed by the directors, even if the transactions contravene the terms of the Management Agreement. In addition, we may change our investment strategy, including our target asset classes, without a stockholder vote.

Our investment strategy may evolve in light of existing market conditions and investment opportunities, and this evolution may involve additional risks depending upon the nature of the assets in which we invest and our ability to finance such assets on a short or long-term basis. Investment opportunities that present unattractive risk-return profiles relative to other available investment opportunities under particular market conditions may become relatively attractive under changed market conditions, and changes in market conditions may therefore result in changes in the investments we target. Decisions to make investments in new asset categories present risks that may be difficult for us to adequately assess and could therefore reduce our ability to pay dividends on our common stock or have adverse effects on our liquidity, results of operations or financial condition. A change in our investment strategy may also increase our exposure to interest rate, foreign currency, real estate market or credit market fluctuations and expose us to new legal and regulatory risks. In addition, a change in our investment strategy may increase our use of non-match-funded financing, increase the guarantee obligations we agree to incur or increase the number of transactions we enter into with affiliates. Our failure to accurately assess the risks inherent in new asset categories or the financing risks associated with such assets could adversely affect our results of operations, liquidity and financial condition.

Our Manager will not be liable to us for any acts or omissions performed in accordance with the Management Agreement, including with respect to the performance of our investments.

Pursuant to our Management Agreement, our Manager will not assume any responsibility other than to render the services called for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager, its members, managers, officers and employees will not be liable to us or any of our subsidiaries, to our board of directors, or our or any subsidiary’s stockholders or partners for any acts or omissions by our Manager, its members, managers, officers or employees, except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement. We shall, to the full extent lawful, reimburse, indemnify and hold our Manager, its members, managers, officers and employees and each other person, if any, controlling our Manager harmless of and from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including attorneys’ fees) in respect of or arising from any acts or omissions of an indemnified party made in good faith in the performance of our Manager’s duties under our Management Agreement and not constituting such indemnified party’s bad faith, willful misconduct, gross negligence or reckless disregard of our Manager’s duties under our Management Agreement.

Our Manager’s due diligence of investment opportunities or other transactions may not identify all pertinent risks, which could materially affect our business, financial condition, liquidity and results of operations.

Our Manager intends to conduct due diligence with respect to each investment opportunity or other transaction it pursues. It is possible, however, that our Manager’s due diligence processes will not uncover all relevant facts, particularly with respect to any assets we acquire from third parties. In these cases, our Manager may be given limited access to information about the investment and will rely on information provided by the target of the investment. In addition, if investment opportunities are scarce, the process for selecting bidders is competitive, or the timeframe in which we are required to complete diligence is short, our ability to conduct a due diligence investigation may be limited, and we would be required to make investment decisions based upon a less thorough diligence process than would otherwise be the case. Accordingly, investments and other transactions that initially appear to be viable may prove not to be over time, due to the limitations of the due diligence process or other factors.

The ownership by our executive officers and directors of shares of common stock, options, or other equity awards of entities either owned by Fortress funds managed by affiliates of our Manager or managed by our Manager may create, or may create the appearance of, conflicts of interest.

Some of our directors, officers and other employees of our Manager hold positions with entities either owned by Fortress funds managed by affiliates of our Manager or managed by our Manager and own such entities’ common stock, options to purchase such entities’ common stock or other equity awards. Such ownership may create, or may create the appearance of, conflicts of interest when these directors, officers and other employees are faced with decisions that could have different implications for such entities than they do for us.

Risks Related to the Financial Markets

The impact of legislative and regulatory changes on our business, as well as the market and industry in which we operate, are uncertain and may adversely affect our business.

The Dodd-Frank Act was enacted in July 2010, which affects almost every aspect of the U.S. financial services industry, including certain aspects of the markets in which we operate, and imposes new regulations on us and how we conduct our business. As we describe in more detail below, it affects our business in many ways but it is difficult at this time to know exactly how or what the cumulative impact will be.

Generally, the Dodd-Frank Act strengthens the regulatory oversight of securities and capital markets activities by the SEC and established the CFPB to enforce laws and regulations for consumer financial products and services. It requires market participants to undertake additional record-keeping activities and imposes many additional disclosure requirements for public companies.

Moreover, the Dodd-Frank Act contains a risk retention requirement for all asset-backed securities, which we issue. In October 2014, final rules were promulgated by a consortium of regulators implementing the final credit risk retention requirements of Section 941(b) of the Dodd-Frank Act. Under these “Risk Retention Rules,” sponsors of both public and private securitization transactions or one of their majority owned affiliates are required to retain at least 5% of the credit risk of the assets collateralizing such securitization transactions. These regulations generally prohibit the sponsor or its affiliate from directly or indirectly hedging or otherwise selling or transferring the retained interest for a specified period of time, depending on the type of asset that is securitized. Certain limited exemptions from these rules are available for certain types of assets, which may be of limited use under our current market practices. In any event, compliance with these new Risk Retention Rules has increased and will likely continue to increase the administrative and operational costs of asset securitization.

Further, the Dodd-Frank Act imposes mandatory clearing and exchange-trading requirements on many derivatives transactions (including formerly unregulated over-the-counter derivatives) in which we may engage. In addition, the Dodd-Frank Act is expected to increase the margin requirements for derivatives transactions that are not subject to mandatory clearing requirements, which may impact our activities. The Dodd-Frank Act also creates new categories of regulated market participants, such as “swap-dealers,” “security-based swap dealers,” “major swap participants” and “major security-based swap participants,” and subjects or may subject these regulated entities to significant new capital, registration, recordkeeping, reporting, disclosure, business conduct and other regulatory requirements that will give rise to new administrative costs.

Also, under the Dodd-Frank Act, financial regulators belonging to the Financial Stability Oversight Council are authorized to designate nonbank financial institutions and financial activities as systemically important to the economy and therefore subject to closer regulatory supervision. Such systemically important financial institutions, or “SIFIs,” may be required to operate with greater safety margins, such as higher levels of capital, and may face further limitations on their activities. The determination of what constitutes a SIFI is evolving, and in time SIFIs may include large investment funds and even asset managers. There can be

no assurance that we will not be deemed to be a SIFI or engage in activities later determined to be systemically important and thus subject to further regulation.

Even new requirements that are not directly applicable to us may still increase our costs of entering into transactions with the parties to whom the requirements are directly applicable. For instance, if the exchange-trading and trade reporting requirements lead to reductions in the liquidity of derivative transactions we may experience higher pricing or reduced availability of derivatives, or the reduction of arbitrage opportunities for us, which could adversely affect the performance of certain of our trading strategies. Importantly, many key aspects of the changes imposed by the Dodd-Frank Act will continue to be established by various regulatory bodies and other groups over the next several years.

In addition, there is significant uncertainty regarding the legislative and regulatory outlook for the Dodd-Frank Act and related statutes governing financial services, which may include Dodd-Frank Act amendments, mortgage finance and housing policy in the U.S., and the future structure and responsibilities of regulatory agencies such as the CFPB and the FHFA. For example, in March 2018, the U.S. Senate approved banking reform legislation intended to ease some of the restrictions imposed by the Dodd-Frank Act. Due to this uncertainty, it is not possible for us to predict how future legislative or regulatory proposals by Congress and the Administration will affect us or the market and industry in which we operate, and there can be no assurance that the resulting changes will not have an adverse impact on our business, results of operations, or financial condition. It is possible that such regulatory changes could, among other things, increase our costs of operating as a public company, impose restrictions on our ability to securitize assets and reduce our investment returns on securitized assets.

The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business.

The payments we receive on the Agency RMBS in which we invest depend upon a steady stream of payments by borrowers on the underlying mortgages and the fulfillment of guarantees by GSEs. Ginnie Mae is part of a U.S. Government agency and its guarantees are backed by the full faith and credit of the U.S. Fannie Mae and Freddie Mac are GSEs, but their guarantees are not backed by the full faith and credit of the U.S. Government.

In response to the deteriorating financial condition of Fannie Mae and Freddie Mac and the credit market disruption beginning in 2007, Congress and the U.S. Treasury undertook a series of actions to stabilize these GSEs and the financial markets, generally. The Housing and Economic Recovery Act of 2008 was signed into law on July 30, 2008, and established the FHFA, with enhanced regulatory authority over, among other things, the business activities of Fannie Mae and Freddie Mac and the size of their portfolio holdings. On September 7, 2008, FHFA placed Fannie Mae and Freddie Mac into federal conservatorship and, together with the U.S. Treasury, established a program designed to boost investor confidence in Fannie Mae’s and Freddie Mac’s debt and Agency RMBS.

As the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and operate Fannie Mae and Freddie Mac with all the powers of the stockholders, the directors and the officers of Fannie Mae and Freddie Mac and conduct all business of Fannie Mae and Freddie Mac; (2) collect all obligations and money due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and Freddie Mac which are consistent with the conservator’s appointment; (4) preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and (5) contract for assistance in fulfilling any function, activity, action or duty of the conservator.

Those efforts resulted in significant U.S. Government financial support and increased control of the GSEs.

The U.S. Federal Reserve (the “Fed”) announced in November 2008 a program of large-scale purchases of Agency RMBS in an attempt to lower longer-term interest rates and contribute to an overall easing of adverse financial conditions. Subject to specified investment guidelines, the portfolios of Agency RMBS purchased through the programs established by the U.S. Treasury and the Fed may be held to maturity and, based on mortgage market conditions, adjustments may be made to these portfolios. This flexibility may adversely affect the pricing and availability of Agency RMBS that we seek to acquire during the remaining term of these portfolios.

There can be no assurance that the U.S. Government’s intervention in Fannie Mae and Freddie Mac will be adequate for the longer-term viability of these GSEs. These uncertainties lead to questions about the availability of and trading market for, Agency RMBS. Accordingly, if these government actions are inadequate and the GSEs defaulted on their guaranteed obligations, suffered losses or ceased to exist, the value of our Agency RMBS and our business, operations and financial condition could be materially and adversely affected.

Additionally, because of the financial problems faced by Fannie Mae and Freddie Mac that led to their federal conservatorships, the Administration and Congress have been examining reform of the GSEs, including the value of a federal mortgage guarantee and the appropriate role for the U.S. government in providing liquidity for residential mortgage loans. The respective chairmen of the Congressional committees of jurisdiction, as well as the Secretary of the Treasury, has each stated that GSE reform, including a possible wind down of the GSEs, is a priority. However, the final details of any plans, policies or proposals with respect to the housing GSEs are unknown at this time. Other bills have been introduced that change the GSEs’ business charters and eliminate the entities or make other changes to the existing framework. We cannot predict whether or when such legislation may be enacted. If enacted, such legislation could materially and adversely affect the availability of, and trading market for, Agency RMBS and could, therefore, materially and adversely affect the value of our Agency RMBS and our business, operations and financial condition.

Legislation that permits modifications to the terms of outstanding loans may negatively affect our business, financial condition, liquidity and results of operations.

The U.S. government has enacted legislation that enables government agencies to modify the terms of a significant number of residential and other loans to provide relief to borrowers without the applicable investor’s consent. These modifications allow for outstanding principal to be deferred, interest rates to be reduced, the term of the loan to be extended or other terms to be changed in ways that can permanently eliminate the cash flow (principal and interest) associated with a portion of the loan. These modifications are currently reducing, or in the future may reduce, the value of a number of our current or future investments, including investments in mortgage backed securities and interests in MSRs. As a result, such loan modifications are negatively affecting our business, results of operations, liquidity and financial condition. In addition, certain market participants propose reducing the amount of paperwork required by a borrower to modify a loan, which could increase the likelihood of fraudulent modifications and materially harm the U.S. mortgage market and investors that have exposure to this market. Additional legislation intended to provide relief to borrowers may be enacted and could further harm our business, results of operations and financial condition.

Risks Related to Our Taxation as a REIT

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Compliance with these requirements must be carefully monitored on a continuing basis. Monitoring and managing our REIT compliance has become challenging due to the increased size and complexity of the assets in our portfolio, a meaningful portion of which are not qualifying REIT assets. There can be no assurance that our Manager’s personnel responsible for doing so will be able to successfully monitor our compliance or maintain our REIT status.

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

We intend to operate in a manner intended to qualify us as a REIT for U.S. federal income tax purposes. Our ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we do not obtain independent appraisals. See “—Risks Related to our Business—The valuations of our assets are subject to uncertainty because most of our assets are not traded in an active market,” and “—Risks Related to Our Business—Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion from the 1940 Act.” Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of one or more of our investments (such as TBAs) may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements. Accordingly, there can be no assurance that the U.S. Internal Revenue Service (“IRS”) will not contend that our investments violate the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and market price for, our stock. See also “—Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.”

Unless entitled to relief under certain provisions of the Internal Revenue Code, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we initially ceased to qualify as a REIT. The rule against re-

electing REIT status following a loss of such status would also apply to us if Drive Shack failed to qualify as a REIT for any taxable year ended on or before December 31, 2014, and we were treated as a successor to Drive Shack for U.S. federal income tax purposes. Although Drive Shack (i) represented in the separation and distribution agreement that it entered into with us on April 26, 2013 (the “Separation and Distribution Agreement”) that it has no knowledge of any fact or circumstance that would cause us to fail to qualify as a REIT and (ii) covenanted in the Separation and Distribution Agreement to use its reasonable best efforts to maintain its REIT status for each of Drive Shack’s taxable years ended on or before December 31, 2014 (unless Drive Shack obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the IRS to the effect that Drive Shack’s failure to maintain its REIT status will not cause us to fail to qualify as a REIT under the successor REIT rule referred to above), no assurance can be given that such representation and covenant would prevent us from failing to qualify as a REIT. Although, in the event of a breach, we may be able to seek damages from Drive Shack, there can be no assurance that such damages, if any, would appropriately compensate us. In addition, if Drive Shack were to fail to qualify as a REIT despite its reasonable best efforts, we would have no claim against Drive Shack.

Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE.

The NYSE requires, as a condition to the listing of our shares, that we maintain our REIT status. Consequently, if we fail to maintain our REIT status, our shares would promptly be delisted from the NYSE, which would decrease the trading activity of such shares. This could make it difficult to sell shares and would likely cause the market volume of the shares trading to decline.

If we were delisted as a result of losing our REIT status and desired to relist our shares on the NYSE, we would have to reapply to the NYSE to be listed as a domestic corporation. As the NYSE’s listing standards for REITs are less onerous than its standards for domestic corporations, it would be more difficult for us to become a listed company under these heightened standards. We might not be able to satisfy the NYSE’s listing standards for a domestic corporation. As a result, if we were delisted from the NYSE, we might not be able to relist as a domestic corporation, in which case our shares could not trade on the NYSE.

The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT.

We enter into financing arrangements that are structured as sale and repurchase agreements pursuant to which we nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings that are secured by the assets sold pursuant thereto. We believe that, for purposes of the REIT asset and income tests, we should be treated as the owner of the assets that are the subject of any such sale and repurchase agreement, notwithstanding that those agreements generally transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase agreement, in which case we might fail to qualify as a REIT.

The failure of our Excess MSRs to qualify as real estate assets or the income from our Excess MSRs to qualify as mortgage interest could adversely affect our ability to qualify as a REIT.

We have received from the IRS a private letter ruling substantially to the effect that our Excess MSRs represent interests in mortgages on real property and thus are qualifying “real estate assets” for purposes of the REIT asset test, which generate income that qualifies as interest on obligations secured by mortgages on real property for purposes of the REIT income test. The ruling is based on, among other things, certain assumptions as well as on the accuracy of certain factual representations and statements that we and Drive Shack have made to the IRS. If any of the representations or statements that we have made in connection with the private letter ruling, are, or become, inaccurate or incomplete in any material respect with respect to one or more Excess MSR investments, or if we acquire an Excess MSR investment with terms that are not consistent with the terms of the Excess MSR investments described in the private letter ruling, then we will not be able to rely on the private letter ruling. If we are unable to rely on the private letter ruling with respect to an Excess MSR investment, the IRS could assert that such Excess MSR investments do not qualify under the REIT asset and income tests, and if successful, we might fail to qualify as a REIT.

Dividends payable by REITs do not qualify for the reduced tax rates available for some “qualified dividends.”

Dividends payable to domestic stockholders that are individuals, trusts, and estates are generally taxed at reduced tax rates applicable to “qualified dividends.” Dividends payable by REITs, however, generally are not eligible for those reduced rates. The more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. In addition, the relative attractiveness of real estate in general may be adversely affected by the favorable tax treatment given to non-REIT corporate dividends, which could affect the value of our real estate assets negatively.

REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan.

We generally must distribute annually at least 90% of our REIT taxable income, excluding any net capital gain, in order for corporate income tax not to apply to earnings that we distribute. We intend to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Internal Revenue Code. Certain of our assets, such as our investment in consumer loans, generate substantial mismatches between taxable income and available cash. As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions; (ii) borrow on unfavorable terms; (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt; or (iv) make taxable distributions of our capital stock or debt securities in order to comply with REIT requirements. Further, amounts distributed will not be available to fund investment activities. If we fail to obtain debt or equity capital in the future, it could limit our ability to satisfy our liquidity needs, which could adversely affect the value of our common stock.

We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them.

Based on IRS guidance concerning the classification of Excess MSRs, we intend to treat our Excess MSRs as ownership interests in the interest payments made on the underlying residential mortgage loans, akin to an “interest only” strip. Under this treatment, for purposes of determining the amount and timing of taxable income, each Excess MSR is treated as a bond that was issued with original issue discount on the date we acquired such Excess MSR. In general, we will be required to accrue original issue discount based on the constant yield to maturity of each Excess MSR, and to treat such original issue discount as taxable income in accordance with the applicable U.S. federal income tax rules. The constant yield of an Excess MSR will be determined, and we will be taxed, based on a prepayment assumption regarding future payments due on the residential mortgage loans underlying the Excess MSR. If the residential mortgage loans underlying an Excess MSR prepay at a rate different than that under the prepayment assumption, our recognition of original issue discount will be either increased or decreased depending on the circumstances. Thus, in a particular taxable year, we may be required to accrue an amount of income in respect of an Excess MSR that exceeds the amount of cash collected in respect of that Excess MSR. Furthermore, it is possible that, over the life of the investment in an Excess MSR, the total amount we pay for, and accrue with respect to, the Excess MSR may exceed the total amount we collect on such Excess MSR. No assurance can be given that we will be entitled to a deduction for such excess, meaning that we may be required to recognize “phantom income” over the life of an Excess MSR.

Other debt instruments that we may acquire, including consumer loans, may be issued with, or treated as issued with, original issue discount. Those instruments would be subject to the original issue discount accrual and income computations that are described above with regard to Excess MSRs.

Under the Tax Cuts and Jobs Act (“TCJA”) enacted in late 2017, we generally will be required to take certain amounts into income no later than the time such amounts are reflected on certain financial statements. The application of this rule may require the accrual of, among other categories of income, income with respect to certain debt instruments or mortgage-backed securities, such as original issue discount, earlier than would be the case under the general tax rules, although the precise application of this rule is unclear at this time.

We may acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of principal of the debt instrument is made. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions.

In addition, we may acquire debt instruments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding instrument are “significant modifications” under the applicable U.S. Treasury regulations, the modified instrument will be considered to have been reissued to us in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified instrument exceeds our adjusted tax basis in the unmodified instrument, even if the value of the instrument or the payment expectations have not changed. Following such a taxable modification, we would hold the modified loan with a cost basis equal to its principal amount for U.S. federal tax purposes.

Finally, in the event that any debt instruments acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to debt instruments at the stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income of an appropriate character in that later year or thereafter.

In any event, if our investments generate more taxable income than cash in any given year, we may have difficulty satisfying our annual REIT distribution requirement.

We may be unable to generate sufficient cash from operations to pay our operating expenses and to pay distributions to our stockholders.

As a REIT, we are generally required to distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and not including net capital gains) each year to our stockholders. To qualify for the tax benefits accorded to REITs, we intend to make distributions to our stockholders in amounts such that we distribute all or substantially all of our net taxable income, subject to certain adjustments, although there can be no assurance that our operations will generate sufficient cash to make such distributions. Moreover, our ability to make distributions may be adversely affected by the risk factors described herein. See also “—Risks Related to our Stock—We have not established a minimum distribution payment level, and we cannot assure you of our ability to pay distributions in the future.”

The stock ownership limit imposed by the Internal Revenue Code for REITs and our certificate of incorporation may inhibit market activity in our stock and restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year after our first taxable year. Our certificate of incorporation, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our qualification as a REIT. Stockholders are generally restricted from owning more than 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of common stock, or 9.8% by value or number of shares, whichever is more restrictive, of our outstanding shares of capital stock. Our board may grant an exemption in its sole discretion, subject to such conditions, representations and undertakings as it may determine in its sole discretion. These ownership limits could delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes. Moreover, if a REIT distributes less than 85% of its ordinary income and 95% of its capital gain net income plus any undistributed shortfall from the prior year (the “Required Distribution”) to its stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in the subsequent year), then it is required to pay an excise tax on 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through TRSs. Such subsidiaries generally will be subject to corporate level income tax at regular rates and the payment of such taxes would reduce our return on the applicable investment. Currently, we hold some of our investments in TRSs, including Servicer Advance Investments and MSRs, and we may contribute other non-qualifying investments, such as our investment in consumer loans, to a TRS in the future.

Complying with the REIT requirements may negatively impact our investment returns or cause us to forgo otherwise attractive opportunities, liquidate assets or contribute assets to a TRS.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. As a result of these tests, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, forgo otherwise attractive investment opportunities, liquidate assets in adverse market conditions or contribute assets to a TRS that is subject to regular corporate federal income tax. Our ability to acquire and hold MSRs, interests in consumer loans, Servicer Advance Investments and other investments is subject to the applicable REIT qualification tests, and we may have to hold these interests through TRSs, which would negatively impact our returns from these assets. In general, compliance with the REIT requirements may hinder our ability to make and retain certain attractive investments.

Complying with the REIT requirements may limit our ability to hedge effectively.

The existing REIT provisions of the Internal Revenue Code may substantially limit our ability to hedge our operations because a significant amount of the income from those hedging transactions is likely to be treated as non-qualifying income for purposes of both REIT gross income tests. In addition, we must limit our aggregate income from non-qualified hedging transactions, from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard to gross income from qualified hedging transactions).

As a result, we may have to limit our use of certain hedging techniques or implement those hedges through TRSs. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur or could increase the cost of our hedging activities. If we fail to comply with these limitations, we could lose our REIT qualification for U.S. federal income tax purposes, unless our failure was due to reasonable cause, and not due to willful neglect, and we meet certain other technical requirements. Even if our failure were due to reasonable cause, we might incur a penalty tax. See also “—Risks Related to Our Business—Any hedging transactions that we enter into may limit our gains or result in losses.”

Distributions to tax-exempt investors may be classified as unrelated business taxable income.

Neither ordinary nor capital gain distributions with respect to our stock nor gain from the sale of stock should generally constitute unrelated business taxable income to a tax-exempt investor. However, there are certain exceptions to this rule. In particular:

•

part of the income and gain recognized by certain qualified employee pension trusts with respect to our stock may be treated as unrelated business taxable income if shares of our stock are predominantly held by qualified employee pension trusts, and we are required to rely on a special look-through rule for purposes of meeting one of the REIT ownership tests, and we are not operated in a manner to avoid treatment of such income or gain as unrelated business taxable income;


•	part of the income and gain recognized by a tax-exempt investor with respect to our stock would constitute unrelated business taxable income if the investor incurs debt in order to acquire the stock; and


•	to the extent that we are (or a part of us, or a disregarded subsidiary of ours, is) a “taxable mortgage pool,” or if we hold residual interests in a real estate mortgage investment conduit (“REMIC”), a portion of the distributions paid to a tax exempt stockholder that is allocable to excess inclusion income may be treated as unrelated business taxable income.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

We may enter into securitization or other financing transactions that result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we would generally not be adversely affected by the characterization of a securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we could incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we might reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we may be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

Uncertainty exists with respect to the treatment of TBAs for purposes of the REIT asset and income tests, and the failure of TBAs to be qualifying assets or of income/gains from TBAs to be qualifying income could adversely affect our ability to qualify as a REIT.

We purchase and sell Agency RMBS through TBAs and recognize income or gains from the disposition of those TBAs, through dollar roll transactions or otherwise. In a dollar roll transaction, we exchange an existing TBA for another TBA with a different settlement date. There is no direct authority with respect to the qualification of TBAs as real estate assets or U.S. Government securities for purposes of the 75% asset test or the qualification of income or gains from dispositions of TBAs as gains from the sale of real property (including interests in real property and interests in mortgages on real property) or other qualifying income for purposes of the 75% gross income test. For a particular taxable year, we would treat such TBAs as qualifying assets for purposes of the REIT asset tests, and income and gains from such TBAs as qualifying income for purposes of the 75% gross income test, to the extent set forth in an opinion from Skadden, Arps, Slate, Meagher & Flom LLP substantially to the effect that (i) for purposes of the REIT asset tests, our ownership of a TBA should be treated as ownership of the underlying Agency RMBS, and (ii) for purposes of the 75% REIT gross income test, any gain recognized by us in connection with the settlement of such TBAs should be treated as gain from the sale or disposition of the underlying Agency RMBS. Opinions of counsel are not binding on the IRS, and no assurance can be given that the IRS would not successfully challenge the conclusions set forth in such opinions. In addition, it must be emphasized that any opinion of Skadden, Arps, Slate, Meagher & Flom LLP would be based on various assumptions relating to any TBAs that we enter into and would be conditioned upon fact-based representations and covenants made by our management regarding such TBAs. No assurance can be given that the IRS would not assert that such assets or income are not qualifying assets or income. If the IRS were to successfully challenge any conclusions of Skadden, Arps, Slate, Meagher & Flom LLP, we could be subject to a penalty tax or we could fail to qualify as a REIT if a sufficient portion of our assets consists of TBAs or a sufficient portion of our income consists of income or gains from the disposition of TBAs.

The tax on prohibited transactions will limit our ability to engage in transactions that would be treated as prohibited transactions for U.S. federal income tax purposes.

Net income that we derive from a “prohibited transaction” is subject to a 100% tax. The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of our trade or business. We might be subject to this tax if we were to dispose of or securitize loans or Excess MSRs in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes.

We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as having been, held-for-sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain sales of loans or Excess MSRs at the REIT level, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular facts and circumstances. No assurance can be given that any property that we sell will not be treated as property held-for-sale to customers, or that we can comply with certain safe-harbor provisions of the Internal Revenue Code that would prevent such treatment. The 100% prohibited transaction tax does not apply to gains from the sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to prevent prohibited transaction characterization.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To qualify as a REIT, we must comply with requirements regarding the composition of our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders.

The present U.S. federal income tax treatment of REITs and their shareholders may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in our shares. The U.S. federal income tax rules, including those dealing with REITs, are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations.

The TCJA, which was enacted in 2017, made substantial changes to the Internal Revenue Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers. The effect of these, and the many other, changes made in the TCJA remains uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the provisions of the TCJA still require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. There also may be technical corrections legislation proposed with respect to the TCJA, the effect of which cannot be predicted and may be adverse to us or our stockholders.

Risks Related to our Stock

There can be no assurance that the market for our stock will provide you with adequate liquidity.

Our common stock began trading on the NYSE in May 2013, and our preferred stock began trading on the NYSE in July 2019. There can be no assurance that an active trading market for our common and preferred stock will be sustained in the future, and the market price of our common and preferred stock may fluctuate widely, depending upon many factors, some of which may be beyond our control. These factors include, without limitation:


•	a shift in our investor base;


•	our quarterly or annual earnings and cash flows, or those of other comparable companies;


•	actual or anticipated fluctuations in our operating results;


•	changes in accounting standards, policies, guidance, interpretations or principles;


•	announcements by us or our competitors of significant investments, acquisitions or dispositions;


•	the failure of securities analysts to cover our common stock;


•	changes in earnings estimates by securities analysts or our ability to meet those estimates;


•	market performance of affiliates and other counterparties with whom we conduct business;


•	the operating and stock price performance of other comparable companies;


•	our failure to qualify as a REIT, maintain our exemption under the 1940 Act or satisfy the NYSE listing requirements;


•	negative public perception of us, our competitors or industry;


•	overall market fluctuations; and


•	general economic conditions.

Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common and preferred stock.

Sales or issuances of shares of our common stock could adversely affect the market price of our common stock.

Sales or issuances of substantial amounts of shares of our common stock, or the perception that such sales or issuances might occur, could adversely affect the market price of our common stock. The issuance of our common stock in connection with property, portfolio or business acquisitions or the exercise of outstanding options or otherwise could also have an adverse effect on the market price of our common stock. We have an effective registration statement on file to sell common stock or convertible securities in public offerings.

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business and stock price.

As a public company, we are required to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and may be revised over time to adapt to changes in our business, or changes in applicable accounting rules. We have made investments through joint ventures, such as our investment in consumer loans, and accounting for such investments can increase the complexity of maintaining effective internal control over financial reporting. We cannot assure you that our internal control over financial reporting will be effective in the future or that a material weakness will not be discovered with respect to a prior period for which we had previously believed that our internal control over financial reporting was effective. If we are not able to maintain or document effective internal control over financial reporting, our independent registered public accounting firm will not be able to certify as to the effectiveness of our

internal control over financial reporting. Matters impacting our internal control over financial reporting may cause us to be unable to report our financial information on a timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to suffer if we or our independent registered public accounting firm reports a material weakness in the effectiveness of our internal control over financial reporting. This could materially adversely affect us by, for example, leading to a decline in our stock price and impairing our ability to raise capital.

Your percentage ownership in us may be diluted in the future.

Your percentage ownership in us may be diluted in the future because of equity awards that we expect will be granted to our Manager, to the directors, officers and employees of our Manager who perform services for us, and to our directors, officers and employees, as well as other equity instruments such as debt and equity financing. We have adopted a Nonqualified Stock Option and Incentive Award Plan, as amended (the “Plan”), which provides for the grant of equity-based awards, including restricted stock, options, stock appreciation rights, performance awards, tandem awards and other equity-based and non-equity based awards, in each case to our Manager, to the directors, officers, employees, service providers, consultants and advisor of our Manager who perform services for us, and to our directors, officers, employees, service providers, consultants and advisors. We reserved 15 million shares of our common stock for issuance under the Plan. The term of the Plan expires in 2023. On the first day of each fiscal year beginning during the term of the Plan, that number will be increased by a number of shares of our common stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal year. In connection with any offering of our common or preferred stock, we will issue to our Manager options relating to shares of our common stock, representing 10% of the number of shares being offered. Our board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares relating to any options granted to the Manager in connection with an offering of our common stock would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

We may incur or issue debt or issue equity, which may negatively affect the market price of our common stock.

We may in the future incur or issue debt or issue equity or equity-related securities. In the event of our liquidation, lenders and holders of our debt and holders of our preferred stock (if any) would receive a distribution of our available assets before common stockholders. Any future incurrence or issuance of debt would increase our interest cost and could adversely affect our results of operations and cash flows. We are not required to offer any additional equity securities to existing common stockholders on a preemptive basis. Therefore, additional issuances of common stock, directly or through convertible or exchangeable securities, warrants or options, will dilute the holdings of our existing common stockholders and such issuances, or the perception of such issuances, may reduce the market price of our common stock. Our preferred stock has, and any additional preferred stock issued by us would likely have, a preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to common stockholders. Because our decision to incur or issue debt or issue equity or equity-related securities in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or success of our future capital raising efforts. Thus, common stockholders bear the risk that our future incurrence or issuance of debt or issuance of equity or equity-related securities will adversely affect the market price of our common stock.

We have not established a minimum distribution payment level for our common stock, and we cannot assure you of our ability to pay distributions in the future.

We intend to make quarterly distributions of our REIT taxable income to holders of our common stock out of assets legally available therefor. We have not established a minimum distribution payment level and our ability to pay distributions may be adversely affected by a number of factors, including the risk factors described in this report. Any distributions will be authorized by our board of directors and declared by us based upon a number of factors, including our actual and anticipated results of operations, liquidity and financial condition, restrictions under Delaware law or applicable financing covenants, our REIT taxable income, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, our operating expenses and other factors our directors deem relevant.

Our board of directors approved two increases in our quarterly dividends during 2017, which has resulted in reduced cash flows and we will begin making distributions on our preferred stock issued in July 2019, beginning in November 2019, which will further reduce our cash flows. Although we have other sources of liquidity, such as sales of and repayments from our investments, potential debt financing sources and the issuance of equity securities, there can be no assurance that we will generate sufficient cash or

achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future.

Furthermore, while we are required to make distributions in order to maintain our REIT status (as described above under “—Risks Related to our Taxation as a REIT—We may be unable to generate sufficient cash from operations to pay our operating expenses and to pay distributions to our stockholders”), we may elect not to maintain our REIT status, in which case we would no longer be required to make such distributions. Moreover, even if we do elect to maintain our REIT status, we may elect to comply with the applicable requirements by, after completing various procedural steps, distributing, under certain circumstances, a portion of the required amount in the form of shares of our common stock in lieu of cash. If we elect not to maintain our REIT status or to satisfy any required distributions in shares of common stock in lieu of cash, such action could negatively and materially affect our business, results of operations, liquidity and financial condition as well as the market price of our common stock. No assurance can be given that we will make any distributions on shares of our common stock in the future.

We may in the future choose to make distributions in our own stock, in which case you could be required to pay income taxes in excess of any cash distributions you receive.

We may in the future make taxable distributions that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution as ordinary income to the extent of our current and accumulated earnings and profits for federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such distributions in excess of the cash distributions received. If a U.S. stockholder sells the stock that it receives as a distribution in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the distribution, depending on the market price of our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such distributions, including in respect of all or a portion of such distribution that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on distributions, it may put downward pressure on the market price of our common stock.

In August 2017, the IRS issued guidance authorizing elective cash/stock dividends to be made by public REITs where there is a minimum (of at least 20%) amount of cash that may be paid as part of the dividend, provided that certain requirements are met. It is unclear whether and to what extent we would be able to or choose to pay taxable distributions in cash and stock. In addition, no assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock distributions, including on a retroactive basis, or assert that the requirements for such taxable cash/stock distributions have not been met.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our stock price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our common stock. For instance, if market interest rates rise without an increase in our distribution rate, the market price of our common stock could decrease, as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our outstanding and future (variable and fixed) rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market price of our common stock.

Our certificate of incorporation, bylaws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the raider and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions include, among others:


•	a classified board of directors with staggered three-year terms;


•	provisions regarding the election of directors, classes of directors, the term of office of directors, the filling of director vacancies and the resignation and removal of directors for cause only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;


•	provisions regarding corporate opportunity only upon the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote thereon;


•	removal of directors only for cause and only with the affirmative vote of at least 80% of the then issued and outstanding shares of our capital stock entitled to vote in the election of directors;


•	our board of directors to determine the powers, preferences and rights of our preferred stock and to issue such preferred stock without stockholder approval;


•	advance notice requirements applicable to stockholders for director nominations and actions to be taken at annual meetings;


•	a prohibition, in our certificate of incorporation, stating that no holder of shares of our common stock will have cumulative voting rights in the election of directors, which means that the holders of a majority of the issued and outstanding shares of common stock can elect all the directors standing for election; and


•	a requirement in our bylaws specifically denying the ability of our stockholders to consent in writing to take any action in lieu of taking such action at a duly called annual or special meeting of our stockholders.

Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is considered favorable to stockholders. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or a change in our management and board of directors and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium.

ERISA may restrict investments by plans in our common stock.

A plan fiduciary considering an investment in our common stock should consider, among other things, whether such an investment is consistent with the fiduciary obligations under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including whether such investment might constitute or give rise to a prohibited transaction under ERISA, the Internal Revenue Code or any substantially similar federal, state or local law and, if so, whether an exemption from such prohibited transaction rules is available.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties.

None.

Item 3. Legal Proceedings.

We are or may become, from time to time, involved in various disputes, litigation and regulatory inquiry and investigation matters that arise in the ordinary course of business. Given the inherent unpredictability of these types of proceedings, it is possible that future adverse outcomes could have a material adverse effect on our business, financial position or results of operations.

New Residential is, from time to time, subject to inquiries by government entities. New Residential currently does not believe any of these inquiries would result in a material adverse effect on New Residential’s business.

Item 4. Mine Safety Disclosures.

None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.

We have one class of common stock, which is listed on the New York Stock Exchange (NYSE) under the symbol “NRZ.” As of February 18, 2020, there were 30 holders of record of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

The following graph compares the cumulative total return for our common stock (stock price change plus reinvested dividends) with the comparable return of four indices: NAREIT All REIT, Russell 2000, NAREIT Mortgage REIT, and S&P 500. The graph assumes an investment of $100 in our common stock and in each of the indices on December 31, 2014 through December 31, 2019. The past performance of our common stock is not an indication of future performance.



	Period Ended
Index	12/31/2014	12/31/2015	12/31/2016	12/31/2017	12/31/2018	12/31/2019
New Residential Investment Corp.	100.00	119.78	177.20	226.51	203.06	260.86
NAREIT All REIT		124.44	135.99	148.60	142.50	182.50
Russell 2000	100.00	119.43	144.88	166.10	147.81	185.54
NAREIT Mortgage REIT		101.43	124.60	149.26	145.50	176.53
S&P 500	100.00	130.77	146.41	178.37	170.55	224.25

See Note 15 to our Consolidated Financial Statements for further information regarding distributions on our common stock. We may declare quarterly distributions on our common stock. No assurance, however, can be given that any future distributions will be made or, if made, as to the amounts or timing of any future distributions as such distributions are subject to our earnings,

financial condition, liquidity, capital requirements, REIT requirements and such other factors as our board of directors deems relevant. In addition, such distributions may be subject to the receipt of sufficient funds from our servicer subsidiaries, NRM and NewRez, which are subject to regulatory restrictions on their ability to pay distributions.

Nonqualified Stock Option and Incentive Award Plan

On April 29, 2013, New Residential’s board of directors adopted the Plan, which was amended and restated as of November 4, 2014. The Plan is intended to facilitate the use of long-term equity-based awards and incentives for the benefit of the service providers to New Residential and its Manager. All outstanding options granted under the Plan will be subject to the terms and conditions set forth in the agreements evidencing such options and the terms of the Plan. The maximum number of shares available for issuance in the aggregate over the ten-year term of the Plan is 15,000,000 shares. New Residential’s board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules.

In connection with our separation from Drive Shack, each Drive Shack option held by our Manager or by the directors, officers, employees, service providers, consultants and advisors of our Manager at the date of the distribution of our common stock to Drive Shack’s stockholders was converted into an adjusted Drive Shack option as well as a new New Residential option (a “Converted Option”). The exercise price of each adjusted Drive Shack option and Converted Option was set to collectively maintain the intrinsic value of the Drive Shack option immediately prior to the distribution and to maintain the ratio of the exercise price of the adjusted Drive Shack option and the Converted Option, respectively, to the fair market value of the underlying shares at the time the distribution was made. The terms and conditions applicable to each such Converted Option were substantially similar to the terms and condition otherwise applicable to the Drive Shack option as of the date of distribution. The grant of such Converted Options did not reduce the number of shares of our common stock otherwise available for issuance under the Plan. These options are contractually required to be settled in an amount of cash equal to the excess of the fair market value of a share on the date of exercise over the exercise price per share, unless a majority of the independent members of the board of directors (or, with respect to a tandem award, one of our authorized officers) determines to settle the option in shares. If the option is settled in shares, the independent members of the board of directors or an authorized officer, as applicable, will determine whether the exercise price will be payable in cash, by withholding from shares of our common stock otherwise issuable upon exercise of such option or through another method permitted under the plan.

The following table summarizes the total number of outstanding securities in the incentive plan and the number of securities remaining for future issuance, as well as the weighted average exercise price of all outstanding securities as of December 31, 2019.



Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options	Weighted Average Exercise Price of Outstanding Options		Number of Securities Remaining Available for Future Issuance Under the 2013 Equity Compensation Plan
Equity Compensation Plans Approved by Security Holders:
Nonqualified Stock Option and Incentive Award Plan	29,792,783	$	15.01	14,733,234
Total	29,792,783	$	15.01	14,733,234	^(A)
Equity Compensation Plans Not Approved by Security Holders:
None

(A)

No award shall be granted on or after May 15, 2023 (but awards granted may extend beyond this date). The number of securities remaining available for future issuance is net of an aggregate of 259,766 shares of our common stock and 7,000 options awarded to our directors, the shares being awarded in lieu of contractual cash compensation. The number of securities remaining available for future issuance is adjusted on the first day of each fiscal year beginning during the ten-year term of the plan and in and after calendar year 2014, by a number of shares of our common stock equal to 10% of the number of shares of our common stock newly issued by us during the immediately preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). No adjustment was made on January 1, 2014. On January 1, 2020, 2019, 2018 and 2017, 4,600,000 shares, 5,799,166 shares, 5,654,578 shares and 2,000,000 shares, respectively, were added to the number of securities remaining available for future issuance; all of these amounts have been included in the table above.

Share Repurchase Program

For details regarding our share repurchase program, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources -Stockholders’ Equity-Common Stock.

Item 6. Selected Financial Data.

The selected historical consolidated financial information set forth below as of December 31, 2019, 2018, 2017, 2016 and 2015 and for the years ended December 31, 2019, 2018, 2017, 2016 and 2015 has been derived from our audited historical Consolidated Financial Statements.

The information below should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and notes thereto included in Part II, Item 8, “Financial Statements and Supplementary Data.”

Selected Consolidated Financial Information

(in thousands, except share and per share data)



	Year Ended December 31,
	2019			2018			2017		2016		2015
Statement of Income Data
Interest income	$	1,766,130		$	1,664,223		$	1,519,679	$	1,076,735	$	645,072
Interest expense	933,751			606,433			460,865		373,424		274,013
Net Interest Income	832,379			1,057,790			1,058,814		703,311		371,059
Impairment	35,577			90,641			86,092		87,980		24,384
Net interest income after impairment	796,802			967,149			972,722		615,331		346,675
Servicing revenue, net	385,159			528,595			424,349		118,169		—
Gain on originated mortgage loans, held-for-sale, net	475,455			96,145			—		—		—
Other Income (Loss)	(41,099		)	(51,385		)	207,786		101,194		42,029
Operating Expenses	968,618			609,404			422,577		174,210		117,823
Income Before Income Taxes	647,699			931,100			1,182,280		660,484		270,881
Income tax (benefit) expense	41,766			(73,431		)	167,628		38,911		(11,001		)
Net Income	$	605,933		$	1,004,531		$	1,014,652	$	621,573	$	281,882
Noncontrolling Interests in Income of Consolidated Subsidiaries	$	42,637		$	40,564		$	57,119	$	78,263	$	13,246
Dividends on Preferred Stock	$	13,281		$	—		$	—	$	—	$	—
Net Income Attributable to Common Stockholders	$	550,015		$	963,967		$	957,533	$	543,310	$	268,636
Net Income per Share of Common Stock, Basic	$	1.35		$	2.82		$	3.17	$	2.12	$	1.34
Net Income per Share of Common Stock, Diluted	$	1.34		$	2.81		$	3.15	$	2.12	$	1.32
Weighted Average Number of Shares of Common Stock Outstanding, Basic	408,789,642			341,268,923			302,238,065		238,122,665		200,739,809
Weighted Average Number of Shares of Common Stock Outstanding, Diluted	408,990,107			343,137,361			304,381,388		238,486,772		202,907,605
Dividends Declared per Share of Common Stock	$	2.00		$	2.00		$	1.98	$	1.84	$	1.75



	December 31,
	2019		2018		2017		2016		2015
Balance Sheet Data
Investments in:
Excess mortgage servicing rights, at fair value	$	379,747	$	447,860	$	1,173,713	$	1,399,455	$	1,581,517
Excess mortgage servicing rights, equity method investees, at fair value	125,596		147,964		171,765		194,788		217,221
Mortgage servicing rights, at fair value	3,967,960		2,884,100		1,735,504		659,483		—
Mortgage servicing rights financing receivables, at fair value	1,718,273		1,644,504		598,728		—		—
Servicer advance investments, at fair value	581,777		735,846		4,027,379		5,706,593		7,426,794
Real estate and other securities, available-for-sale	19,477,728		11,636,581		8,071,140		5,073,858		2,501,881
Residential mortgage loans, held-for-investment	925,706		735,329		691,155		190,761		330,178
Residential mortgage loans, held-for-sale	1,429,052		932,480		1,725,534		696,665		776,681
Residential mortgage loans, held-for-sale, at fair value	4,613,612		2,808,529		—		—		—
Consumer loans, held-for-investment	827,545		1,072,202		1,374,263		1,799,486		—
Cash and cash equivalents	528,737		251,058		295,798		290,602		249,936
Total assets	44,863,454		31,691,013		22,213,562		18,399,529		15,192,722
Total debt	35,636,373		22,656,235		15,746,530		13,181,236		11,292,622
Total liabilities	37,627,194		25,602,718		17,417,400		14,931,352		12,206,142
Total New Residential stockholders’ equity	7,157,710		5,997,670		4,690,205		3,260,100		2,795,933
Noncontrolling interests in equity of consolidated subsidiaries	78,550		90,625		105,957		208,077		190,647
Total equity	7,236,260		6,088,295		4,796,162		3,468,177		2,986,580
Preferred stock	423,444		—		—		—		—
Supplemental Balance Sheet Data
Common shares outstanding	415,520,780		369,104,429		307,361,309		250,773,117		230,471,202
Book value per share of common stock	$	16.21	$	16.25	$	15.26	$	13.00	$	12.13
Other Data
Core earnings^(A)	$	886,794	$	815,158	$	861,381	$	510,821	$	388,756

(A)

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, including any impairment, on our investments, and (v) income from our origination and servicing businesses. “Core earnings” is a non-GAAP measure of our operating performance, excluding the fourth variable above and adjusts the earnings from the consumer loan investment to a level yield basis. Core earnings is used by management to evaluate our performance without taking into account: (i) realized and unrealized gains and losses, which although they represent a part of our recurring operations, are subject to significant variability and are generally limited to a potential indicator of future economic performance; (ii) incentive compensation paid to our Manager; (iii) non-capitalized transaction-related expenses; and (iv) deferred taxes, which are not representative of current operations.

Our definition of core earnings includes accretion on held-for-sale loans as if they continued to be held-for-investment. Although we intend to sell such loans, there is no guarantee that such loans will be sold or that they will be sold within any expected timeframe. During the period prior to sale, we continue to receive cash flows from such loans and believe that it is appropriate to record a yield thereon. In addition, our definition of core earnings excludes all deferred taxes, rather than just deferred taxes related to unrealized gains or losses, because we believe deferred taxes are not representative of current operations. Our definition of core earnings also limits accreted interest income on RMBS where we receive par upon the exercise of associated call rights based on the estimated value of the underlying collateral, net of related costs including advances. We created this limit in order to be able to accrete to the lower of par or the net value of the underlying collateral, in instances where the net value of the underlying collateral is lower than par. We believe this amount represents the amount of accretion we would have expected to earn on such bonds had the call rights not been exercised.

to adjust consumer loans to a level yield is to present income recognition across the consumer loan portfolio in the manner in which it is economically earned, avoid potential delays in loss recognition, and align it with our overall portfolio of mortgage-related assets which generally record income on a level yield basis. With respect to consumer loans classified as held-for-sale, the level yield is computed through the expected sale date. With respect to the gains recorded under GAAP in 2014 and 2016 as a result of a refinancing of, and the consolidation of, the Consumer Loan Companies, respectively, we continue to record a level yield on those assets based on their original purchase price.

While incentive compensation paid to our Manager may be a material operating expense, we exclude it from core earnings because (i) from time to time, a component of the computation of this expense will relate to items (such as gains or losses) that are excluded from core earnings, and (ii) it is impractical to determine the portion of the expense related to core earnings and non-core earnings, and the type of earnings (loss) that created an excess (deficit) above or below, as applicable, the incentive compensation threshold. To illustrate why it is impractical to determine the portion of incentive compensation expense that should be allocated to core earnings, we note that, as an example, in a given period, we may have core earnings in excess of the incentive compensation threshold but incur losses (which are excluded from core earnings) that reduce total earnings below the incentive compensation threshold. In such case, we would either need to (a) allocate zero incentive compensation expense to core earnings, even though core earnings exceeded the incentive compensation threshold, or (b) assign a “pro forma” amount of incentive compensation expense to core earnings, even though no incentive compensation was actually incurred. We believe that neither of these allocation methodologies achieves a logical result. Accordingly, the exclusion of incentive compensation facilitates comparability between periods and avoids the distortion to our non-GAAP operating measure that would result from the inclusion of incentive compensation that relates to non-core earnings.

With regard to non-capitalized transaction-related expenses, management does not view these costs as part of our core operations, as they are considered by management to be similar to realized losses incurred at acquisition. Non-capitalized transaction-related expenses are generally legal and valuation service costs, as well as other professional service fees, incurred when we acquire certain investments, as well as costs associated with the acquisition and integration of acquired businesses.

Since the third quarter of 2018, as a result of the Shellpoint Acquisition, we, through our wholly owned subsidiary, NewRez, originate conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. In connection with the transfer of loans to the GSEs or mortgage investors, we report realized gains or losses on the sale of originated residential mortgage loans and retention of mortgage servicing rights, which we believe is an indicator of performance for the Servicing and Origination segments and therefore included in core earnings. Realized gains or losses on the sale of originated residential mortgage loans had no impact on core earnings in any prior period, but may impact core earnings in future periods.

Beginning with the third quarter of 2019, as a result of the continued evaluation of how Shellpoint operates its business and its impact on our operating performance, core earnings includes Shellpoint’s GAAP net income with the exception of the unrealized gains or losses due to changes in valuation inputs and assumptions on MSRs owned by NewRez, and non-capitalized transaction-related expenses. This change was not material to core earnings for the quarter ended September 30, 2019.

Management believes that the adjustments to compute “core earnings” specified above allow investors and analysts to readily identify and track the operating performance of the assets that form the core of our activity, assist in comparing the core operating results between periods, and enable investors to evaluate our current core performance using the same measure that management uses to operate the business. Management also utilizes core earnings as a measure in its decision-making process relating to improvements to the underlying fundamental operations of our investments, as well as the allocation of resources between those investments, and management also relies on core earnings as an indicator of the results of such decisions. Core earnings excludes certain recurring items, such as gains and losses (including impairment 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), (ii) non-capitalized transaction-related expenses and (iii) deferred taxes (other than those related to unrealized gains and losses). Each are excluded from core earnings and included in our incentive compensation measure (either immediately or through amortization). In addition, our incentive compensation measure does not include accretion on held-for-sale loans and the timing of recognition of income from consumer loans

is different. Unlike core earnings, our incentive compensation measure is intended to reflect all realized results of operations. The Gain on Remeasurement of Consumer Loans Investment was treated as an unrealized gain for the purposes of calculating incentive compensation and was therefore excluded from such calculation.

Core earnings does not represent and should not be considered as a substitute for, or superior to, net income or as a substitute for, or superior to, cash flows from operating activities, each as determined in accordance with U.S. GAAP, and 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 Consolidation and Results of Operations—Liquidity and Capital Resources.” Set forth below is a reconciliation of core earnings to the most directly comparable GAAP financial measure (in thousands):



	Year Ended December 31,
	2019			2018			2017			2016			2015
Net income attributable to common stockholders	$	550,015		$	963,967		$	957,533		$	504,453		$	268,636
Adjustments for Non-Core Earnings:
Impairment	35,344			90,641			86,092			87,980			24,384
Change in fair value of investments in mortgage servicing rights	171,915			(244,624		)	(282,018		)	—			—
Change in fair value of servicer advance investments	(10,288		)	89,332			(84,418		)	7,768			57,491
Change in fair value of investments in residential mortgage loans	43,009			(74,162		)	—			—			—
Change in fair value of derivative instruments	49,699			113,558			2,190			(5,774		)	3,538
(Gain) loss on settlement of investments, net (Note 2)	(158,640		)	(96,319		)	(10,310		)	48,800			19,626
Other (income) loss (Note 2)	(27,985		)	11,425			(6,298		)	15,211			1,991
Other Income and Impairment attributable to non-controlling interests	(13,548		)	(22,247		)	(30,416		)	(26,303		)	(22,102		)
Non-capitalized transaction-related expenses	56,289			21,946			21,723			9,493			31,002
Incentive compensation to affiliate (Note 17)	91,892			94,900			81,373			42,197			16,017
Preferred stock management fee to affiliate	2,642			—			—			—			—
Deferred taxes (Note 19)	38,207			(80,054		)	168,518			34,846			(6,633		)
Interest income on residential mortgage loans, held-for sale	60,689			13,374			13,623			18,356			22,484
Limit on RMBS discount accretion related to called deals	(19,590		)	(58,581		)	(28,652		)	(30,233		)	(9,129		)
Adjust consumer loans to level yield	5,239			(21,181		)	(41,250		)	7,470			71,070
Core earnings of equity method investees:
Excess mortgage servicing rights	11,905			13,183			13,691			18,206			25,853
Core Earnings	$	886,794		$	815,158		$	861,381		$	510,821		$	388,756

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 Consolidated Financial Statements and notes thereto, and with Part I, Item 1A, “Risk Factors.”

GENERAL

New Residential is a publicly traded REIT primarily focused on opportunistically investing in, and actively managing, investments related to the residential real estate market. We seek to generate long-term value for our investors by using our investment expertise to identify and invest primarily in mortgage related assets, including operating companies, that offer attractive risk-adjusted returns. Our investment strategy also involves opportunistically pursuing acquisitions and seeking to establish strategic partnerships that we believe enable us to maximize the value of the mortgage loans we originate and service by offering products and services to customers, servicers, and other parties through the lifecycle of transactions that affect each mortgage loan and underlying residential property. For more information about our investment guidelines, see “Item 1. Business — Investment Guidelines.”

Our portfolio is currently composed of mortgage servicing related assets (including investments in operating entities consisting of servicing, origination, and related businesses), residential securities (and associated called rights) and loans, and consumer loans. Within our portfolio, we target complementary assets that generate stable long-term cash flows and employ conservative capital structures in an effort to generate returns across different interest rate environments. Our investment approach and capital allocation decisions combine a focus on asset selection, relative value, and risk management, taking into consideration relevant macroeconomic factors. In our efforts to identify and invest in target assets, we compete with banks, other REITs, independent mortgage lenders and servicers, private equity firms, hedge funds, and other large financial services companies. In the face of this competition, the experience of members of our management team and dedicated investment professionals provided by our manager provide us with a competitive advantage when pursuing attractive investment opportunities.

Our investments in operating entities include our mortgage origination and servicing subsidiary, NewRez, and its special servicing division, SMS, as well as investments in related businesses, such as Avenue 365 and eStreet, that provide services that are complementary to our origination and servicing businesses and our other portfolios of mortgage related assets. Our origination business sources and originates loans through four distinct channels: direct-to-consumer, joint venture/retail, wholesale, and correspondent. Our servicing platforms offer our subsidiaries and third-party clients performing and special servicing capabilities. We also have investments in Guardian, and our non-controlling interest in, and partnerships with, Covius Holdings, Inc. (collectively with its subsidiaries, Covius) and other entities that provide services that support the mortgage and housing industries.

We seek to protect book value and the value of our assets by actively managing and hedging our portfolio. Diversification of our overall portfolio, including our portfolio assets and operating entities, and a variety of hedging strategies, help contribute to book value stability. Both our portfolio composition (inclusive of long and short duration instruments and various operating businesses) as well as specific hedging instruments (including Agency MBS, interest rate swaps and others) are employed to mitigate book value volatility. We believe that the actions we have taken over the past number of years to diversify and grow our portfolio have allowed us to operate efficiently and perform dynamically across economic conditions.

We also attempt to protect our assets and reduce the impact of prepayments on our MSRs and Excess MSR investments through recapture agreements with our servicers, subservicers and through our origination and servicing operations. Under these agreements, New Residential is generally entitled to the MSRs or a pro rata interest in the Excess MSRs on any initial or subsequent refinancing of loans relating to MSRs and Excess MSRs subserviced or serviced by PHH, LoanCare, Flagstar, Mr. Cooper, or SLS. In addition, we obtain new production MSRs associated with loans originated by NewRez, which partially offset prepayments of MSRs in our portfolio.

As of December 31, 2019, we had $44.9 billion in assets under management and 3,384 employees within our operating entities.

We have elected to be treated as a REIT for U.S. federal income tax purposes. New Residential became a publicly-traded entity on May 15, 2013. We are externally managed by an affiliate of Fortress Investment Group LLC and benefit from the resources of this highly diversified global investment manager.

OUR MANAGER

On December 27, 2017, SoftBank Group Corp. (“SoftBank”) acquired Fortress (the “SoftBank Merger”) and Fortress operates within SoftBank as an independent business headquartered in New York.

STRATEGIC INVESTMENTS AND ACQUISITIONS

As announced on May 1, 2019, we made a strategic investment in Covius. Covius is a provider of various mortgage and real estate related services. Examples of services offered by Covius include settlement and title, document and letter fulfillment, regulatory compliance, quality assurance, commercial and residential loan due diligence and business process automation. Following the investment, New Residential owns a non-controlling interest in Covius, with an option to increase its ownership position through specified future investments. With this transaction, we believe that we have made a strategic investment in a business that provides services that are complementary and important to our other businesses and to the broader mortgage and housing industries. As of December 31, 2019, New Residential owns 24% of Covius.

As announced on August 19, 2019, we purchased 100% of the shares of DGG RE Investments LLC d/b/a Guardian Asset Management (“Guardian”), a national provider of field services and property management to government agencies, financial institutions and asset management firms. We believe that the addition of Guardian, combined with our investment in Covius and our existing businesses, further expands our ability to provide ancillary services to mortgage and real estate industry participants, which we believe creates additional opportunities to grow revenues and earnings for our shareholders.

As announced on October 2, 2019, we completed the acquisition of select assets and liabilities from Ditech Holding Corporation and Ditech Financial (collectively “Ditech”). As part of the acquisition, New Residential purchased Ditech’s forward Fannie Mae, Ginnie Mae and non-agency MSRs, with an aggregate unpaid principal balance of approximately $61.9 billion as of October 1, 2019, the servicer advance receivables relating to such MSRs and other assets core to the forward origination and servicing businesses. Additionally, we assumed certain Ditech leases and other contracts, and added approximately 1,100 Ditech employees to support the increase in volume to our existing origination and servicing operations. We believe that the acquisition of these select assets, operations and the addition of employees from Ditech are complementary to our existing portfolio and business, accelerate the growth of our servicing and origination operations, and benefit our long-term strategy and shareholders.

CAPITAL ACTIVITIES

In July 2018, we entered into a Distribution Agreement to sell shares of our common stock, par value $0.01 per share (the “ATM Shares”), having an aggregate offering price of up to $500.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). During the year ended December 31, 2018, we sold 0.5 million ATM Shares for aggregate proceeds of $9.1 million. On August 1, 2019, the Distribution Agreement was amended to, among other things, (i) add additional sales agents under the ATM Program, and (ii) restore the aggregate offering price under the ATM Program to the original amount of $500.0 million. During the year ended December 31, 2019, we did not sell any ATM Shares.

In February 2019, we raised approximately $752.1 million of gross proceeds through an underwritten common stock offering. The net proceeds were for investments and general corporate purposes.

In July 2019, we raised approximately $155.3 million of gross proceeds in an underwritten public offering of 7.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Preferred Series A”). The net proceeds were for investments and general corporate purposes.

In August 2019, we raised approximately $282.5 million of gross proceeds in an underwritten public offering of 7.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Preferred Series B”). The net proceeds were for investments and general corporate purposes.

In August 2019, we announced a share repurchase program authorizing the repurchase of up to $200.0 million of our common shares from time to time in the open market or in privately negotiated transactions through December 31, 2020. 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.

During the year ended December 31, 2019, we declared an aggregate common stock dividend of $2.00 per common share, and declared aggregate preferred dividends of $1.16 per share of Preferred Series A and $0.89 per share of Preferred Series B, respectively.

MARKET CONSIDERATIONS

Some key macroeconomic factors that affect our business include, but are not limited to, changes in mortgage rates, interest rates, housing data, prepayment speeds, employment rates and credit spreads.

The year ended December 31, 2019 was generally marked by a declining interest rate environment as the Federal Open Market Committee (“FOMC”) cut rates 3 times (bringing the target rate to 1.50%-1.75% in October 2019 from 2.25%-2.50% as of year-end 2018). Heading into 2020, the FOMC has indicated that it will be in a holding pattern for the foreseeable future.

With a dovish FOMC, nominal rates moved lower throughout the year, with the 10-year Treasury declining dramatically, from 2.68% as of December 31, 2018 to 1.92% as of December 31, 2019, fluctuating throughout the year and hitting a low of 1.42% on September 3, 2019. Given the move lower in rates, mortgage rates also declined during the year, moving 62 bps from 4.418% as of December 31, 2018 to 3.802% as of December 31, 2019. During 2019, mortgage rates hit a low of 3.524% on September 4, 2019.



	As of December 31,
	2019	2018	Year over Year Change
10-Year U.S. Treasury rate	1.92%	2.68%	(0.76)%
30-Year mortgage current coupon	3.80%	4.42%	(0.62)%

Lower mortgage rates (the lowest since 2016) resulted in an increase in origination and refinancing activity across the market in 2019. Broadly, total originations in 2019 grew 30% over 2018, with refinance originations growing to 48% of total originations from 44% in 2018. The MBA Refi Index ended the year at 1,859.0 as of December 2019, up from 729.9 as of December 2018, peaking in August 2019 at 2,754.7. Rising originations would generally be expected to benefit our origination platform through increased gains on sales of originated loans, considering loan sales result in new MSR creation to off-set the run-off that may arise as prepayments increase.

Lower mortgage rates are generally associated with a rise in prepayment rates for residential mortgage loans since they decrease the cost of borrowing for homeowners. Rising prepayment rates would generally be expected to decrease the value of our interests in Excess MSRs, MSRs and Servicer Advance Investments, which include the right to a portion of the related MSRs, because the duration of the cash flows we are entitled to receive declines, resulting in a reduction of current cash flows. Rising prepayment rates also have a positive impact on the value of investments purchased at a significant discount as the recovery of the discount accelerates.

Mortgage rates are expected to remain steady into 2020 and total originations in 2020 are forecasted to be $1.9 trillion, slightly below forecast total originations in 2019. While expectations for purchase originations are expected to remain stable in 2020, refinance originations are expected to decrease to $0.6 trillion from $0.8 trillion (Mortgage Bankers Association).

Changes in interest rates will also directly impact our costs of borrowing either immediately (floating rate debt) or upon refinancing (fixed rate debt) and may also be associated with changes in credit spreads and/or the discount rates used in valuing investments. Changes in interest rates during the year also directly impacted our borrowing costs either immediately (floating rate debt) or upon refinancing (fixed rate debt). Given the lower rate environment and declining LIBOR values, we were able to improve and lower our financing costs during 2019.

Lower yields on fixed income assets can increase the difficulty in sourcing new accretive investments. In 2019, this trend of lower yields drove fixed income prices higher but also increased the value of certain of our existing investments.

Trends in consumer credit and health of the consumer impact our bond and loan portfolios as improvement in consumer health generally results in fewer delinquencies and thereby stronger portfolio performance. During 2019, the U.S. unemployment rate continued to move lower, hitting its lowest level in 50 years, signaling a general improvement in the U.S. economy. In our view, an improvement in the economy, as demonstrated through such measure, generally improves the value of housing and the ability of borrowers to make payments on their loans, thereby decreasing delinquencies and defaults on residential mortgage loans, consumer loans and RMBS. Low rates and healthy consumer balance sheets supported the housing market in 2019. The Case Shiller Home Price Index decreased from 227 as of the fourth quarter of 2018 to 219 as of the third quarter of 2019. The total number of mortgaged residential properties with negative equity stood at 2.0 million, or 3.7 percent of mortgaged homes, as of the fourth quarter of 2019, down from 2.2 million, or 4.1 percent, as of the fourth quarter of 2018. This trend generally helps to support the values of our residential mortgage loans, consumer loans and RMBS. The improvement in credit during the year,

coupled with the decline in rates and delinquencies, benefited New Residential’s portfolio of call rights. As a result, New Residential exercised call rights on 140 securitizations in 2019 with collateral of $4.5 billion in UPB.

Corporate credit spreads, which generally have an impact on the value of yield driven financial instruments (e.g., RMBS and loan portfolios), tightened during 2019. High Yield index tightened by over 100bps and Investment Grade Index by over 40bps driven by lower broader market volatility. While a useful market proxy, corporate credit spreads are not necessarily indicative or directly correlated to mortgage credit spreads.

OUR PORTFOLIO

Our portfolio is currently composed of servicing and origination, including our subsidiary operating entities, residential securities and loans and other investments, as described in more detail below. The assets in our portfolio are described in more detail below (dollars in thousands), as of December 31, 2019.



	Servicing and Origination								Residential Securities and Loans
	Origination		Servicing		MSR Related Investments		Total Servicing and Origination		Real Estate Securities		Residential Mortgage Loans		Consumer Loans		Corporate			Total
December 31, 2019
Investments	$	1,414,528	$	—	$	6,773,353	$	8,187,881	$	19,477,728	$	5,843,983	$	827,545	$	—		$	34,337,137
Cash and cash equivalents	77,237		32,225		318,714		428,176		87,359		1,180		6,514		5,508			528,737
Restricted cash	6,730		15,769		107,328		129,827		—		—		32,370		—			162,197
Other assets	250,709		204,723		3,420,122		3,875,554		5,590,456		174,940		78,740		85,956			9,805,646
Goodwill	11,836		12,809		5,092		29,737		—		—		—		—			29,737
Total assets	$	1,761,040	$	265,526	$	10,624,609	$	12,651,175	$	25,155,543	$	6,020,103	$	945,169	$	91,464		$	44,863,454
Debt	$	1,304,621	$	33,412	$	6,646,159	$	7,984,192	$	22,151,110	$	4,676,849	$	824,222	$	—		$	35,636,373
Other liabilities	117,328		51,264		451,629		620,221		980,415		55,121		16,795		318,269			1,990,821
Total liabilities	1,421,949		84,676		7,097,788		8,604,413		23,131,525		4,731,970		841,017		318,269			37,627,194
Total equity	339,091		180,850		3,526,821		4,046,762		2,024,018		1,288,133		104,152		(226,805		)	7,236,260
Noncontrolling interests in equity of consolidated subsidiaries	11,354		—		45,025		56,379		—		—		22,171		—			78,550
Total New Residential stockholders’ equity	$	327,737	$	180,850	$	3,481,796	$	3,990,383	$	2,024,018	$	1,288,133	$	81,981	$	(226,805	)	$	7,157,710
Investments in equity method investees	$	—	$	—	$	165,848	$	165,848	$	—	$	—	$	—	$	—		$	165,848

Operating Investments

Origination

Our origination business operates through the lending division of NewRez. As a lender, NewRez provides refinance opportunities to eligible existing servicing customers, primarily through its direct-to-consumer channel and also originates or purchases loans from brokers or originators through retail, wholesale and correspondent channels. We originate or purchase residential mortgage loans conforming to the underwriting standards of the Agencies, government-insured residential mortgage loans which are insured by the FHA, VA and USDA, and non-conforming loans through our SMART Loan Series. NewRez’s SMART Loan Series is a Non-QM loan product that provides a variety of options for highly qualified borrowers who fall outside the specific requirements of Agency mortgage loans. NewRez generates revenue through sales of residential mortgage loans, including, but not limited to, gain on loans originated and sold, the settlement of mortgage loan origination derivative instruments and the value of MSRs retained on transfer of the loans. Profit margins per loan vary by channel, with correspondent typically being the lowest and retail being the highest. NewRez sells conforming loans to the GSEs and Non-QM to another subsidiary of New Residential. NewRez relies on warehouse financing to fund loans at origination through the sale date.

NewRez sells newly originated Agency MSRs to NRM under a flow agreement and may, from time to time, sell the excess MSR to another subsidiary of New Residential. These transactions are recorded at fair value with gains or losses recognized on sale in the Origination segment. Subsequent to sale, these assets are included in MSR investments and the risks and rewards related to these assets are recognized in our MSR Related Investments segment.

For the year ended December 31, 2019, NewRez increased loan origination volume to $22.3 billion, up from $7.2 billion in the year prior including $3.2 billion originated in the period prior to the date of acquisition. The continued lower interest rate

environment, increased refinancings by borrowers, the integration of the Ditech origination platform into NewRez, and increased market share helped drive the growth in our origination.

The charts below provide selected operating statistics for our Origination segment:



	Unpaid Principal Balance for the Year Ended
	December 31, 2019			December 31, 2018^(A)			Change
Production by Channel (in millions)
Retail / Shelter	$	2,240.4		$	860.1		$	1,380.3
Direct to Consumer / Retention	4,100.2			971.7			3,128.5
Wholesale	4,972.9			1,723.9			3,249.0
Correspondent	11,021.6			424.1			10,597.5
Total Production by Channel	$	22,335.1		$	3,979.8		$	18,355.3

Production by Product (in millions)
Agency	$	11,809.8		$	1,752.1		$	10,057.7
Government	8,346.3			1,271.3			7,075.0
Non-QM	1,499.3			660.2			839.1
Non-Agency	597.0			238.8			358.2
Other	82.7			57.4			25.3
Total Production by Product	$	22,335.1		$	3,979.8		$	18,355.3

% Purchase	45		%	63		%	(18		)%
% Refinance	55		%	37		%	18		%



	December 31, 2019			December 31, 2018^(A)			Change
Origination Revenue (in thousands)
Gain on loans originated and sold^(B)	$	3,091		$	55,337		$	(52,246	)
Gain (loss) on settlement of mortgage loan derivative instruments^(C)	(52,878		)	1,230			(54,108		)
MSRs retained on transfer of loans^(D)	365,974			34,977			330,997
Other^(E)	28,004			9,042			18,962
Realized gain on sale of originated mortgage loans, net	$	344,191		$	100,586		$	243,605

Change in fair value of loans	$	25,010		$	4,762		$	20,248
Change in fair value of interest rate lock commitments	26,151			23			26,128
Change in fair value of derivative instruments	1,900			(5,211		)	7,111
Unrealized origination revenue	$	53,061		$	(426	)	$	53,487

Gain on originated mortgage loans, held-for-sale, net^(F)	$	397,252		$	100,160		$	297,092
Provision for indemnification provisions, net of release ^(G)	$	(6,246	)	$	(1,139	)	$	(5,107	)
Pull through adjusted lock volume	$	25,196,789		$	3,998,922		$	21,197,867

Revenue as a percentage of pull through adjusted lock volume	1.55		%	2.48		%	(0.93		)%


(A)	Includes results from July 3, 2018, the date of acquisition.


(B)	Includes loan origination fees of $421.3 million and $21.8 million in December 31, 2019 and December 31, 2018, respectively.


(C)	Represents settlement of forward securities delivery commitments utilized as an economic hedge for mortgage loans not included within forward loan sale commitments.


(D)	Represents the initial fair value of the capitalized mortgage servicing rights upon loan sales with servicing retained.


(E)	Includes fees for services associated with the loan origination process.


(F)	Excludes $78.2 million and $4.0 million of gain on originated mortgage loans, held-for-sale, net for the year ended December 31, 2019 and 2018, respectively, related to the MSR Related Investments, Servicing, and Residential Mortgage Loans segments, as well as intercompany eliminations (Note 4 to our Consolidated Financial Statements).


(G)	Recorded in General and administrative expenses on the Consolidated Statements of Income.

We also have several wholly-owned subsidiaries that perform various services in the mortgage and real estate industries. Our subsidiary Avenue 365 is a title agency providing title and settlement services to mortgage lenders and servicers. Our subsidiary eStreet is an appraisal management company that performs appraisal and valuation services.

Servicing

Our servicing business operates through NewRez Servicing and its special servicing division, SMS. NewRez Servicing services current Agency and government-insured loans. SMS services delinquent Agency loans and non-Agency loans on behalf of the owners of the underlying mortgages. Servicing consists of collecting loan payments, remitting principal and interest payments to investors, managing escrow funds for the payment of mortgage-related expenses, such as taxes and insurance, performing loss mitigation activities, negotiating workouts and modifications, conducting or managing foreclosures on behalf of investors or other servicers and otherwise administering our mortgage loan servicing portfolio.

NewRez enters into market based subservicing agreements in connection with its subservicing on behalf of other New Residential subsidiaries. We recognize this subservicing income earned from other subsidiaries in Servicing revenue, net in the Servicing segment. To the extent the subsidiary is the owner of the MSR or whole-loan, subservicing expense is recognized in the MSR Related Investments and Residential Securities and Loans segments, respectively.

We may be obligated to make servicing advances to fund scheduled principal, interest, tax and insurance payments when the borrower has failed to make such payments and various other items that are required to preserve the assets being serviced. As a subservicer, we may be obligated to make servicing advances; however, advances and other incurred costs are generally lower compared to those of the MSR owner, and recovery times are substantially faster, often within the following month. To the extent we make or recover servicing advances under our subservicing agreements with other New Residential subsidiaries, such amounts are recognized as intercompany receivables or payables with the corresponding servicing advance recognized in the MSR Related Investments or Residential Securities and Loans segment, as appropriate.

During 2019, NewRez’s servicing platform grew to approximately $219.4 billion UPB as of December 31, 2019 compared to $109.1 billion UPB as of December 31, 2018. Growth in the servicing platform during the year resulted primarily from additional subservicing and servicing transfers relating to MSRs and loans owned by New Residential, including certain assets acquired from Ditech.

The table below provides the mix of our serviced assets portfolio between subserviced performing servicing on behalf of New Residential, NRM or NewRez (labeled as “Performing Servicing”) and subserviced non-performing, or special servicing (labeled as “Special Servicing”) for third parties and delinquent loans subserviced for other New Residential subsidiaries as of December 31, 2018 and December 31, 2019.



	Unpaid Principal Balance
	December 31, 2019		December 31, 2018		Change
Performing Servicing (in millions)
MSR Assets	$	136,409.1	$	55,987.3	$	80,421.8
Acquired Residential Whole Loans	2,322.4		672.0		1,650.4
Total Performing Servicing	138,731.5		56,659.3		82,072.2

Special Servicing (in millions)
MSR Assets	$	3,834.6	$	1,783.3	$	2,051.3
Acquired Residential Whole Loans	5,596.8		1,852.9		3,743.9
Third Party	71,263.8		48,776.9		22,486.9
Total Special Servicing	80,695.2		52,413.1		28,282.1
Total Servicing Portfolio	$	219,426.7	$	109,072.4	$	110,354.3
Agency Servicing (in millions)
MSR Assets	$	110,492.8	$	29,748.9	$	80,743.9
Acquired Residential Whole Loans	—		—		—
Third Party	19,994.9		4,003.8		15,991.1
Total Agency Servicing	130,487.7		33,752.7		96,735.0

Government Servicing (in millions)
MSR Assets	$	29,212.9	$	27,390.2	$	1,822.7
Acquired Residential Whole Loans	—		—		—
Third Party	1,770.8		2,126.9		(356.1		)
Total Government Servicing	30,983.7		29,517.1		1,466.6

Non-Agency (Private Label) Servicing (in millions)
MSR Assets	$	537.9	$	631.5	$	(93.6	)
Acquired Residential Whole Loans	7,919.3		2,524.9		5,394.4
Third Party	49,498.1		42,646.2		6,851.9
Total Non-Agency (Private Label) Servicing	57,955.3		45,802.6		12,152.7
Total Servicing Portfolio	$	219,426.7	$	109,072.4	$	110,354.3



	Year Ended
	December 31, 2019		December 31, 2018^(A)		Change
Base Servicing Fees (in thousands):
MSR Assets	$	52,297	$	11,570	$	40,727
Acquired Residential Whole Loans	8,074		1,439		6,635
Third Party	71,145		33,785		37,360
Total	$	131,516	$	46,794	$	84,722

Other Fees (in thousands):
Incentive fees	$	35,866	$	16,382	$	19,484
Ancillary fees	30,161		10,313		19,848
Boarding fees	8,111		1,934		6,177
Other fees	4,394		—		4,394
Total	$	78,532	$	28,629	$	49,903


(A)	Includes results from July 3, 2018, the date of acquisition.

MSR Related Investments

MSRs and MSR Financing Receivables

As of December 31, 2019, we had $5,686.2 million carrying value of MSRs and MSR financing receivables.

We have contracted with certain subservicers to perform the related servicing duties on the residential mortgage loans underlying our MSRs. As of December 31, 2019, these subservicers include PHH Corporation (“PHH”), Mr. Cooper, LoanCare, LLC (“LoanCare”), Ditech and Flagstar Bank, FSB (“Flagstar”), which subservice 23.5%, 19.9%, 17.9%, 9.1%, and 1.0% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 28.6% of the underlying UPB of the related mortgages is subserviced by NewRez. We have entered into agreements with PHH, LoanCare, Flagstar, and Mr. Cooper, whereby we are entitled to the MSR on any refinancing by such subservicer of a loan in the related original portfolio.

We are, generally, obligated to fund all future servicer advances related to the underlying pools of mortgages on our MSRs and MSR financing receivables. Generally, we will advance funds when the borrower fails to meet contractual payments (e.g. principal, interest, property taxes, insurance). We will also advance funds to maintain and report foreclosed real estate properties on behalf of investors. Advances are recovered through claims to the related investor and subservicers. Per the servicing agreements, we are obligated to make certain advances on mortgages to be in compliance with applicable requirements. In certain instances, the subservicer is required to reimburse us for any advances that were deemed nonrecoverable or advances that were not made in accordance with the related servicing contract.

See Note 6 to our Consolidated Financial Statements for further information regarding our investments in MSR financing receivables.

The table below summarizes our investments in MSRs and MSR financing receivables as of December 31, 2019.



	Current UPB (mm)		Weighted Average MSR (bps)		Carrying Value (mm)
MSRs
GSE	$	315,427.9	28	bps	$	3,319.0
Non-Agency	6,402.8		31		20.3
Ginnie Mae	52,019.3		42		628.6
MSR Financing Receivables
GSE	54,867.0		27		547.4
Non-Agency	76,117.9		47		1,170.9
Total	$	504,834.9	32	bps	$	5,686.2

The following table summarizes the collateral characteristics of the loans underlying our investments in MSRs and MSR financing receivables as of December 31, 2019 (dollars in thousands):



	Collateral Characteristics
	Current Carrying Amount		Current Principal Balance		Number of Loans	WA FICO Score^(A)	WA Coupon		WA Maturity (months)	Average Loan Age (months)	Adjustable Rate Mortgage %^(B)		Three Month Average CPR^(C)		Three Month Average CRR^(D)		Three Month Average CDR^(E)		Three Month Average Recapture Rate
MSRs
GSE	$	3,319,035	$	315,427,933	2,079,403	746	4.3	%	262	72	3.7	%	15.3	%	15.1	%	0.1	%	11.4	%
Non-Agency	20,283		6,402,833		142,682	668	7.6	%	188	163	2.9	%	17.2	%	16.5	%	0.8	%	2.0	%
Ginnie Mae	628,642		52,019,295		275,606	684	4.0	%	318	37	3.9	%	18.5	%	18.0	%	0.6	%	23.6	%
MSR Financing Receivables
GSE	547,351		54,866,978		230,505	748	4.3	%	300	30	1.1	%	32.8	%	32.8	%	—	%	3.3	%
Non-Agency	1,170,922		76,117,892		555,868	644	4.4	%	305	167	15.7	%	10.5	%	8.4	%	2.3	%	2.2	%
Total	$	5,686,233	$	504,834,931	3,284,064	723	4.3	%	277	79	5.2	%	16.8	%	16.3	%	0.5	%	10.2	%



	Collateral Characteristics
	Delinquency 30 Days^(F)		Delinquency 60 Days^(F)		Delinquency 90+ Days^(F)		Loans in Foreclosure		Real Estate Owned		Loans in Bankruptcy
MSRs
GSE	1.8	%	0.5	%	0.5	%	0.5	%	—	%	0.4	%
Non-Agency	4.8	%	2.2	%	7.3	%	1.9	%	0.7	%	2.5	%
Ginnie Mae	4.2	%	1.4	%	1.5	%	1.1	%	0.1	%	1.2	%
MSR Financing Receivables
GSE	0.8	%	0.2	%	0.2	%	—	%	—	%	0.1	%
Non-Agency	9.5	%	4.9	%	3.6	%	8.1	%	1.9	%	3.0	%
Total	3.2	%	1.2	%	1.1	%	1.7	%	0.3	%	0.9	%


(A)	The WA FICO score is based on the weighted average of information provided by the loan servicer on a monthly basis. The loan servicer generally updates the FICO score when loans are refinanced or become delinquent.


(B)	Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages.


(C)	Three Month Average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool.


(D)	Three Month Average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool.


(E)	Three Month Average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool.


(F)	Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30–59 days, 60–89 days or 90 or more days, respectively.

Excess MSRs

The tables below summarize the terms of our investments in Excess MSRs completed as of December 31, 2019.

Summary of Direct Excess MSR Investments as of December 31, 2019



			MSR Component^(A)					Excess MSR
	Current UPB (mm)		Weighted Average MSR (bps)		Weighted Average Excess MSR (bps)		Interest in Excess MSR (%)	Carrying Value (mm)
Agency	$	43,310.9	29	bps	21	bps	32.5% - 66.7%	$	209.6
Non-Agency^(B)	45,034.3		35		15		33.3% - 100.0%	170.1
Total/Weighted Average	$	88,345.2	35	bps	15	bps		$	379.7


(A)	The MSR is a weighted average as of December 31, 2019, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).


(B)	Serviced by Mr. Cooper and SLS, we also invested in related Servicer Advance Investments, including the basic fee component of the related MSR (Note 7 to our Consolidated Financial Statements) on $31.4 billion UPB underlying these Excess MSRs.

Summary of Excess MSR Investments Through Equity Method Investees as of December 31, 2019



			MSR Component^(A)
	Current UPB (mm)		Weighted Average MSR (bps)		Weighted Average Excess MSR (bps)		New Residential Interest in Investee (%)		Investee Interest in Excess MSR (%)		New Residential Effective Ownership (%)		Investee Carrying Value (mm)
Agency	$	33,592.6	33	bps	21	bps	50.0	%	66.7	%	33.3	%	$	226.8


(A)	The MSR is a weighted average as of December 31, 2019, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).

The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of December 31, 2019 (dollars in thousands):



	Collateral Characteristics
	Current Carrying Amount		Current Principal Balance		Number of Loans	WA FICO Score^(A)	WA Coupon		WA Maturity (months)	Average Loan Age (months)	Adjustable Rate Mortgage %^(B)		Three Month Average CPR^(C)		Three Month Average CRR^(D)		Three Month Average CDR^(E)		Three Month Average Recapture Rate
Agency
Original Pools	$	152,543	$	31,343,873	228,659	725	4.6	%	242	117	1.8	%	14.0	%	13.6	%	0.5	%	14.8	%
Recaptured Loans	57,090		11,967,044		72,282	726	4.3	%	276	44	0.1	%	14.5	%	14.3	%	0.3	%	33.8	%
	$	209,633	$	43,310,917	300,941	725	4.6	%	253	95	1.3	%	14.2	%	13.8	%	0.5	%	20.5	%
Non-Agency^(F)
Mr. Cooper and SLS Serviced:
Original Pools	$	146,284	$	41,091,448	231,923	672	4.7	%	279	165	9.8	%	14.8	%	11.9	%	3.3	%	9.4	%
Recaptured Loans	23,830		3,942,872		18,062	739	4.3	%	282	30	0.1	%	19.1	%	19.1	%	—	%	30.5	%
	$	170,114	$	45,034,320	249,985	677	4.7	%	279	154	8.4	%	15.1	%	12.4	%	3.1	%	11.7	%
Total/Weighted Average^(I)	$	379,747	$	88,345,237	550,926	700	4.6	%	266	126	4.5	%	14.6	%	13.0	%	1.8	%	16.1	%



	Collateral Characteristics
	Delinquency 30 Days^(G)		Delinquency 60 Days^(G)		Delinquency 90+ Days^(G)		Loans in Foreclosure		Real Estate Owned		Loans in Bankruptcy
Agency
Original Pools	2.9	%	0.8	%	0.6	%	0.5	%	0.2	%	0.1	%
Recaptured Loans	1.9	%	0.4	%	0.4	%	0.2	%	0.1	%	—	%
	2.6	%	0.7	%	0.5	%	0.4	%	0.2	%	0.1	%
Non-Agency^(F)
Mr. Cooper and SLS Serviced:
Original Pools	11.1	%	3.4	%	2.3	%	5.2	%	1.0	%	1.9	%
Recaptured Loans	1.4	%	0.2	%	0.2	%	—	%	—	%	—	%
	10.3	%	3.1	%	2.1	%	4.8	%	0.9	%	1.7	%
Total/Weighted Average^(H)	6.6	%	1.9	%	1.3	%	2.7	%	0.6	%	1.0	%


(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 7 to our Consolidated Financial Statements) on $31.4 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 December 31, 2019 of the loans underlying Excess MSR investments made through joint ventures accounted for as equity method investees (dollars in thousands). For each of these pools, we own a 50% interest in an entity that invested in a 66.7% interest in the Excess MSRs.



	Collateral Characteristics
	Current Carrying Amount		Current Principal Balance		New Residential Effective Ownership (%)		Number of Loans	WA FICO Score^(A)	WA Coupon		WA Maturity (months)	Average Loan Age (months)	Adjustable Rate Mortgage %^(B)		Three Month Average CPR^(C)		Three Month Average CRR^(D)		Three Month Average CDR^(E)		Three Month Average Recapture Rate
Agency
Original Pools	$	133,422	$	19,648,429	33.3	%	203,520	705	5.2	%	234	137	1.4	%	14.9	%	13.6	%	1.3	%	17.9	%
Recaptured Loans	93,421		13,944,125		33.3	%	99,923	710	4.3	%	270	51	0.1	%	14.0	%	13.4	%	0.8	%	40.0	%
Total/Weighted Average	$	226,843	$	33,592,554			303,443	707	4.9	%	248	102	1.4	%	14.6	%	13.5	%	1.1	%	26.7	%



	Collateral Characteristics
	Delinquency 30 Days^(F)		Delinquency 60 Days^(F)		Delinquency 90+ Days^(F)		Loans in Foreclosure		Real Estate Owned		Loans in Bankruptcy
Agency
Original Pools	4.2	%	1.1	%	0.6	%	0.7	%	0.3	%	0.2	%
Recaptured Loans	3.0	%	0.9	%	0.4	%	0.2	%	0.1	%	0.1	%
Total/Weighted Average^(G)	3.7	%	1.0	%	0.5	%	0.5	%	0.2	%	0.1	%


(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 on a monthly basis.


(B)	Adjustable Rate Mortgage % represents the percentage of the total principal balance of the pool that corresponds to adjustable rate mortgages.


(C)	Three Month Average CPR, or the constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total principal balance of the pool.


(D)	Three Month Average CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the quarter as a percentage of the total principal balance of the pool.


(E)	Three Month Average CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the quarter as a percentage of the total principal balance of the pool.


(F)	Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively.


(G)	Weighted averages exclude collateral information for which collateral data was not available as of the report date.

Servicer Advance Investments

The following is a summary of our Servicer Advance Investments, including the right to the basic fee component of the related MSRs (dollars in thousands):



	December 31, 2019
	Amortized Cost Basis		Carrying Value^(A)		UPB of Underlying Residential Mortgage Loans		Outstanding Servicer Advances		Servicer Advances to UPB of Underlying Residential Mortgage Loans
Servicer Advance Investments
Mr. Cooper and SLS serviced pools	$	557,444	$	581,777	$	31,442,267	$	462,843	1.5	%


(A)	Carrying value represents the fair value of the Servicer Advance Investments, including the basic fee component of the related MSRs.

The following is additional information regarding our Servicer Advance Investments, and related financing, as of and for the year ended, December 31, 2019 (dollars in thousands):



				Year Ended December 31, 2019				Loan-to-Value (“LTV”)^(A)				Cost of Funds^(B)
	Weighted Average Discount Rate		Weighted Average Life (Years)^(C)	Change in Fair Value Recorded in Other Income		Face Amount of Notes and Bonds Payable		Gross		Net^(D)		Gross		Net
Servicer Advance Investments^(E)	5.3	%	6.3	$	10,288	$	443,248	88.3	%	87.2	%	3.4	%	2.8	%


(A)	Based on outstanding servicer advances, excluding purchased but unsettled servicer advances.


(B)	Annualized measure of the cost associated with borrowings. Gross Cost of Funds primarily includes interest expense and facility fees. Net Cost of Funds excludes facility fees.


(C)	Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment.


(D)	Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve.


(E)	The following types of advances are included in Servicer Advance Investments:



	December 31, 2019
Principal and interest advances	$	71,574
Escrow advances (taxes and insurance advances)	180,047
Foreclosure advances	211,222
Total	$	462,843

The Buyer

We, through a wholly owned subsidiary, are the managing member of the Buyer. As of December 31, 2019, we owned an approximately 73.2% interest in the Buyer.

In the event that any member of the Buyer does not fund its capital contribution, each other member has the right, but not the obligation, to make pro rata capital contributions in excess of its stated commitment, provided that any member’s decision not to fund any such capital contribution will result in a reduction of its membership percentage.

Servicing Fee

Mr. Cooper and SLS remain the named servicers under the applicable servicing agreements and will continue to perform all servicing duties for the related residential mortgage loans. The Buyer, or the related New Residential subsidiary, as applicable, has the right, but not the obligation, to become the named servicer with respect to its investments, subject to obtaining consents and ratings agency approvals required for a formal change of the named servicer. In exchange for their services, we pay Mr. Cooper and SLS a monthly servicing fee representing a portion of the amounts from the purchased basic fee.

The Mr. Cooper Servicing Fee is equal to a fixed percentage of the amounts from the purchased basic fee. This percentage was equal to approximately 9.2%, which is equal to (i) 2 bps divided by (ii) the basic fee, which is 21.7 bps, on a weighted average basis as of December 31, 2019. The SLS servicing fee is equal to 10.75 bps, based on the servicing fee collections of the underlying loans.

Targeted Return/Incentive Fee

The Buyer Targeted Return and the Mr. Cooper Performance Fee, with respect to Mr. Cooper, are designed to achieve three objectives: (i) provide a reasonable risk-adjusted return to the Buyer based on the expected amount and timing of estimated cash flows from the purchased basic fee and advances, with both upside and downside based on the performance of the investment, (ii) provide Mr. Cooper with a sufficient fee to compensate it for acting as servicer, and (iii) provide Mr. Cooper with an incentive to effectively service the underlying loans. The Buyer Targeted Return implements these objectives by allocating payments in respect of the purchased basic fee between the Buyer and Mr. Cooper. The SLS Incentive Fee functions in the same fashion with respect to the SLS Transaction (Note 7 to our Consolidated Financial Statements).

The amount available to satisfy the Buyer Targeted Return is equal to: (i) the amounts from the purchased basic fee, minus (ii) the Mr. Cooper Servicing Fee (“Mr. Cooper Net Collections”). The Buyer will retain the amount of Mr. Cooper Net Collections

necessary to achieve the Buyer Targeted Return. Amounts in excess of the Buyer Targeted Return will be used to pay the Mr. Cooper Performance Fee.

The Buyer Targeted Return, which is payable monthly, is generally equal to (i) 14% multiplied by (ii) the Buyer’s total invested capital. Total invested capital is generally equal to the sum of the Buyer’s (i) equity in advances as of the beginning of the prior month, plus (ii) working capital (equal to a percentage of the equity as of the beginning of the prior month), plus (iii) equity and working capital contributed during the course of the prior month.

The Buyer Targeted Return is calculated after giving effect to (i) interest expense on the advance financing, (ii) other expenses and fees of the Buyer and its subsidiaries related to financing facilities, (iii) write-offs on account of any non-recoverable servicer advances, and (iv) any shortfall with respect to a prior month in the satisfaction of the Buyer Targeted Return.

The Mr. Cooper Performance Fee is calculated as follows. Pursuant to a Master Servicing Rights Purchase Agreement and related sale supplements, Mr. Cooper Net Collections is divided into two subsets: the “Retained Amount” and the “Surplus Amount.” If the amount necessary to achieve the Buyer Targeted Return is equal to or less than the Retained Amount, then 50% of the excess Retained Amount (if any) and 100% of the Surplus Amount is paid to Mr. Cooper as the Mr. Cooper Performance Fee. If the amount necessary to achieve the Buyer Targeted Return is greater than the Retained Amount but less than Mr. Cooper Net Collections, then 100% of the excess Surplus Amount is paid to Mr. Cooper as a Mr. Cooper Performance Fee. Mr. Cooper Performance Fee payments were made to Mr. Cooper in the amounts of $26.8 million, $33.9 million and $37.6 million during the years ended December 31, 2019, 2018 and 2017, respectively.

The SLS Incentive Fee is equal to up to 4.0 bps on the UPB of the underlying loans, depending on the ratio of the outstanding servicer advances to the UPB of the underlying loans.

A discussion of the sensitivity of these incentive fees to changes in LIBOR is included below under “Quantitative and Qualitative Disclosures About Market Risk.”

MSR Related Ancillary Business

Our MSR related investments segment also includes the activity from several wholly-owned subsidiaries that perform various services in the mortgage and real estate industries. Our subsidiary Guardian is a national provider of field services and property management services. We also made a strategic investment in Covius, a leading provider of technology-enabled services to the financial services industry.

Residential Securities and Loans

Real Estate Securities

Agency RMBS

The following table summarizes our Agency RMBS portfolio as of December 31, 2019 (dollars in thousands):



							Gross Unrealized
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Percentage of Total Amortized Cost Basis		Gains		Losses			Carrying Value^(A)		Count	Weighted Average Life (Years)	3-Month CPR^(B)		Outstanding Repurchase Agreements
Agency RMBS	$	11,301,603	$	11,474,338	100.0	%	$	57,221	$	(11,616	)	$	11,519,943	43	6.0	12.0	%	$	10,439,505


(A)	Fair value, which is equal to carrying value for all securities.


(B)	Three month average constant prepayment rate, represents the annualized rate of the prepayments during the quarter as a percentage of the total amortized cost basis.

The following table summarizes the net interest spread of our Agency RMBS portfolio as of December 31, 2019:



Net Interest Spread^(A)
Weighted Average Asset Yield	2.78	%
Weighted Average Funding Cost	1.99	%
Net Interest Spread	0.79	%


(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.

Non-Agency RMBS

The following table summarizes our Non-Agency RMBS portfolio as of December 31, 2019 (dollars in thousands):



					Gross Unrealized
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value^(A)		Outstanding Repurchase Agreements
Non-Agency RMBS	$	24,857,988	$	7,307,837	$	689,158	$	(39,210	)	$	7,957,785	$	7,315,588


(A)	Fair value, which is equal to carrying value for all securities.

The following tables summarize the characteristics of our Non-Agency RMBS portfolio and of the collateral underlying our Non-Agency RMBS as of December 31, 2019 (dollars in thousands):



	Non- Agency RMBS Characteristics^(A)
Vintage^(B)	Average Minimum Rating^(C)	Number of Securities	Outstanding Face Amount		Amortized Cost Basis		Percentage of Total Amortized Cost Basis		Carrying Value		Principal Subordination^(D)		Excess Spread^(E)		Weighted Average Life (Years)	Weighted Average Coupon^(F)
Pre 2006	CCC-	357	$	1,866,663	$	1,411,320	19.6	%	$	1,577,408	15.3	%	0.8	%	7.0	3.2	%
2006	CCC-	136	2,978,231		1,873,136		26.0	%	2,102,121		6.6	%	1.2	%	7.6	2.2	%
2007	CCC	80	2,137,966		1,281,107		17.8	%	1,447,031		5.4	%	1.0	%	7.2	2.4	%
2008 and later	BBB	417	17,765,097		2,631,587		36.6	%	2,727,436		14.9	%	0.1	%	6.6	3.4	%
Total/Weighted Average	B	990	$	24,747,957	$	7,197,150	100.0	%	$	7,853,996	11.0	%	0.7	%	7.0	2.8	%



	Collateral Characteristics^{(A) (G)}
Vintage^(B)	Average Loan Age (years)	Collateral Factor^(H)	3-Month CPR^(I)		Delinquency^(J)		Cumulative Losses to Date
Pre 2006	15.0	0.06	9.8	%	11.1	%	13.3	%
2006	13.6	0.11	9.0	%	10.6	%	32.8	%
2007	12.8	0.21	11.6	%	10.8	%	37.2	%
2008 and later	9.5	0.79	20.4	%	1.3	%	0.1	%
Total/Weighted Average	12.2	0.37	13.8	%	7.3	%	17.8	%


(A)	Excludes $25.0 million face amount of bonds backed by consumer loans and $85.0 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 340 bonds with a carrying value of $1,129.3 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 December 31, 2019.


(D)	The percentage of amortized cost basis of securities and residual interests that is subordinate to our investments. This excludes interest-only bonds.


(E)	The current amount of interest received on the underlying loans in excess of the interest paid on the securities, as a percentage of the outstanding collateral balance for the quarter ended December 31, 2019.


(F)	Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $41.0 million and $3.4 million, respectively, for which no coupon payment is expected.


(G)	The weighted average loan size of the underlying collateral is $214.6 thousand.


(H)	The ratio of original UPB of loans still outstanding.


(I)	Three month average constant prepayment rate and default rates.


(J)	The percentage of underlying loans that are 90+ days delinquent, or in foreclosure or considered REO.

The following table summarizes the net interest spread of our Non-Agency RMBS portfolio as of December 31, 2019:



Net Interest Spread^(A)
Weighted Average Asset Yield	4.70	%
Weighted Average Funding Cost	2.76	%
Net Interest Spread	1.94	%


(A)	The Non-Agency RMBS portfolio consists of 74.9% floating rate securities and 25.1% fixed rate securities (based on amortized cost basis).

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 $101.0 billion.

We continue to evaluate the call rights we acquired from each of our servicers, and our ability to exercise such rights and realize the benefits therefrom are subject to a number of risks. See “Risk Factors—Risks Related to Our Business—Our ability to exercise our cleanup call rights may be limited or delayed if a third party also possessing such cleanup call rights exercises such rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings.” The actual UPB of the residential mortgage loans on which we can successfully exercise call rights and realize the benefits therefrom may differ materially from our initial assumptions.

We have exercised our call rights with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO contained in such trusts prior to their termination. In certain cases, we sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, we received par on the securities issued by the called trusts which we owned prior to such trusts’ termination. Refer to Note 9 in our Consolidated Financial Statements for further details on these transactions.

The improvement in credit during the year, coupled with the decline in rates and delinquencies, benefited New Residential’s portfolio of call rights. As a result, New Residential exercised call rights on 140 securitizations in 2019 with collateral of $4.5 billion in UPB.

Residential Mortgage Loans

As of December 31, 2019, we had approximately $7.2 billion outstanding face amount of residential mortgage loans. These investments were financed with repurchase agreements with an aggregate face amount of approximately $5.1 billion and notes and bonds payable with an aggregate face amount of approximately $866.0 million. We acquired these loans through open market purchases, as well as through the exercise of call rights and acquisitions.

The following table presents the total residential mortgage loans outstanding by loan type at December 31, 2019 (dollars in thousands).



	Outstanding Face Amount		Carrying Value		Loan Count	Weighted Average Yield		Weighted Average Life (Years)^(A)	Floating Rate Loans as a % of Face Amount		LTV Ratio^(B)		Weighted Avg. Delinquency^(C)		Weighted Average FICO^(D)
Performing Loans^{(G) (J)}	$	858,703	$	859,428	13,627	6.9	%	5.3	8.8	%	76.1	%	15.8	%	646
Purchased Credit Deteriorated Loans^(H)	96,420		66,278		945	8.5	%	3.2	21.8	%	91.1	%	60.0	%	588
Total Residential Mortgage Loans, held-for-investment	$	955,123	$	925,706	14,572	7.1	%	5.1	10.1	%	77.6	%	20.2	%	641

Reverse Mortgage Loans^{(E) (F)}	$	11,628	$	5,844	28	7.9	%	4.6	5.7	%	149.9	%	69.5	%	N/A
Performing Loans^{(G) (I)}	839,141		857,821		12,808	4.5	%	4.0	62.7	%	50.1	%	7.8	%	688
Non-Performing Loans^{(H) (I)}	680,736		565,387		5,032	5.2	%	3.1	11.8	%	73.8	%	77.3	%	587
Total Residential Mortgage Loans, held-for-sale	$	1,531,505	$	1,429,052	17,868	4.9	%	3.6	39.7	%	61.4	%	39.2	%	643

Acquired Loans	$	3,132,007	$	3,024,288	19,204	4.0	%	7.0	3.3	%	62.2	%	23.1	%	626
Originated Loans	1,543,799		1,589,324		5,806	3.8	%	28.6	3.5	%	79.0	%	8.2	%	674
Total Residential Mortgage Loans, held-for-sale, at fair value^(K)	$	4,675,806	$	4,613,612	25,010	4.0	%	14.1	3.4	%	67.8	%	18.2	%	642


(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 at December 31, 2019. Approximately 45.6% 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)	Includes loans with evidence of credit deterioration since origination where it is probable that we will not collect all contractually required principal and interest payments. As of December 31, 2019, we have placed all Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (J) below.


(I)	Includes $36.0 million and $26.9 million UPB of Ginnie Mae EBO performing and non-performing loans, respectively, on accrual status as contractual cash flows are guaranteed by the FHA.


(J)	Includes $107.7 million and $345.1 million UPB of non-agency mortgage loans underlying the SAFT 2013-1 securitization and MDST Trusts, respectively, which are carried at fair value based on New Residential’s election of the fair value option.


(K)	New Residential elected the fair value option to measure these loans at fair value on a recurring basis.

We consider the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as our credit quality indicators.

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 of December 31, 2019 (dollars in thousands):



	Collateral Characteristics
	UPB		Personal Unsecured Loans %		Personal Homeowner Loans %		Number of Loans	Weighted Average Original FICO Score^(A)	Weighted Average Coupon		Adjustable Rate Loan %		Average Loan Age (months)	Average Expected Life (Years)	Delinquency 30 Days^(B)		Delinquency 60 Days^(B)		Delinquency 90+ Days^(B)		12-Month CRR^(C)		12-Month CDR^(D)
Consumer loans, held-for-investment	$	823,917	59.0	%	41.0	%	110,426	672	18.2	%	12.2	%	175	3.9	1.8	%	1.2	%	1.7	%	17.0	%	4.8	%


(A)	Weighted average original FICO score represents the FICO score at the time the loan was originated.


(B)	Delinquency 30 Days, Delinquency 60 Days and Delinquency 90+ Days represent the percentage of the total principal balance of the pool that corresponds to loans that are delinquent by 30-59 days, 60-89 days or 90 or more days, respectively.


(C)	12-Month CRR, or the voluntary prepayment rate, represents the annualized rate of the voluntary prepayments during the three months as a percentage of the total principal balance of the pool.


(D)	12-Month CDR, or the involuntary prepayment rate, represents the annualized rate of the involuntary prepayments (defaults) during the three months as a percentage of the total principal balance of the pool.

In addition, as of December 31, 2019, our investments in PF LoanCo Funding LLC (“LoanCo”) and PF WarrantCo Holdings, LP (“WarrantCo”) had been fully distributed to us. The final distribution resulted in a gain of $3.6 million on the investment.

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.

MSRs

As an approved owner of MSRs, upon acquisition, we account for our MSRs as servicing assets or servicing liabilities as we have undertaken an obligation to service financial assets. We measure our MSRs at fair value at acquisition and elect to subsequently measure at fair value at each reporting date using the fair value measurement method. Our MSRs are categorized as Level 3 under the GAAP fair value hierarchy, as described in Note 13 to our Consolidated Financial Statements. The inputs used in the valuation of MSRs include prepayment rate, delinquency rate, recapture rate, mortgage servicing amount, discount rate, and estimated market level future costs to service. These inputs are primarily based on current market data obtained from servicers and other third parties, which may be adjusted based on our expectations for the future, and requires significant judgement. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. The methods used to estimate fair value may not result in an amount that is indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. We validate significant inputs and outputs of our models by comparing them to available independent third party market parameters and models for reasonableness. We believe the assumptions we use are within the range that a market participant would use, and factor in the liquidity conditions in the markets. We review any changes to the valuation methodology to ensure the changes are appropriate.

In order to evaluate the reasonableness of our fair value determinations, we engage an independent valuation firm to separately measure the fair value of our MSRs. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range. We compare the range included in the opinion to the values generated by our internal models. To date, we have not made any significant valuation adjustments as a result of these fairness opinions.

For these reasons, the determination of the estimated fair value of MSRs may not result in an amount that is indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. In order to evaluate the reasonableness of our fair value determinations, we engage an independent valuation firm to separately measure the fair value of our MSRs, similar to our Excess MSRs.

Servicing Revenue, Net is comprised of the following components: (i) income from the MSRs, less (ii) amortization of the basis of the MSRs, plus or minus (iii) the mark-to-market on the MSRs. Amortization of the basis of the MSRs is based on the remaining UPB of the residential mortgage loans underlying the MSRs relative to their UPB at acquisition.

MSR Financing Receivables

In certain cases, New Residential has legally purchased MSRs or the right to the economic interest in MSRs, however, New Residential has determined that each purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in MSR financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New Residential has elected to measure the investment at fair value, with changes in fair value flowing through change in fair value of investments in MSR financing receivables in the Consolidated Statements of Income.

Excess MSRs

Upon acquisition, we elected to record each investment in Excess MSRs at fair value, in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.

Our Excess MSRs are categorized as Level 3 under the GAAP fair value hierarchy, as described in Note 13 to our Consolidated Financial Statements. The inputs used in the valuation of Excess MSRs include prepayment rate, delinquency rate, recapture rate, excess mortgage servicing amount and discount rate. For the same reasons as noted in “MSRs” above, the determination of estimated cash flows may not result in an amount that is indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. In order to evaluate the reasonableness of its fair value determinations, we engage an independent valuation firm to separately measure the fair value of our Excess MSR pools, similar to our MSRs.

Investments in Excess MSRs are aggregated into pools as applicable; each pool of Excess MSRs is accounted for in the aggregate. Interest income for Excess MSRs is accreted using an effective yield or “interest” method, based upon the expected income from the Excess MSRs through the expected life of the underlying mortgages. The inputs used in estimating cash flows are generally the same as those used in estimating fair value, and are subject to the same judgments and uncertainties. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded in the period in which the change in expected cash flows occurs. Under the retrospective method, the interest income recognized for a reporting period would be measured as the difference between the amortized cost basis at the end of the period and the amortized cost basis at the beginning of the period, plus any cash received during the period. The amortized cost basis is calculated as the present value of estimated future cash flows using an effective yield, which is the yield that equates all past actual and current estimated future cash flows to the initial investment. In addition, our policy is to recognize interest income only on Excess MSRs in existing eligible underlying mortgages.

Under the fair value election, the difference between the fair value of Excess MSRs and their amortized cost basis is recorded as “Change in fair value of investments in excess mortgage servicing rights,” as applicable. Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the Excess MSRs, and therefore may differ from their effective yields.

Servicer Advance Investments

We account for Servicer Advance Investments, which include the basic fee component of the related MSR, as financial instruments, in instances where neither of our subsidiaries, NRM or NewRez, is the named servicer.

We have elected to account for the Servicer Advance Investments at fair value. Accordingly, we estimate the fair value of the Servicer Advance Investments at each reporting date and reflect changes in the fair value of the Servicer Advance Investments as gains or losses.

We recognize interest income from our Servicer Advance Investments using the interest method, with adjustments to the yield applied based upon changes in actual or expected cash flows under the retrospective method. The servicer advances are not interest-bearing, but we accrete the effective rate of interest applied to the aggregate cash flows from the servicer advances and the basic fee component of the related MSR.

We categorize Servicer Advance Investments under Level 3 of the GAAP hierarchy because we use internal pricing models to estimate the future cash flows related to the Servicer Advance Investments that incorporate significant unobservable inputs and include assumptions that are inherently subjective and imprecise. In order to evaluate the reasonableness of our fair value determinations, we engage an independent valuation firm to separately measure the fair value of our Servicer Advance Investments. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range.

Our estimations of future cash flows include the combined cash flows of all of the components that comprise the Servicer Advance Investments: existing advances, the requirement to purchase future advances and the right to the basic fee component of the related MSR. The factors that most significantly impact the fair value include (i) the rate at which the servicer advance balance declines, which we estimate is approximately $40.2 million per year on average over the weighted average life of the investment held as of December 31, 2019, (ii) the duration of outstanding servicer advances, which we estimate is approximately nine months on average for an advance balance at a given point in time (not taking into account new advances made with respect to the pool), and (iii) the UPB of the underlying loans with respect to which we have the obligation to make advances and own the basic fee component.

As described above, we recognize income from Servicer Advance Investments in the form of (i) interest income, which we reflect as a component of net interest income and (ii) changes in the fair value of the Servicer Advance Investments, which we reflect as a component of other income.

We remit to our servicers a portion of the basic fee component of the MSR related to our Servicer Advance Investments as compensation for acting as servicer, as described in more detail under “—Our Portfolio—Servicing Related Assets—Servicer Advances.” Our interest income is recorded net of the servicing fees owed to our servicers.

Real Estate Securities (RMBS)

Our Non-Agency RMBS and Agency RMBS are classified as available-for-sale. As such, they are carried at fair value, with net unrealized gains or losses reported as a component of accumulated other comprehensive income, to the extent impairment losses are considered temporary, as described below.

We expect that any Agency RMBS we acquire will be categorized under Level 2 or and any Non-Agency we acquire will be categorized as Level 3 of the GAAP hierarchy. Fair value may be based upon broker quotations, counterparty quotations, pricing service quotations or internal pricing models. The significant inputs used in the valuation of our securities include the discount rate, prepayment rates, default rates and loss severities, as well as other variables.

The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. The methods used to estimate fair value may not be indicative of net realizable value or reflective of future fair values. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in fair value. We validate significant inputs and outputs of our models by comparing them to available independent third party market parameters and models for reasonableness. We believe the assumptions we use are within the range that a market participant would use, and factor in the liquidity conditions in the markets. We review any changes to the valuation methodology to ensure the changes are appropriate.

We must also assess whether unrealized losses on securities, if any, reflect a decline in value that is other-than-temporary and, if so, record an other-than-temporary impairment through earnings. A decline in value is deemed to be other-than-temporary if (i) it is probable that we will be unable to collect all amounts due according to the contractual terms of a security that was not impaired at acquisition (there is an expected credit loss), or (ii) if we have the intent to sell a security in an unrealized loss position or it is more likely than not that we will be required to sell a security in an unrealized loss position prior to its anticipated recovery (if any). For the purposes of performing this analysis, we will assume the anticipated recovery period is until the expected maturity of the applicable security. Also, for securities that represent beneficial interests in securitized financial assets within the scope of ASC No. 325-40, whenever there is a probable adverse change in the timing or amounts of estimated cash flows of a security from the cash flows previously projected, an other-than-temporary impairment will be deemed to have occurred. Our Non-Agency RMBS acquired with evidence of deteriorated credit quality for which it was probable, at acquisition, that we would be unable to collect all contractually required payments receivable, fall within the scope of ASC No. 310-30, as opposed to ASC No. 325-40. All of our other Non-Agency RMBS, those not acquired with evidence of deteriorated credit quality, fall within the scope of ASC No. 325-40.

Income on these securities is recognized using a level yield methodology based upon a number of cash flow assumptions that are subject to uncertainties and contingencies. Such assumptions include the rate and timing of principal and interest receipts (which may be subject to prepayments and defaults). These assumptions are updated on at least a quarterly basis to reflect changes related to a particular security, actual historical data, and market changes. These uncertainties and contingencies are difficult to predict and are subject to future events, and economic and market conditions, which may alter the assumptions. For securities acquired at a discount for credit losses, we recognize the excess of all cash flows expected over our investment in the securities as Interest Income on a “loss adjusted yield” basis. The loss-adjusted yield is determined based on an evaluation of the credit status of securities, as described in connection with the analysis of impairment above.

Impairment of Performing Loans

To the extent that they are classified as held-for-investment, we must periodically evaluate each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the loan, or for loans acquired at a discount for credit losses, when it is deemed probable that we will be unable to collect as anticipated. Upon determination of impairment, we would establish a specific valuation allowance with a corresponding charge to earnings. We continually evaluate our loans receivable for impairment.

Our residential mortgage loans are aggregated into pools for evaluation based on like characteristics, such as loan type and acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of borrowers, loan to value ratios, the estimated value of the underlying collateral, the key terms of the loans and historical and anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining impairment and in estimating the resulting loss allowance. Furthermore, we must assess our intent and ability to hold our loan investments on a periodic basis. If we do not have the intent to hold a loan for the foreseeable future or until its expected payoff, the loan must be classified as “held-for-sale” and recorded at the lower of cost or estimated value.

A loan is determined to be past due when a monthly payment is due and unpaid for 30 days or more. Loans, other than PCD loans (described below), are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of collection. A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan.

Loans, other than PCD loans, are generally charged off or charged down to the net realizable value of the underlying collateral (i.e., fair value less costs to sell), with an offset to the allowance for loan losses, when available information indicates that loans are uncollectible.

Determinations of whether a loan is collectible are inherently uncertain and subject to significant judgment.

Purchased Credit Deteriorated (“PCD”) Loans

We evaluate the credit quality of our loans, as of the acquisition date, for evidence of credit quality deterioration. Loans with evidence of credit deterioration since their origination and where it is probable that we will not collect all contractually required principal and interest payments are PCD loans. Recognition of income and accrual status on PCD loans is dependent on having a reasonable expectation about the timing and amount of cash flows to be collected. At acquisition, we aggregate PCD loans into pools based on common risk characteristics and loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows.

The excess of the total cash flows (both principal and interest) expected to be collected over the carrying value of the PCD loans is referred to as the accretable yield. This amount is not reported on our Consolidated Balance Sheets but is accreted into interest income at a level rate of return over the remaining estimated life of the pool of loans.

On a quarterly basis, we estimate the total cash flows expected to be collected over the remaining life of each pool. Probable decreases in expected cash flows trigger the recognition of impairment. Impairments are recognized through the valuation provision for loans and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield adjustment over the remaining estimated lives of the underlying loans.

The excess of the total contractual cash flows over the cash flows expected to be collected is referred to as the nonaccretable difference. This amount is not reported on our Consolidated Balance Sheets and represents an estimate of the amount of principal and interest that will not be collected.

The estimation of future cash flows for PCD loans is subject to significant judgment and uncertainty. Actual cash flows could be materially different than our estimates.

The liquidation of PCD loans, which may include sales of loans, receipt of payment in full by the borrower, or foreclosure, results in removal of the loans from the underlying PCD pool. When the amount of the liquidation proceeds (e.g., cash, real estate), if any, is less than the unpaid principal balance of the loan, the difference is first applied against the PCD pool’s nonaccretable difference. When the nonaccretable difference for a particular loan pool has been fully depleted, any excess of the unpaid principal balance of the loan over the liquidation proceeds is written off against the PCD pool’s allowance for loan losses.

Residential Mortgage Loans, Held-For-Sale, at Fair Value

Residential mortgage loans, held-for-sale, at fair value are originated or acquired loans for which we have elected to account for at fair value. Accordingly, we estimate the fair value of the residential mortgage loans, held-for-sale, at fair value at each reporting date and reflect the change in the fair value as gains or losses.

Interest earned on residential mortgage loans measured at fair value are reported in other income.

Real Estate Owned (REO)

REO assets are those individual properties where the lender receives the property in satisfaction of a debt (e.g., by taking legal title or physical possession). We recognize REO assets at the completion of the foreclosure process or upon execution of a deed in lieu of foreclosure with the borrower. We measure REO assets at the lower of cost or fair value, with valuation changes recorded in other income. REO is illiquid in nature and its valuation is subject to significant uncertainty and judgment and is greatly impacted by local market conditions.

Consumer Loans

Prior to our acquisition of an additional interest, we accounted for our investment in the Consumer Loan Companies pursuant to the equity method of accounting because we could exercise significant influence over the Consumer Loan Companies, but the requirements for consolidation were not met. Our share of earnings and losses in these equity method investees was recorded in “Earnings from investments in consumer loans, equity method investees” on the Consolidated Statements of Income. Equity method investments are included in “Investments in consumer loans, equity method investees” on the Consolidated Balance Sheets.

Subsequent to our acquisition of an additional interest, we consolidate the Consumer Loan Companies. The Consumer Loan Companies classify their investments in consumer loans as held-for-investment, as they have the intent and ability to hold for the foreseeable future, or until maturity or payoff. The Consumer Loan Companies record the consumer loans at cost net of any unamortized discount or loss allowance. The Consumer Loan Companies determined at acquisition that these loans would be aggregated into pools based on common risk characteristics (credit quality, loan type, and date of origination or acquisition); the loans aggregated into pools are accounted for as if each pool were a single loan.

We account for our investments in LoanCo and WarrantCo (Note 10 to our Consolidated Financial Statements) pursuant to the equity method of accounting because we can exercise significant influence over LoanCo and WarrantCo, but the requirements for consolidation are not met. Our share of earnings and losses in these equity method investees is included in “Earnings from investments in consumer loans, equity method investees” on the Consolidated Statements of Income. Equity method investments are included in “Investments in consumer loans, equity method investees” on the consolidated balance sheets. LoanCo has elected to measure its investment in consumer loans at fair value and WarrantCo has elected to measure its investments in warrants at fair value. As of December 31, 2019, our investments in LoanCo and WarrantCo had been fully distributed to us. The final distribution resulted in a gain of $3.6 million in the investment.

Investment Consolidation

The analysis as to whether to consolidate an entity is subject to a significant amount of judgment. Some of the criteria considered are the determination as to the degree of control over an entity by its various equity holders, the design of the entity, how closely related the entity is to each of its equity holders, the relation of the equity holders to each other and a determination of the primary beneficiary in entities in which we have a variable interest. These analyses involve estimates, based on our assumptions, as well as judgments regarding significance and the design of entities.

Variable interest entities (“VIEs”) are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated by its primary beneficiary, and only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

Our investments and certain other interests in Non-Agency RMBS are variable interests. We monitor these investments and analyze the potential need to consolidate the related securitization entities pursuant to the VIE consolidation requirements.

These analyses require considerable judgment in determining whether an entity is a VIE and determining the primary beneficiary of a VIE since they involve subjective determinations of significance, with respect to both power and economics. The result could be the consolidation of an entity that otherwise would not have been consolidated or the de-consolidation of an entity that otherwise would have been consolidated.

We have not consolidated the securitization entities that issued our Non-Agency RMBS. This determination is based, in part, on our assessment that we do not have the power to direct the activities that most significantly impact the economic performance of these entities, such as if we owned a majority of the currently controlling class. In addition, we are not obligated to provide, and have not provided, any financial support to these entities.

We have not consolidated the entities in which we hold a 50% interest that made an investment in Excess MSRs. We have determined that the decisions that most significantly impact the economic performance of these entities will be made collectively by us and the other investor in the entities. In addition, these entities have sufficient equity to permit the entities to finance their activities without additional subordinated financial support. Based on our analysis, these entities do not meet any of the VIE criteria.

We have invested in Mr. Cooper serviced Servicer Advance Investments, including the basic fee component of the related MSRs, through the Buyer, of which we are the managing member. The Buyer was formed through cash contributions by us and third-parties in exchange for membership interests. As of December 31, 2019, we owned an approximately 73.2% interest in the Buyer, and the third-party investors owned the remaining membership interests. Through our managing member interest, we direct substantially all of the day-to-day activities of the Buyer. The third-party investors do not possess substantive participating rights or the power to direct the day-to-day activities that most directly affect the operations of the Buyer. In addition, no single third-party investor, or group of third-party investors, possesses the substantive ability to remove us as the managing member of the Buyer. We have determined that the Buyer is a voting interest entity. As a result of our managing member interest, which represents a controlling financial interest, we consolidate the Buyer and its wholly owned subsidiaries and reflect membership interests in the Buyer held by third parties as noncontrolling interests.

In July 2018, as a result of our acquisition of Shellpoint Partners LLC (“Shellpoint”), we consolidate Shellpoint Asset Funding Trust 2013-1 (“SAFT 2013-1”) and the Shelter retail mortgage origination joint ventures (“Shelter JVs”).

A wholly owned subsidiary of Shellpoint, NewRez, was deemed to be the primary beneficiary of the SAFT 2013-1 securitization entity as a result of its ability to direct activities that most significantly impact the economic performance of the entity in its role as servicer and its ownership of subordinate retained interests.

A wholly owned subsidiary of Shellpoint, Shelter Mortgage Company LLC (“Shelter”) is a mortgage originator specializing in retail origination. Shelter operates its business through a series of joint ventures and was deemed to be the primary beneficiary of the joint ventures as a result of its ability to direct activities that most significantly impact the economic performance of the entities and its ownership of a significant equity investment.

In October 2019, as a result of our acquisition of servicing assets from Ditech and our pre existing ownership of the equity, we consolidate Mid-State Capital Corporation 2004-1 Trust (“MDST 2004-1”), Mid-State Trust VII ( “MDST VII”), Mid-State Trust VIII (“MDST VIII”) and Mid-State Capital Trust 2010-1 (“MDST 2010-1”) and collectively (“MDST Trusts”). Our determination to consolidate the MDST Trust is a result of our ownership of the equity in these trusts in conjunction with the ability to direct activities that most significantly impact the economic performance of the entities with the acquisition of the servicing by NewRez.

Income Taxes

We intend to operate in a manner that allows us to qualify for taxation as a REIT. As a result of our expected REIT qualification, we do not generally expect to pay U.S. federal or state and local corporate level taxes on income earned outside of our Taxable REIT Subsidiaries (“TRSs”). Many of the REIT requirements, however, are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject to U.S. federal, state and local income and franchise taxes, and we would face a variety of adverse consequences. See “Risk Factors—Risks Related to Our Taxation as a REIT.” We have made certain investments, particularly our investments in MSRs, REO and Servicer Advance Investments, through TRSs and are subject to regular corporate income taxes on these investments.

Recent Accounting Pronouncements

See Note 2 to our Consolidated Financial Statements.

Accounting Impact of Valuation Changes

New Residential’s assets fall into three general categories as disclosed in the table below. These categories are:


1)	Marked to Market Assets (“MTM Assets”): Assets that are marked to market through the statement of income. Changes in the value of these assets (a) are recorded on the statement of income, as unrealized gains or losses that impact net income, and (b) impact our Total New Residential Stockholders’ Equity (net book value).

Other Comprehensive Income Assets (“OCI Assets”): Assets that are marked to market through the statement of comprehensive income. Changes in the value of these assets (a) are recorded on the statement of comprehensive income, as unrealized gains or losses, and therefore do not impact net income on the statement of income, and (b) impact our Total New Residential Stockholders’ Equity (net book value).


3)	Cost Assets: Assets that are not marked to market. Changes in value of these assets do not impact net income on the statement of income nor do they impact our Total New Residential Stockholders’ Equity (net book value).

An exception to these descriptions results from changes in value that represent impairment. Any such change (a) is recorded on the statement of income, as impairment that impacts net income, and (b) impacts our Total New Residential Stockholders’ Equity (net book value). In the case of residential mortgage loans, held-for-sale, at lower of cost or fair value, any reductions in value are considered impairment. Impairment on loans and REO is subject to reversal if values subsequently increase; impairment on securities is not subject to reversal.

All of New Residential’s liabilities, with the exception of derivatives and contingent consideration liabilities (which are marked to market through the statement of income), are recorded at their amortized cost basis.



MTM Assets	OCI Assets	Cost Assets
Excess MSRs	Real estate and other securities, available-for-sale	Residential mortgage loans, held-for-investment
Excess MSRs, equity method investees		Residential mortgage loans, held-for-sale, at lower of cost or fair value
MSRs		Real estate owned (REO)
MSR Financing Receivables		Consumer loans, held-for-investment
Servicer Advance Investments		Consumer loans, equity method investees
Certain assets within Other Assets, primarily derivatives and equity investments		Servicer advances receivable
Residential mortgage loans, held-for-sale at fair value		Trades receivable
Certain loans within Residential mortgage loans, held-for-investments		Deferred tax asset, net
Certain debt within Notes and bonds payable		Other assets, except as described above

RESULTS OF OPERATIONS

The following tables summarize the changes in our results of operations from year-to-year (dollars in thousands). Our results of operations are not necessarily indicative of our future performance.

Comparison of Results of Operations for the years ended December 31, 2019 and 2018



	Year Ended December 31,						Increase (Decrease)
	2019			2018			Amount			%
Interest income	$	1,766,130		$	1,664,223		$	101,907		6.1	%
Interest expense	933,751			606,433			327,318			54.0	%
Net Interest Income	832,379			1,057,790			(225,411		)	(21.3	)%
Impairment
Other-than-temporary impairment (OTTI) on securities	25,174			30,017			(4,843		)	(16.1	)%
Valuation and loss provision (reversal) on loans and real estate owned (REO)	10,403			60,624			(50,221		)	(82.8	)%
	35,577			90,641			(55,064		)	(60.7	)%
Net interest income after impairment	796,802			967,149			(170,347		)	(17.6	)%
Servicing revenue, net of change in fair value of $(712,950) and $(191,245), respectively	385,159			528,595			(143,436		)	(27.1	)%
Gain on originated mortgage loans, held-for-sale, net	475,455			96,145			379,310			394.5	%
Other Income
Change in fair value of investments in excess mortgage servicing rights	(10,505		)	(58,656		)	48,151			(82.1	)%
Change in fair value of investments in excess mortgage servicing rights, equity method investees	6,800			8,357			(1,557		)	(18.6	)%
Change in fair value of investments in mortgage servicing rights financing receivables	(189,023		)	31,550			(220,573		)	(699.1	)%
Change in fair value of servicer advance investments	10,288			(89,332		)	99,620			(111.5	)%
Change in fair value of investments in residential mortgage loans	(70,914		)	69,820			(140,734		)	(201.6	)%
Change in fair value of derivative instruments	(56,143		)	(108,234		)	52,091			(48.1	)%
Gain (loss) on settlement of investments, net	225,687			95,085			130,602			137.4	%
Earnings from investments in consumer loans, equity method investees	(1,438		)	10,803			(12,241		)	(113.3	)%
Other income (loss), net	44,149			(10,778		)	54,927			(509.6	)%
	(41,099		)	(51,385		)	10,286			(20.0	)%
Operating Expenses
General and administrative expenses	538,035			231,579			306,456			132.3	%
Management fee to affiliate	79,472			62,594			16,878			27.0	%
Incentive compensation to affiliate	91,892			94,900			(3,008		)	(3.2	)%
Loan servicing expense	31,737			43,547			(11,810		)	(27.1	)%
Subservicing expense	227,482			176,784			50,698			28.7	%
	968,618			609,404			359,214			58.9	%
Income Before Income Taxes	647,699			931,100			(283,401		)	(30.4	)%
Income tax (benefit) expense	41,766			(73,431		)	115,197			(156.9	)%
Net Income	$	605,933		$	1,004,531		$	(398,598	)	(39.7	)%
Noncontrolling Interests in Income of Consolidated Subsidiaries	$	42,637		$	40,564		$	2,073		5.1	%
Dividends on Preferred Stock	$	13,281		$	—		$	13,281		100.0	%
Net Income Attributable to Common Stockholders	$	550,015		$	963,967		$	(400,671	)	(41.6	)%

Interest Income

Interest income increased by $101.9 million primarily attributable to incremental interest income of (i) $170.6 million from an increase in the size of the Real Estate Securities portfolio and accelerated accretion on Real Estate Securities owned in Non-Agency RMBS trusts that were terminated upon the execution of calls, (ii) $90.8 million from the Residential Mortgage Loans portfolio due to the acquisition of loans through purchases, originations, and the execution of calls, (iii) $29.7 million and $25.9 million from growth in the origination and servicing businesses, respectively. The increase was partially offset by (iv) a $138.0 million decrease from MSR Financing Receivable attributable to the drop in discount accretion income recognized on servicer advances related to the Ocwen Transaction subsequent to December 31, 2018, (v) a $40.4 million decrease from Consumer Loans attributable to lower unpaid principal balance, and (vi) a $35.2 million decrease from Servicer Advance Investments and Excess Mortgage Servicing Rights driven by retrospective adjustments resulting from changes in valuation assumptions during the year ended December 31, 2019.

Interest Expense

Interest expense increased by $327.3 million primarily attributable to increases of (i) $213.0 million of interest expense on repurchase agreements financings on Real Estate Securities in which we made additional levered investments subsequent to December 31, 2018, (ii) $77.4 million on Residential Mortgage Loans due to an increase in the underlying principal balance of the portfolio levered with repurchase agreements, (iii) $31.9 million and $0.8 million from additional financing obtained driven by growth in the origination and servicing businesses, respectively, and (iv) $14.2 million of interest expense on MSRs, Excess MSRs, and related servicer advances financing obtained subsequent to December 31, 2018. The increases were partially offset by (v) a $10.0 million decrease in interest expense on the Consumer Loan securitization notes due to a decrease in the principal balance outstanding and refinancing.

Other than Temporary Impairment (OTTI) on Securities

The other-than-temporary impairment on securities decreased by $4.8 million primarily resulting from a decline in fair values on a smaller portion of our Non-Agency RMBS, which we purchased with existing credit impairment, below their amortized cost basis as of December 31, 2019.

Valuation and Loss Provision (Reversal) on Loans and Real Estate Owned

The $50.2 million decrease in the valuation and loss provision (reversal) on loans and real estate owned resulted from, (i) $17.6 million less provision due to a reduction in net charge-offs on the Consumer Loan Companies attributable to lower unpaid principal balance, (ii) $30.8 million reversal of impairment on certain loans related to changes in interest rates and improved performance, and (iii) $4.1 million less impairment on certain REOs with an increase in home prices during the year ended December 31, 2019. The decrease was partially offset by (iv) $2.3 million less in reversals of reserves related to certain Ginnie Mae EBO servicer advance receivables, during the year ended December 31, 2019.

Servicing Revenue, Net

The component of servicing revenue, net related to changes in valuation inputs and assumptions related to the following:



	Year Ended December 31,						Increase (Decrease)
	2019			2018			Amount
Changes in interest rates and prepayment rates	$	(433,098	)	$	31,298		$	(464,396	)
Changes in discount rates	127,314			43,887			83,427
Changes in other factors	119,580			(6,598		)	126,178
Total	$	(186,204	)	$	68,587		$	(254,791	)

Servicing revenue, net decreased $143.4 million during the year ended December 31, 2019 compared to the year ended December 31, 2018. Specifically, (i) a $273.1 million increase in amortization as a result of higher prepayment speeds during the year ended December 31, 2019 and MSR acquisitions by our licensed servicer subsidiary, NRM, subsequent to December 31, 2018 (Note 6 to our Consolidated Financial Statements), and (ii) a $254.8 million change from positive mark-to-market during the year ended December 31, 2018 to negative mark-to-market during the year ended December 31, 2019, primarily driven by an increase in prepayment rates, partially offset by a decrease in discount rates and costs of subservicing, and an increase in ancillary income. The decrease was partially offset by (iii) a $378.3 million increase in servicing fee revenue and fees as a result of MSR

acquisitions and the Shellpoint Acquisition that closed in July 2018, and (iv) realization of $3.3 million loss on sales through Gain (loss) on settlement of investments, net during the year ended December 31, 2019 compared to $2.9 million gain on sales during the year ended December 31, 2018.

Gain on Originated Mortgage Loans, Held-for-Sale, Net

As a result of the Shellpoint Acquisition in July 2018, our wholly owned subsidiary, NewRez, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The GSEs or Ginnie Mae guarantee conventional and government-insured mortgage securitizations and private investors issue nonconforming private label mortgage securitizations while NewRez generally retains the right to service the underlying residential mortgage loans.

Gain on originated mortgage loans, held-for-sale, net increased $379.3 million during the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily driven by (i) $339.1 million higher value of MSRs retained on transfer of loans, (ii) a $28.9 million increase in appraisal and other revenues earned in conjunction with the loan origination process, (iii) a $26.1 million positive change in fair value of interest rate lock commitments, (iv) a $25.1 million positive change in fair value of loans, (v) an $8.3 million net positive change in fair value of derivative instruments primarily related to TBAs, and (vi) a $6.4 million increase in gain on loans originated and sold. The increase was partially offset by (vii) a $54.6 million change from gain on settlement to loss on settlement of mortgage loan origination derivative instruments.

Change in Fair Value of Investments in Excess Mortgage Servicing Rights

Changes in the fair value of investments in Excess MSRs related to the following:



	Year Ended December 31,						Increase (Decrease)
	2019			2018			Amount
Changes in interest rates and prepayment rates	$	(18,279	)	$	(20,350	)	$	2,071
Changes in discount rates	13,446			—			13,446
Changes in other factors	(5,672		)	(38,306		)	32,634
Total	$	(10,505	)	$	(58,656	)	$	48,151

The negative mark-to-market fair value adjustments during the year ended December 31, 2019 were mainly driven by changes in interest rates and prepayment rates and changes in other factors, partially offset by a decrease in discount rates. The change between the mark-to-market adjustments during the year ended December 31, 2019 compared to the year ended December 31, 2018 were primarily due to the realization of unrealized gains related to the Ocwen Transaction in 2018, which were reflected in Gain (loss) on settlement of investments, net.

Change in Fair Value of Investments in Excess Mortgage Servicing Rights, Equity Method Investees

Changes in the fair value of investments in Excess MSRs, equity method investees related to the following:



	Year Ended December 31,						Increase (Decrease)
	2019			2018			Amount
Changes in interest rates and prepayment rates	$	(7,659	)	$	(7,183	)	$	(476	)
Changes in discount rates	3,939			—			3,939
Changes in other factors	10,520			15,540			(5,020		)
Total	$	6,800		$	8,357		$	(1,557	)

The positive mark-to-market adjustments during the year ended December 31, 2019 were mainly driven by interest income net of expenses recorded at the investee level, a decrease in discount rates and changes in other factors, partially offset by changes in interest rates and prepayment rates. Compared to the year ended December 31, 2018 where the positive mark-to-market adjustments were mainly driven by interest income net of expenses recorded at the investee level and other market factors, partially offset by changes in interest rates and prepayment rates.

Change in Fair Value of Investments in MSR Financing Receivables

The component of changes in the fair value of investments in mortgage servicing rights financing receivables related to changes in valuation inputs and assumptions related to the following:



	Year Ended December 31,						Increase (Decrease)
	2019			2018			Amount
Changes in interest rates and prepayment rates	$	(112,269	)	$	(22,164	)	$	(90,105	)
Changes in discount rates	99,674			212,273			(112,599		)
Changes in other factors	33,689			39,927			(6,238		)
Total	$	21,094		$	230,036		$	(208,942	)

The change in fair value of investments in mortgage servicing rights financing receivables decreased $220.6 million during the year ended December 31, 2019 compared to the year ended December 31, 2018. $208.9 million of the decrease was related to changes in valuation inputs and assumptions, primarily due to less decrease in discount rates and an increase in prepayment rates, partially offset by a decrease in costs of subservicing and an increase in ancillary income. Additionally, amortization expense increased $6.0 million, attributable to higher prepayments partially offset by lower unpaid principal balance.

Change in Fair Value of Servicer Advance Investments

Changes in the fair value of Servicer Advance Investments related to the following:



	Year Ended December 31,						Increase (Decrease)
	2019			2018			Amount
Changes in interest rates and prepayment rates	$	628		$	1,629		$	(1,001	)
Changes in discount rates	17,786			(12,829		)	30,615
Changes in other factors	(8,126		)	(78,132		)	70,006
Total	$	10,288		$	(89,332	)	$	99,620

The positive mark-to-market adjustments during the year ended December 31, 2019 were mainly driven by a decrease in discount rates, whereas the negative mark-to-market adjustments during the year ended December 31, 2018 were mainly driven by both an increase in discount rates and the realization of unrealized gains related to the Ocwen Transaction in 2018, which were reflected in Gain (loss) on settlement of investments, net.

Change in Fair Value of Investments in Residential Mortgage Loans

Change in fair value of investments in Residential Mortgage Loans decreased $140.7 million during the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily related to (i) $156.2 million realization of unrealized gains related to securitization (Note 9 to our Consolidated Financial Statements), which were reflected in Gain (loss) on settlement of investments, net. This was partially offset by (ii) a $15.5 million increase related to changes in valuation inputs and assumptions.

Change in Fair Value of Derivative Instruments

Change in fair value of derivative instruments increased $52.1 million during the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily related to (i) a $49.2 million decrease in unrealized loss on Interest Rate Swaps and (ii) a $3.3 million change from unrealized loss to unrealized gain on TBAs. The increase was partially offset by (iii) a $0.4 million change from unrealized gain to unrealized loss on Interest Rate Caps.

Gain (Loss) on Settlement of Investments, Net

Gain (loss) on settlement of investments increased by $130.6 million, primarily related to (i) a $235.9 million change from loss on sale of real estate securities to gain on sale of real estate securities, (ii) a $160.9 million change in loss on sale of residential mortgage loans to gain on sale of residential mortgage loans, (iii) a $38.3 million change in loss on collapses to gain on collapses due primarily to market interest rates and decreased delinquencies, and (iv) a $0.9 million decrease in loss on sale of REO. The

increase was partially offset by (v) a $184.8 million change from gain on settlement of derivatives to loss on settlement of derivatives related to TBAs and interest rate swaps, (vi) a $113.0 million decrease in gains on settlement of investments in excess MSRs and Servicer Advance Investments as a result of the Ocwen Transaction in 2018 (Note 6 to our Consolidated Financial Statements), (vii) a $7.9 million increase in loss on extinguishment of debt related to debt restructuring, and (viii) a $1.1 million increase in loss on liquidated residential mortgage loans related to debt restructuring, during the year ended December 31, 2019 compared to the year ended December 31, 2018.

Earnings from Investments in Consumer Loans, Equity Method Investees

Earnings from investments in Consumer Loans, Equity Method Investees decreased by $12.2 million as a result of a decrease in net earnings generated by our approximately 25% member interest in LoanCo and WarrantCo (Note 10 to our Consolidated Financial Statements) during the year ended December 31, 2019 compared to the year ended December 31, 2018.

Other Income (Loss), Net

Other income (loss), net increased by $54.9 million, primarily attributable to (i) a $49.5 million bargain purchase gain as a result of the Ditech Acquisition in October 2019 (Note 3 to our Consolidated Financial Statements), (ii) $21.2 million rental and ancillary revenue resulting from the acquisitions and operations of Guardian (Note 3 to our Consolidated Financial Statements) and single-family rental properties, and (iii) an $11.0 million change from loss on Ocwen common stock to gain on Ocwen common stock, during the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was partially offset by (iv) an $8.9 million increase in unrealized loss on contingent consideration primarily related to the Shellpoint Acquisition (Note 3 to our Consolidated Financial Statements), (v) an $8.2 million decrease in unrealized gain on other ABS, and (vi) a $7.7 million decrease in gain on transfer of loans to REO, during the year ended December 31, 2019 compared to the year ended December 31, 2018.

General and Administrative Expenses

General and administrative expenses increased by $306.5 million primarily attributable the Shellpoint and Ditech Acquisitions (Note 3 to our Consolidated Financial Statements). Specifically, there was (i) a $175.6 million increase in compensation and benefits expense as a result of the Shellpoint Acquisition in July 2018 and Ditech Acquisition in October 2019, resulting in an increase in the number of employees, (ii) a $43.4 million increase in loan origination expense, (iii) $22.9 million of deal expenses related to transition, integration, relocation and training costs incurred as part of the Ditech Acquisition, (iv) a $21.4 million increase in securitization fees, and deal and other consulting expenses due to increased securitization, deal, and refinancing activity, (v) a $10.5 million increase in occupancy expense, (vi) an $8.1 million increase in property maintenance and inspection expense resulting from the acquisitions and operations of Guardian (Note 3 to our Consolidated Financial Statements), (vii) a $7.0 million increase in technology and software enhancements, (viii) a $4.5 million increase in marketing expenses, and (ix) a $13.0 million increase in other general and administrative expenses during the year ended December 31, 2019 compared to year ended December 31, 2018.

Management Fee to Affiliate

Management fee to affiliate increased by $16.9 million as a result of increases to our gross equity subsequent to December 31, 2018.

Incentive Compensation to Affiliate

Incentive compensation to affiliate decreased by $3.0 million due to a decrease in our incentive compensation earnings measure resulting from the changes in the income and expense items described above, excluding any unrealized gains or losses from mark-to-market valuation changes on investments and debt during the year ended December 31, 2019 compared to the year ended December 31, 2018.

Loan Servicing Expense

Loan servicing expense decreased by $11.8 million primarily attributable to a decrease of loan servicing expense on Consumer Loans, held for investment, attributable to lower unpaid principal balance.

Subservicing Expense

Subservicing expense increased $50.7 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 as a result of MSR acquisitions that closed subsequent to December 31, 2018 within our servicer subsidiary, NRM (Note 6 to our Consolidated Financial Statements).

Income Tax (Benefit) Expense

Income tax (benefit) expense changed by $115.2 million as a result of an income tax expense of $41.8 million during the year ended December 31, 2019 compared to an income tax benefit of $73.4 million during the year ended December 31, 2018, primarily due to the deferred tax expense generated by changes in the fair value of MSRs giving rise to an increase in taxable income in the TRS.

Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries

Noncontrolling interests in income (loss) of consolidated subsidiaries increased by $2.1 million primarily due to (i) a $4.6 million increase from the Shelter JVs, acquired as part of the Shellpoint Acquisition in the third quarter of 2018 (Note 3 to our Consolidated Financial Statements), (ii) a $2.3 million increase in other’s interest in the net income of the Buyer as a result of a change from negative to positive mark-to-market adjustments in the fair value of the Buyer’s assets and lower interest expense, partially offset by a net decrease in interest income earned on the Buyer’s levered assets, partially offset by (iii) a $4.8 million decrease from a net decrease in income from the Consumer Loan Companies, which are 46.5% owned by third parties, during the year ended December 31, 2019.

Dividends on Preferred Stock

During the year ended December 31, 2019, in a public offering, we issued Preferred Series A and Preferred Series B (Note 15 to our Consolidated Financial Statements), and declared preferred dividends of $13.3 million.

Other Comprehensive Income. See “—Accumulated Other Comprehensive Income (Loss)” below.

Comparison of Results of Operations for the years ended December 31, 2018 and 2017



	Year Ended December 31,						Increase (Decrease)
	2018			2017			Amount			%
Interest income	$	1,664,223		$	1,519,679		$	144,544		9.5	%
Interest expense	606,433			460,865			145,568			31.6	%
Net Interest Income	1,057,790			1,058,814			(1,024		)	(0.1	)%
Impairment
Other-than-temporary impairment (OTTI) on securities	30,017			10,334			19,683			190.5	%
Valuation and loss provision (reversal) on loans and real estate owned	60,624			75,758			(15,134		)	(20.0	)%
	90,641			86,092			4,549			5.3	%
Net interest income after impairment	967,149			972,722			(5,573		)	(0.6	)%
Servicing revenue, net of change in fair value of $(191,245) and $(67,672), respectively	528,595			424,349			104,246			24.6	%
Gain on originated mortgage loans, held-for-sale, net	96,145			—			96,145			100.0	%
Other Income
Change in fair value of investments in excess mortgage servicing rights	(58,656		)	4,322			(62,978		)	(1,457.1	)%
Change in fair value of investments in excess mortgage servicing rights, equity method investees	8,357			12,617			(4,260		)	(33.8	)%
Change in fair value of investments in mortgage servicing rights financing receivables	31,550			66,394			(34,844		)	(52.5	)%
Change in fair value of servicer advance investments	(89,332		)	84,418			(173,750		)	(205.8	)%
Change in fair value of investments in residential mortgage loans	69,820			—			69,820			100.0	%
Change in fair value of derivative instruments	(108,234		)	(2,190		)	(106,044		)	4,842.2	%
Gain (loss) on settlement of investments, net	95,085			10,310			84,775			822.3	%
Earnings from investments in consumer loans, equity method investees	10,803			25,617			(14,814		)	(57.8	)%
Other income (loss), net	(10,778		)	6,298			(17,076		)	(271.1	)%
	(51,385		)	207,786			(259,171		)	(124.7	)%
Operating Expenses
General and administrative expenses	231,579			67,159			164,420			244.8	%
Management fee to affiliate	62,594			55,634			6,960			12.5	%
Incentive compensation to affiliate	94,900			81,373			13,527			16.6	%
Loan servicing expense	43,547			52,330			(8,783		)	(16.8	)%
Subservicing expense	176,784			166,081			10,703			6.4	%
	609,404			422,577			186,827			44.2	%
Income Before Income Taxes	931,100			1,182,280			(251,180		)	(21.2	)%
Income tax (benefit) expense	(73,431		)	167,628			(241,059		)	(143.8	)%
Net Income	$	1,004,531		$	1,014,652		$	(10,121	)	(1.0	)%
Noncontrolling Interests in Income of Consolidated Subsidiaries	$	40,564		$	57,119		$	(16,555	)	(29.0	)%
Net Income Attributable to Common Stockholders	$	963,967		$	957,533		$	6,434		0.7	%

Interest Income

Interest income increased by $144.5 million primarily attributable to incremental interest income of (i) $141.8 million increase from an increase in the size of the Real Estate Securities portfolio and accelerated accretion on Real Estate Securities owned in Non-Agency RMBS trusts that were terminated upon the execution of calls, (ii) $48.8 million from the Residential Mortgage Loans portfolio due to the acquisition of loans through the execution of calls, and (iii) an increase of $10.6 million from the MSRs

portfolio net of a decrease due to the transfer of HLSS Servicer Advance Investments and Excess MSR investment to Mortgage Servicing Rights Financing Receivables and related servicer advance receivables as a result of the Ocwen Transaction (Note 6 to our Consolidated Financial Statements). The increase was partially offset by (iv) a $57.5 million decrease from Consumer Loans attributable to lower unpaid principal balance.

Interest Expense

Interest expense increased by $145.6 million primarily attributable to increases of (i) $117.6 million of interest expense on repurchase agreements and financings on Real Estate Securities in which we made additional levered investments subsequent to December 31, 2017, (ii) $29.4 million on Residential Mortgage Loans due to an increase in the underlying principal balance of the portfolio levered with repurchase agreements, and (iii) $31.3 million of interest expense on MSRs and related servicer advances financing obtained subsequent to December 31, 2017. The increase was partially offset by (iv) a $22.5 million decrease in interest on debt collateralized by Excess MSRs as a result of repayments subsequent to December 31, 2017, and (v) a $10.2 million decrease in interest on the Consumer Loan securitization notes attributable to lower unpaid principal balance.

Other than Temporary Impairment (OTTI) on Securities

The other-than-temporary impairment on securities increased by $19.7 million primarily resulting from a decline in fair values on a greater portion of our Non-Agency RMBS, which we purchased with existing credit impairment, below their amortized cost basis as of December 31, 2018.

Valuation and Loss Provision (Reversal) on Loans and Real Estate Owned

The $15.1 million decrease in the valuation and loss provision (reversal) on loans and real estate owned resulted from, (i) $14.6 million less provision due to a reduction in net charge-offs on the Consumer Loan Companies attributable to lower unpaid principal balance, (ii) $4.4 million less provision on Residential Mortgage Loans, and (iii) $1.2 million increase of reserve related to certain Ginnie Mae EBO servicer advance receivables during the year ended December 31, 2018. The decrease was partially offset by (iv) REO impairment increase of $5.1 million due primarily to a decline in home prices, during the year ended December 31, 2018.

Servicing Revenue, Net

The component of servicing revenue, net related to changes in valuation inputs and assumptions related to the following:



	Year Ended December 31,						Increase (Decrease)
	2018			2017			Amount
Changes in interest rates and prepayment rates	$	31,298		$	(38,848	)	$	70,146
Changes in discount rates	43,887			165,496			(121,609		)
Changes in other factors	(6,598		)	28,847			(35,445		)
Total	$	68,587		$	155,495		$	(86,908	)

Servicing revenue, net increased $104.2 million during the year ended December 31, 2018 compared to the year ended December 31, 2017. Specifically, Servicing fee revenue and fees increased $227.7 million as a result of MSR acquisitions by our servicer subsidiary, NRM, subsequent to December 31, 2017 (Note 6 to our Consolidated Financial Statements). This was offset by (i) a $33.7 million increase in amortization as a result of MSR acquisitions closed subsequent to December 31, 2017, (ii) a $86.9 million decrease related to changes in valuation inputs and assumptions, primarily driven by less decrease in discount rates, partially offset by a decrease in prepayment speeds, and (iii) a $2.9 million gain on sales realized through Gain (loss) on settlement of investments, net subsequent to December 31, 2017.

Gain on Originated Mortgage Loans, Held-for-Sale, Net

The gain on sale of originated mortgage loans of $96.1 million during the year ended December 31, 2018 was a result of the Shellpoint Acquisition (Note 3 to our Consolidated Financial Statements). Our wholly owned subsidiary, NewRez, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The GSEs or Ginnie Mae guarantee conventional and government-insured mortgage securitizations and private investors issue nonconforming private label mortgage securitizations while NewRez generally retains the right to service the underlying residential mortgage loans. In

connection with the transfer of loans, we report Gain on originated mortgage loans, held-for-sale, net in the Consolidated Statements of Income (Note 9 to our Consolidated Financial Statements).

Change in Fair Value of Investments in Excess Mortgage Servicing Rights

Changes in the fair value of investments in Excess MSRs related to the following:



	Year Ended December 31,						Increase (Decrease)
	2018			2017			Amount
Changes in interest rates and prepayment rates	$	(20,350	)	$	(41,410	)	$	21,060
Changes in discount rates	—			41,526			(41,526		)
Changes in other factors	(38,306		)	4,206			(42,512		)
Total	$	(58,656	)	$	4,322		$	(62,978	)

The negative mark-to-market fair value adjustments during the year ended December 31, 2018 was mainly driven by (i) the realization of unrealized gains related to the Ocwen Transaction (Note 6 to our Consolidated Financial Statements), which were reflected as a reclassification to Gain (loss) on settlement of investments, net, and (ii) an increase in projected prepayment speeds and faster actual prepayment rates.

Change in Fair Value of Investments in Excess Mortgage Servicing Rights, Equity Method Investees

Changes in the fair value of investments in Excess MSRs, equity method investees related to the following:



	Year Ended December 31,						Increase (Decrease)
	2018			2017			Amount
Changes in interest rates and prepayment rates	$	(7,183	)	$	(3,420	)	$	(3,763	)
Changes in discount rates	—			4,840			(4,840		)
Changes in other factors	15,540			11,197			4,343
Total	$	8,357		$	12,617		$	(4,260	)

The positive mark-to-market adjustments during the year ended December 31, 2018 were mainly driven by interest income net of expenses recorded at the investee level and other market factors, which totaled $15.5 million during the year ended December 31, 2018, compared to $11.2 million during the year ended December 31, 2017. This was partially offset by an increase in projected prepayment speeds and faster actual prepayment rates along with steady discount rates throughout the year ended December 31, 2018.

Change in Fair Value of Investments in MSR Financing Receivables

The component of changes in the fair value of investments in mortgage servicing rights financing receivables related to changes in valuation inputs and assumptions related to the following:



	Year Ended December 31,						Increase (Decrease)
	2018			2017			Amount
Changes in interest rates and prepayment rates	$	(22,164	)	$	(259	)	$	(21,905	)
Changes in discount rates	212,273			115,840			96,433
Changes in other factors	39,927			(5,997		)	45,924
Total	$	230,036		$	109,584		$	120,452

The decrease in change in fair value of investments in mortgage servicing rights financing receivables of $34.8 million during the year ended December 31, 2018 was primarily driven by a $154.5 million increase in amortization of servicing rights and a $0.8 million gain on sales realized through Gain (loss) on settlement of investments, net. These were offset by a $120.5 million increase

related to changes in valuation inputs and assumptions, primarily driven by a decrease in discount rates, partially offset by an increase in prepayment speeds.

Change in Fair Value of Servicer Advance Investments

Changes in the fair value of Servicer Advance Investments related to the following:



	Year Ended December 31,						Increase (Decrease)
	2018			2017			Amount
Changes in interest rates and prepayment rates	$	1,629		$	(16,109	)	$	17,738
Changes in discount rates	(12,829		)	(128,336		)	115,507
Changes in other factors	(78,132		)	228,863			(306,995		)
Total	$	(89,332	)	$	84,418		$	(173,750	)

The negative mark-to-market adjustments during the year ended December 31, 2018 were mainly driven by the realization of unrealized gains related to the Ocwen Transaction (Note 6 to our Consolidated Financial Statements) resulting in a reclassification to Gain (loss) on settlement of investments, net, and an increase in discount rates.

Change in Fair Value of Investments in Residential Mortgage Loans

The change in fair value of investments in Residential Mortgage Loans of $69.8 million during the year ended December 31, 2018 was due to the election of the fair value option on Residential Mortgage Loans acquired in the fourth quarter of 2018 coupled with a decrease in discount rates on loans acquired during the fourth quarter of 2018, whereas Residential Mortgage Loans were held at lower of cost or market value in 2017.

Change in Fair Value of Derivative Instruments

Change in fair value of derivative instruments decreased $106.0 million. The decrease was primarily related to (i) a $107.4 million increase in unrealized loss on Interest Rate Swaps. The decrease was partially offset by (ii) a $1.3 million decrease in unrealized loss on TBAs, and (iii) a $0.1 million decrease in unrealized gain on Interest Rate Caps.

Gain (Loss) on Settlement of Investments, Net

Gain on settlement of investments, net increased by $84.8 million, primarily related to (i) $101.7 million of gains reclassified from change in fair value of investments in Excess Mortgage Servicing Rights and Servicer Advance investments as a result of the Ocwen Transaction (Note 6 to our Consolidated Financial Statements), (ii) a $94.1 million change from loss to gain on settlement of derivatives related to an increase in gains on settlement of Interest Rate Swaps and a decrease in loss on settlement of TBAs, and (iii) a $6.5 million decrease in loss on liquidated residential mortgage loans during the year ended December 31, 2018 compared to the year ended December 31, 2017. This increase was partially offset by (iv) a $50.6 million change from gain on sale of real estate securities to loss on sale of real estate securities, (v) a $47.4 million change from gain on sale of residential mortgage loans to loss on sale of residential mortgage loans, (vi) a $3.2 million increased loss on sale of REO, and (vii) a $16.3 million increase in other losses primarily as a result of increased losses on securitizations of residential mortgage loans during the year ended December 31, 2018 compared to the year ended December 31, 2017.

Earnings from Investments in Consumer Loans, Equity Method Investees

Earnings from investments in Consumer Loans, Equity Method Investees decreased by $14.8 million as a result of a decrease in net earnings generated by our approximately 25% member interest in LoanCo and WarrantCo (Note 10 to our Consolidated Financial Statements) during the year ended December 31, 2018 compared to the year ended December 31, 2017.

Other Income (Loss), Net

Other income (loss), net decreased by $17.1 million, primarily attributable to (i) a $16.2 million change from gain on Ocwen common stock to loss on Ocwen common stock, (ii) a $3.4 million decrease in gain on transfer of loans to REO, (iii) a $2.4 million change from gain on transfer of loans to other assets to loss on transfer of loans to other assets, and (iv) a $1.6 million increase in unrealized loss on contingent consideration attributable to the Shellpoint Acquisition (Note 3 to our Consolidated Financial Statements), during the year ended December 31, 2018 compared to the year ended December 31, 2017. This decrease was partially

offset by (v) a $7.4 million increase in unrealized gain on other ABS during the year ended December 31, 2018 compared to the year ended December 31, 2017.

General and Administrative Expenses

General and administrative expenses increased by $164.4 million primarily attributable to the Shellpoint Acquisition (Note 3 to our Consolidated Financial Statements) which led to increased General and administrative expenses during the year ended December 31, 2018. Specifically, there was (i) a $109.7 million increase in compensation and benefit expense, (ii) a $16.1 million increase in loan origination expense, (iii) a $8.9 million increase in rent and other office expenses, (iv) a $5.9 million increase in marketing expenses, and (v) a $5.1 million increase in legal and professional expense driven by transactions closed subsequent to December 31, 2017, during the year ended December 31, 2018 compared to the year ended December 31, 2017.

Management Fee to Affiliate

Management fee to affiliate increased by $7.0 million as a result of increases to our gross equity subsequent to December 31, 2017.

Incentive Compensation to Affiliate

Incentive compensation to affiliate increased by $13.5 million due to an increase in our incentive compensation earnings measure resulting from the changes in the income and expense items described above, excluding any unrealized gains or losses from mark-to-market valuation changes on investments and debt during the year ended December 31, 2018 compared to the year ended December 31, 2017.

Loan Servicing Expense

Loan servicing expense decreased by $8.8 million primarily attributable to a $8.7 million decrease of loan servicing expense on Consumer Loans, held for investment, attributable to lower unpaid principal balance.

Subservicing Expense

Subservicing expense increased $10.7 million during the year ended December 31, 2018 compared to the year ended December 31, 2017 as a result of MSR acquisitions that closed subsequent to December 31, 2017 within our servicer subsidiary, NRM (Note 6 to our Consolidated Financial Statements).

Income Tax (Benefit) Expense

Income tax (benefit) expense changed by $241.1 million as a result of an income tax benefit of $73.4 million during the year ended December 31, 2018 compared to an income tax expense of $167.6 million during the year ended December 31, 2017, primarily due to (i) the release of valuation allowances on deferred tax assets attributable to our TRSs, (ii) realization of deferred tax assets related to the Ocwen Transaction (Note 6 to our Consolidated Financial Statements), (iii) net deferred tax expense resulting from changes in assumptions impacting interest income and mark-to-market on investments in Servicer Advances during the year ended December 31, 2017, (iv) mark-to-market and interest income on Servicing Related Assets during the year ended December 31, 2018, and (v) a decrease in effective tax rates subsequent to December 31, 2017.

Noncontrolling Interests in Income (Loss) of Consolidated Subsidiaries

Noncontrolling interests in income (loss) of consolidated subsidiaries decreased by $16.6 million primarily due to (i) a $9.2 million decrease in other’s interest in the net income of the Buyer as a result of a decrease in noncontrolling ownership from 54.2% to 27.2% in August 2017, as well as a net decrease in interest income earned on the Buyer’s levered assets and in the change in fair value of the Buyer’s assets, during the year ended December 31, 2018, and (ii) a $8.9 million decrease from a net decrease in income from the Consumer Loan Companies, which are 46.5% owned by third parties. The decrease was partially offset by (iii) a $1.2 million increase in noncontrolling interest in income (loss) as a result of the Shellpoint Acquisition (Note 3 to our Consolidated Financial Statements).

Other Comprehensive Income. See “—Accumulated Other Comprehensive Income (Loss)” below.

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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 for liquidity generally consist of cash provided by operating activities (primarily income from our investments in Excess MSRs, MSRs, Servicer Advance Investments, RMBS and loans), sales of and repayments from our investments, potential debt financing sources, including securitizations, and the issuance of equity securities, when feasible and appropriate. As of December 31, 2019, approximately $45.1 million of our cash and cash equivalents was held to satisfy liquidity requirements related to repurchase agreements maturing after period end. Our ability to utilize funds generated by the MSRs held in our servicer subsidiaries, NRM and NewRez, is subject to regulatory requirements regarding NRM’s and NewRez’s liquidity. As of December 31, 2019, approximately $386.0 million of our cash and cash equivalents was held at NRM and NewRez, of which $199.6 million was in excess of regulatory liquidity requirements and available for deployment. 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) and other operating expenses, and the repayment of borrowings and hedge obligations, as well as dividends. Although we have other sources of liquidity, such as sales of and repayments from our investments, potential debt financing sources and the issuance of equity securities, there can be no assurance that we will generate sufficient cash or achieve investment results that will allow us to make a specified level of cash distributions or year-to-year increases in cash distributions in the future. We have also committed to purchase certain future servicer advances. Currently, we expect that net recoveries of servicer advances will exceed net fundings for the foreseeable future. However, in the event of a significant economic downturn, net fundings could exceed net recoveries, which could have a materially adverse impact on our liquidity and could also result in additional expenses, primarily interest expense on any related financings of incremental advances.

Currently, our primary sources of financing are notes and bonds payable and repurchase agreements, although we have in the past and may in the future also pursue one or more other sources of financing such as securitizations and other secured and unsecured forms of borrowing. As of December 31, 2019, we had outstanding repurchase agreements with an aggregate face amount of approximately $27.9 billion to finance our investments. The financing of our entire RMBS portfolio, which generally has 30 to 90 day terms, is subject to margin calls. Under repurchase agreements, we sell a security to a counterparty and concurrently agree to repurchase the same security at a later date for a higher specified price. The sale price represents financing proceeds and the difference between the sale and repurchase prices represents interest on the financing. The price at which the security is sold generally represents the market value of the security less a discount or “haircut,” which can range broadly, for example from 2%-8% for Agency RMBS, 4%-60% for Non-Agency RMBS, and 2%-60% for residential mortgage loans. During the term of the repurchase agreement, the counterparty holds the security as collateral. If the agreement is subject to margin calls, the counterparty monitors and calculates what it estimates to be the value of the collateral during the term of the agreement. If this value declines by more than a de minimis threshold, the counterparty could require us to post additional collateral (or “margin”) in order to maintain the initial haircut on the collateral. This margin is typically required to be posted in the form of cash and cash equivalents. Furthermore, we may, from time to time, be a party to derivative agreements or financing arrangements that may be subject to margin calls based on the value of such instruments. In addition, $2.9 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 will enhance our ability to source and finance asset acquisitions on attractive terms and access borrowings and the capital markets at attractive levels.

With respect to the next 12 months, we expect that our cash on hand combined with our cash flow provided by operations and our ability to roll our repurchase agreements and servicer advance financings will be sufficient to satisfy our anticipated liquidity needs with respect to our current investment portfolio, including related financings, potential margin calls, mortgage loan origination and operating expenses. Our ability to roll over short-term borrowings is critical to our liquidity outlook. While it is inherently more difficult to forecast beyond the next 12 months, we currently expect to meet our long-term liquidity requirements through our cash on hand and, if needed, additional borrowings, proceeds received from repurchase agreements and other financings, proceeds from equity offerings and the liquidation or refinancing of our assets.

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These short-term and long-term expectations are forward-looking and subject to a number of uncertainties and assumptions, including those described under “—Market Considerations” as well as “Risk Factors.” If our assumptions about our liquidity prove to be incorrect, we could be subject to a shortfall in liquidity in the future, and such a shortfall may occur rapidly and with little or no notice, which could limit our ability to address the shortfall on a timely basis and could have a material adverse effect on our business.

Our cash flow provided by operations differs from our net income due to these primary factors: (i) the difference between (a) accretion and amortization and unrealized gains and losses recorded with respect to our investments and (b) cash received therefrom, (ii) unrealized gains and losses on our derivatives, and recorded impairments, if any, (iii) deferred taxes, and (iv) principal cash flows related to held-for-sale loans, which are characterized as operating cash flows under GAAP.

In addition to the information referenced above, the following factors could affect our liquidity, access to capital resources and our capital obligations. As such, if their outcomes do not fall within our expectations, changes in these factors could negatively affect our liquidity.

•

Access to Financing from Counterparties – Decisions by investors, counterparties and lenders to enter into transactions with us will depend upon a number of factors, such as our historical and projected financial performance, compliance with the terms of our current credit arrangements, industry and market trends, the availability of capital and our investors’, counterparties’ and lenders’ policies and rates applicable thereto, and the relative attractiveness of alternative investment or lending opportunities. Our business strategy is dependent upon our ability to finance certain of our investments at rates that provide a positive net spread.

•

Impact of Expected Repayment or Forecasted Sale on Cash Flows – The timing of and proceeds from the repayment or sale of certain investments may be different than expected or may not occur as expected. Proceeds from sales of assets are unpredictable and may vary materially from their estimated fair value and their carrying value. Further, the availability of investments that provide similar returns to those repaid or sold investments is unpredictable and returns on new investments may vary materially from those on existing investments.

Debt Obligations

The following table presents certain information regarding our debt obligations (dollars in thousands):



	December 31, 2019
										Collateral
Debt Obligations/Collateral		Outstanding Face Amount		Carrying Value^(A)		Final Stated Maturity^(B)	Weighted Average Funding Cost		Weighted Average Life (Years)	Outstanding Face		Amortized Cost Basis		Carrying Value		Weighted Average Life (Years)
Repurchase Agreements^(C)
Agency RMBS^(D)		$	15,481,677	$	15,481,677	Jan-20 to May-20	1.99	%	0.1	$	15,499,156	$	15,810,728	$	15,862,218	4.0
Non-Agency RMBS^(E)		7,317,519		7,317,519		Jan-20 to Sep-20	2.76	%	0.1	25,220,620		8,014,409		8,661,349		7.0
Residential Mortgage Loans^(F)		5,054,667		5,053,207		Feb-20 to May-21	3.48	%	0.6	5,778,009		5,847,650		5,577,297		15.4
Real Estate Owned^{(G) (H)}		63,846		63,822		Feb-20 to May-21	3.53	%	0.7	N/A		N/A		77,556		N/A
Total Repurchase Agreements		27,917,709		27,916,225			2.47	%	0.2
Notes and Bonds Payable
Excess MSRs^(I)		217,300		217,300		Feb-20 to Jul-22	4.45	%	2.6	97,846,949		306,803		394,644		5.9
MSRs^(J)		2,646,540		2,640,036		Mar-20 to Jul-24	4.16	%	1.6	394,098,370		3,998,060		4,446,855		5.7
Servicer Advances^(K)		3,189,486		3,181,672		Jan-20 to Aug-23	2.90	%	2.1	3,587,593		3,858,818		3,883,151		1.4
Residential Mortgage Loans^(L)		866,001		864,451		Apr-20 to Dec-45	4.63	%	8.3	1,183,625		1,199,326		1,171,201		7.1
Consumer Loans^(M)		813,808		816,689		Dec-21 to May-36	3.25	%	3.9	823,806		830,900		827,434		3.9
Total Notes and Bonds Payable		7,733,135		7,720,148			3.60	%	2.8
Total/Weighted Average		$	35,650,844	$	35,636,373		2.71	%	0.8


(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 repurchase agreements had approximately $84.1 million of associated accrued interest payable as of December 31, 2019.

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(D)	All of the Agency RMBS repurchase agreements have a fixed rate. Collateral amounts include approximately $5.3 billion of related trade and other receivables.

(E)

$6,788.4 million face amount of the Non-Agency RMBS repurchase agreements have LIBOR-based floating interest rates while the remaining $529.1 million face amount of the Non-Agency RMBS repurchase agreements have a fixed rate. This also includes repurchase agreements and related collateral of $7.5 million and $10.0 million, respectively, on retained consumer loan bonds and of $638.6 million and $744.4 million, respectively, on retained bonds collateralized by Agency MSRs.


(F)	All of these repurchase agreements have LIBOR-based floating interest rates.


(G)	All of these repurchase agreements have LIBOR-based floating interest rates.


(H)	Includes financing collateralized by receivables including claims from FHA on Ginnie Mae EBO loans for which foreclosure has been completed and for which we have made or intend to make a claim on the FHA guarantee.


(I)	Includes $217.3 million of corporate loans which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 2.75%. The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the interests in MSRs that secure these notes.

(J)

Includes: $1,250.0 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin ranging from 2.25% to 2.75%; $59.5 million of MSR notes which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 2.50%; and $1,337.1 million of public notes with fixed interest rates ranging from 3.55% to 4.62%. The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the MSRs and MSR financing receivables that secure these notes.

(K)

$1.9 billion face amount of the notes have a fixed rate while the remaining notes bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR or a cost of funds rate, as applicable, and (ii) a margin ranging from 1.0% to 2.0%. 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 $5.6 million note payable to Mr. Cooper which includes a $2.1 million receivable from government agency and bears interest equal to one-month LIBOR plus 2.88%, (ii) $105.3 million fair value of SAFT 2013-1 mortgage-backed securities issued with fixed interest rates ranging from 3.50% to 3.76% (see Note 13 for fair value details), (iii) $353.5 million of 2019-RPL 1 asset-backed notes held by third parties which include $0.3 million of REO and bear interest equal to 4.59% (see Note 13 for fair value details), (iv) $202.5 million of MDST Trusts asset-backed notes held by third parties which bear interest equal to 6.58% (see Note 13 for fair value details), and (v) $199.1 million of asset-backed notes held by third parties which include $1.5 million of REO and bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 1.25%.

(M)

Includes the SpringCastle debt, which is comprised of the following classes of asset-backed notes held by third parties: $734.7 million UPB of Class A notes with a coupon of 3.20% and a stated maturity date in May 2036; $70.4 million UPB of Class B notes with a coupon of 3.58% and a stated maturity date in May 2036; and $8.7 million UPB of Class C notes with a coupon of 5.06% and a stated maturity date in May 2036.

Certain of the debt obligations included above are obligations of our consolidated subsidiaries, which own the related collateral. In some cases, such collateral is not available to other creditors of ours.

We have margin exposure on $27.9 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.

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The following table provides additional information regarding our short-term borrowings (dollars in thousands):



			Year Ended December 31, 2019
	Outstanding Balance at December 31, 2019		Average Daily Amount Outstanding^(A)		Maximum Amount Outstanding		Weighted Average Daily Interest Rate
Repurchase Agreements
Agency RMBS	$	15,481,677	$	9,453,261	$	28,404,186	2.34	%
Non-Agency RMBS	7,317,519		7,612,857		8,800,115		3.31	%
Residential mortgage loans	4,878,731		2,467,091		6,367,610		3.96	%
Real estate owned	52,957		69,428		101,153		4.18	%
Notes and Bonds Payable
Excess MSRs	—		70,000		100,000		4.72	%
MSRs	1,250,000		849,772		1,256,040		4.58	%
Servicer advances	525,300		413,374		773,968		3.15	%
Residential mortgage loans	204,703		310,098		542,321		3.40	%
Total/Weighted Average	$	29,710,887	$	21,245,881			2.96	%


(A)	Represents the average for the period the debt was outstanding.



	Average Daily Amount Outstanding^(A)
	Three Months Ended
	March 31, 2019		June 30, 2019		September 30, 2019		December 31, 2019
Repurchase Agreements
Agency RMBS	$	5,364,480	$	6,846,716	$	10,544,720	$	14,939,907
Non-Agency RMBS	7,399,226		7,675,607		7,986,868		7,403,488
Residential mortgage loans	2,155,752		2,681,220		3,432,062		2,644,559
Real estate owned	91,025		48,247		58,390		66,317



	Average Daily Amount Outstanding^(A)
	Three Months Ended
	March 31, 2018		June 30, 2018		September 30, 2018		December 31, 2018
Repurchase Agreements
Agency RMBS	$	1,280,639	$	1,165,909	$	2,639,286	$	3,428,226
Non-Agency RMBS	4,946,706		5,259,463		6,094,029		7,444,959
Residential mortgage loans	1,178,834		1,617,382		2,154,943		1,675,353
Real estate owned	102,198		85,368		73,656		68,416


(A)	Represents the average for the period the debt was outstanding.

For additional information on our debt activities, see Note 12 to our Consolidated Financial Statements.

Repurchase Agreements

New Residential has outstanding repurchase agreements with terms that generally conform to the terms of the standard master repurchase agreement published by the Securities Industry and Financial Markets Association as to repayment, margin requirements and segregation of all securities sold under any repurchase transactions. In addition, each counterparty typically requires additional terms and conditions to the standard master repurchase agreement, including changes to the margin maintenance requirements, required haircuts, purchase price maintenance requirements, requirements that all controversies related to the repurchase agreement

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be litigated in a particular jurisdiction and cross default provisions. These provisions may differ by counterparty and are not determined until New Residential engages in a specific repurchase transaction.

Servicer Advance Notes Payable (the “Servicer Advance Notes”)

Following their revolving period, principal will be paid on the Servicer Advance Notes to the extent of available funds and in accordance with the priorities of payments set forth in the related transaction documents. The following table sets forth information regarding these revolving periods as of December 31, 2019 (dollars in thousands):



Servicer Advance Note Amount		Revolving Period Ends^(A)
$	22,995	January 2020
355,855		May 2020
33,412		June 2020
9,958		August 2020
103,080		October 2020
161,553		March 2021
92,672		April 2021
76,707		June 2021
700,000		October 2021
400,000		July 2022
400,000		September 2022
433,254		October 2022
400,000		August 2023
$	3,189,486


(A)	On the earlier of this date or the occurrence of an early amortization event or a target amortization event.

Upon the occurrence of an early amortization event or a target amortization event, there is either an interest rate increase on the Servicer Advance Notes, a rapid amortization of the Servicer Advance Notes or an acceleration of principal repayment, or all of the foregoing.

The early amortization and target amortization events under the Servicer Advance Notes include: (i) the occurrence of an event of default under the transaction documents, (ii) failure to satisfy an interest coverage test, (iii) the occurrence of any servicer default or termination event for pooling and servicing agreements representing 15% or more (by mortgage loan balance as of the date of termination) of all the pooling and servicing agreements related to the purchased basic fee subject to certain exceptions; (iv) failure to satisfy a collateral performance test measuring the ratio of collected advance reimbursements to the balance of advances; (v) for certain Servicer Advance Notes, failure to satisfy minimum tangible net worth requirements for the applicable servicer, the Buyer or New Residential; (vi) for certain Servicer Advance Notes, failure to satisfy minimum liquidity requirements for the applicable servicer and the Buyer, (vii) for certain Servicer Advance Notes, failure to satisfy leverage tests for the applicable servicer, the Buyer or New Residential; (viii) for certain Servicer Advance Notes, a change of control of the Buyer or New Residential; (ix) for certain Servicer Advance Notes, a change of control of the applicable servicer, (x) for certain Servicer Advance Notes, the failure of the applicable servicer to maintain minimum servicer ratings, (xi) for certain Servicer Advance Notes, certain judgments against the Buyer or certain other subsidiaries of New Residential in excess of certain thresholds; (xii) for certain Servicer Advance Notes, payment default under, or an acceleration of, other debt of the Buyer or certain other subsidiaries of New Residential; (xiii) failure to deliver certain reports; and (xiv) material breaches of any of the transaction documents.

The definitive documents related to the Servicer Advance Notes contain customary representations and warranties, as well as affirmative and negative covenants. Affirmative covenants include, among others, reporting requirements, provision of notices of material events, maintenance of existence, maintenance of books and records, compliance with laws, compliance with covenants under the designated servicing agreements and maintaining certain servicing standards with respect to the advances and the related mortgage loans. Negative covenants include, among others, limitations on amendments to the designated servicing agreements and limitations on amendments to the procedures and methodology for repaying the advances or determining that advances have become non-recoverable.

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The definitive documents related to the Servicer Advance Notes also contain customary events of default, including, among others, (i) non-payment of principal, interest or other amounts when due, (ii) insolvency of the applicable servicer, the Buyer, or certain other related subsidiaries of New Residential; (iii) the applicable issuer becoming subject to registration as an “investment company” within the meaning of the 1940 Act; (iv) the applicable servicer or New Residential subsidiary fails to comply with the deposit and remittance requirements set forth in any pooling and servicing agreement or such definitive documents; and (v) the related servicer’s failure to make an indemnity payment after giving effect to any applicable grace period. Upon the occurrence and during the continuance of an event of default under any facility, the requisite percentage of the related noteholders may declare the Servicer Advance Notes and all other obligations of the applicable issuer immediately due and payable and may terminate the commitments. A bankruptcy event of default causes such obligations automatically to become immediately due and payable and the commitments automatically to terminate.

Certain of the Servicer Advance Notes accrue interest based on a floating rate of interest. Servicer advances and deferred servicing fees are non-interest bearing assets. The interest obligations in respect of certain of the Servicer Advance Notes are not supported by any interest rate hedging instrument or arrangement. If the applicable index rate for purposes of determining the interest rates on the Servicer Advance Notes rises, there may not be sufficient collections on the servicer advances and deferred servicing fees and a target amortization event or an event of default could occur in respect of certain Servicer Advance Notes. This could result in a partial or total loss on our investment.

Consumer Loans

In October 2016, the Consumer Loan Companies refinanced their outstanding asset-backed notes with an asset-backed securitization. The issuance consisted of $1.7 billion face amount of asset-backed notes comprised of six classes with maturity dates in November 2023 and March 2024, of which approximately $157.6 million face amount was retained by the Consumer Loan Companies and subsequently distributed to their members including New Residential. New Residential’s $79.9 million portion of these bonds was not treated as outstanding debt in consolidation through June 2019. In connection with the refinancing, the Consumer Loan Companies recorded approximately $4.7 million of loss on extinguishment of debt related to an unamortized discount.

In June 2019, the Consumer Loan Companies refinanced their outstanding asset-backed notes with a new asset-backed securitization. The issuance consisted of $938.7 million face amount of asset-backed notes comprised of three classes with maturity dates in May 2036, of which approximately $13.4 million face amount was retained by the Consumer Loan Companies and subsequently distributed to their members including New Residential. New Residential’s $10.0 million portion of these bonds is not treated as outstanding debt in consolidation. In connection with the refinancing, the Consumer Loan Companies recorded approximately $8.4 million of loss on extinguishment of debt related to an unamortized discount.

SpringCastle Debt (the “SpringCastle Notes”)

Principal will be paid on the SpringCastle Notes to the extent of available funds and in accordance with the priorities of payments set forth in the related securitization transaction documents. Prior to the occurrence of an event of default under such documents, payments of principal on the SpringCastle Notes are made in amounts necessary to maintain the prescribed relationship among the senior and subordinated notes balances relative to the principal balance of the underlying consumer loans, with any excess available funds flowing back to the co-issuers or as the co-issuers may direct. After the occurrence of an event of default, available funds are applied to pay the SpringCastle Notes sequentially in full before any distribution to the co-issuer or as the co-issuers may direct.

The definitive documents related to the SpringCastle Notes contain customary events of default, including, among others, (i) non-payment of principal, interest or other amounts when due, (ii) insolvency of any co-issuer; (iii) any co-issuer becoming subject to registration as an “investment company” within the meaning of the Investment Company Act of 1940; (iv) any co-issuer shall become taxable as an association, taxable mortgage pool or publicly traded partnership taxable as a corporation under the Internal Revenue Code; and (v) breaches of representations, warranties and covenants, subject to certain cure periods. Upon the occurrence and during the continuance of an event of default under any facility, the requisite percentage of the related noteholders may declare the SpringCastle Notes and all other obligations of the co-issuers immediately due and payable. A bankruptcy event of default causes such obligations automatically to become immediately due and payable and the commitments automatically to terminate.

The definitive documents related to the SpringCastle Notes contain customary representations and warranties, as well as covenants. Covenants include, among others, reporting requirements, provision of notices of material events, maintenance of existence, maintenance of books and records and compliance with laws.

Both the SpringCastle Notes and the underlying consumer loans accrue interest at fixed rates.

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NRZ Excess Spread-Collateralized Notes (the “Excess Spread Notes”)

Principal will be paid on the Excess Spread Notes in accordance with the priorities of payments set forth in the related transaction documents. The following table sets forth information regarding the note amounts for the Excess Spread Notes as of December 31, 2019 (in thousands):


(A)	The PLS1 Excess Spread Notes may be paid off on any payment date occurring on or after December 2019 upon 180 days written notice from the Borrowers or Noteholders.


(B)	The Agency MSRs Loan has a loan repayment date of July 11, 2022.

At closing, the PLS1 Excess Spread Notes had a note amount of $126.2 million, but are subject to increase on any funding date upon 1 business days’ notice and if there is sufficient collateral value to support such increase. The related MSR valuation agent may, at its sole discretion, recalculate the market value of the excess servicing fees and generate a market value report. If the collateral value (using the market value from the most recent market value report) multiplied by the advance rate is determined to be less than the note amount, the borrowers will be required to make a principal payment to the extent necessary to cure such imbalance. The borrowers are required to pay the outstanding principal balance of the PLS1 Excess Spread Notes on the maturity date set forth in the table above. Prior to the maturity date, upon the occurrence of an event of default, the PLS1 Excess Spread Notes become immediately due and payable. For the PLS1 Excess Spread Notes, New Residential Investment Corp. guarantees the payment of all amounts payable when due.

At closing, the Agency MSRs Loan, had a loan amount of $213.7 million. Beginning on the first monthly settlement date (August 25, 2017) following the anniversary of the funding date (July 11, 2017), the borrowers are required to pay any unpaid principal in equal parts on each remaining monthly payment date occurring prior to the loan repayment date (July 11, 2022). The lender shall have the right to determine the collateral value at any time in its sole good faith discretion. If, on any determination date, the outstanding aggregate loan amount exceeds the borrowing base, the borrowers shall, on the next monthly settlement date, repay the loan in an amount equal to the borrowing base deficiency. Prior to the loan repayment date, upon the occurrence of an event of default, the Agency MSRs Loan becomes immediately due and payable.

The definitive documents related to the Excess Spread Notes contain customary representations and warranties, as well as affirmative and negative covenants. Affirmative covenants include, among others, reporting requirements, provision of notices of material events, maintenance of existence, delivery of financial statements, use of proceeds, maintenance of deposit accounts, maintenance of books and records, compliance with laws, compliance with covenants in the transaction/facility documents, and financial covenants. Negative covenants include, among others, impairment on the value of the collateral, limitations on liens on the collateral, limitations on other indebtedness or business activity, and changes in state of organization without notice.

The definitive documents related to the Excess Spread Notes also contain customary events of default, including, among others, (i) non-payment of principal, interest or other amounts when due, (ii) material misrepresentations in the transaction/facility documents, (iii) failure to maintain a first priority security interest in the collateral, (iv) change of control, (v) insolvency, (vi) judgments, (vii) the failure of New Residential to be listed on the NYSE or have a public debt rating by at least one of S&P, Moody’s or Fitch, (viii) the failure of the underlying servicer to be an approved servicer under the guidelines of the applicable agency and (ix) the failure of New Residential to maintain its status as a REIT or failure of certain specified financial tests or a servicer termination event trigger occurs. Upon the occurrence and during the continuance of an event of default under any facility, the noteholders may declare the Excess Spread Notes and all other obligations immediately due and payable and may terminate the commitments.

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Maturities

Our debt obligations as of December 31, 2019, as summarized in Note 12 to our Consolidated Financial Statements, had contractual maturities as follows (in thousands):



Year	Nonrecourse^(A)		Recourse^(B)		Total
2020	$	527,231	$	29,183,656	$	29,710,887
2021	1,030,932		752,496		1,783,428
2022	1,646,318		217,300		1,863,618
2023	400,000		382,215		782,215
2024	—		389,177		389,177
2025 and thereafter	1,121,519		—		1,121,519
	$	4,726,000	$	30,924,844	$	35,650,844


(A)	Includes repurchase agreements and notes and bonds payable of $1.9 million and $4,724.1 million, respectively.


(B)	Includes repurchase agreements and notes and bonds payable of $27,915.8 million and $3,009.0 million, respectively.

The weighted average differences between the fair value of the assets and the face amount of available financing for the Agency RMBS repurchase agreements (including amounts related to Trades Receivable) and Non-Agency RMBS repurchase agreements were 2.4% and 15.5%, respectively, and for Residential Mortgage Loans and Real Estate Owned were 9.4% and 17.7%, respectively, during the year ended December 31, 2019.

Borrowing Capacity

The following table represents our borrowing capacity as of December 31, 2019 (in thousands):



Debt Obligations/ Collateral	Borrowing Capacity		Balance Outstanding		Available Financing
Repurchase Agreements
Residential mortgage loans and REO	$	6,296,106	$	3,685,133	$	2,610,973
New Loan Origination	4,433,000		1,433,380		2,999,620
Non-Agency RMBS	650,000		529,096		120,904
Notes and Bonds Payable
Excess MSRs	150,000		—		150,000
MSRs	1,575,000		1,309,484		265,516
Servicer advances^(A)	1,645,000		1,289,521		355,479
Residential Mortgage Loans	650,000		199,132		450,868
Consumer loans	150,000		—		150,000
	$	15,549,106	$	8,445,746	$	7,103,360


(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. We pay a 0.02% fee on the unused borrowing capacity.

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 of December 31, 2019.

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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 $0.01 per share, in one or more classes or series.

On July 2, 2019, in a public offering, we issued 6.2 million shares of our Preferred Series A. To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 0.6 million shares of our common stock at the closing price per share of common stock on the pricing date, which had a fair value of approximately $0.5 million as of the grant date.

On August 15, 2019, in a public offering, we issued 11.3 million shares of our Preferred Series B. To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 1.1 million shares of our common stock at the closing price per share of common stock on the pricing date, which had a fair value of approximately $0.7 million as of the grant date.

Our Preferred Series A and Preferred Series B 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 and Preferred Series B 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 and Preferred Series B 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 and Preferred Series B are convertible to shares of our common stock.

From and including, July 2, 2019 and August 15, 2019, but excluding, August 15, 2024, holders of shares of our Preferred Series A and Preferred Series B are entitled to receive cumulative cash dividends at a rate of 7.50% and 7.125% per annum of the $25.00 liquidation preference per share (equivalent to $1.875 and $1.781 per annum per share), respectively, and from and including August 15, 2024, at a floating rate per annum equal to the three-month LIBOR plus a spread of 5.802% and 5.640% per annum, respectively. Dividends are payable quarterly in arrears on or about the 15th day of each February, May, August and November.

The Preferred Series A and Preferred Series B will not be redeemable before August 15, 2024, except under certain limited circumstances intended to preserve our qualification as a REIT for U.S. federal income tax purposes and except upon the occurrence of a Change of Control (as defined in the Certificate of Designations). On or after August 15, 2024, we may, at our option, upon not less than 30 nor more than 60 days’ written notice, redeem the Preferred Series A and Preferred Series B, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus any accumulated and unpaid dividends thereon (whether or not authorized or declared) to, but excluding, the redemption date, without interest.

Common Stock

Our certificate of incorporation authorizes 2,000,000,000 shares of common stock, par value $0.01 per share.

Approximately 2.4 million shares of our common stock were held by Fortress, through its affiliates, and its principals as of December 31, 2019.

In February 2017, we issued 56.5 million shares of our common stock in a public offering at a price to the public of $15.00 per share for net proceeds of approximately $834.5 million. One of our executive officers participated in this offering and purchased 18,600 shares at the public offering price. To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 5.7 million shares of our common stock at the public offering price, which had a fair value of approximately $8.1 million as of the grant date. The assumptions used in valuing the options were: a 2.38% risk-free rate, a 10.82% dividend yield, 28.64% volatility and a 10-year term.

In January 2018, we issued 28.8 million shares of its common stock in a public offering at a price to the public of $17.10 per share for net proceeds of approximately $482.3 million. To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 2.9 million shares of our common stock at the public offering price, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.58% risk-free rate, a 9.86% dividend yield, 23.16% volatility and a 10-year term.

On July 30, 2018, we entered into a Distribution Agreement to sell shares of our common stock, par value $0.01 per share (the “ATM Shares”), having an aggregate offering price of up to $500.0 million, from time to time, through an “at-the-market” equity

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offering program (the “ATM Program”). During the year ended December 31, 2018, we sold 0.5 million ATM Shares for aggregate proceeds of $9.1 million. In connection with the shares sold under the ATM program, we granted options to the Manager relating to 0.05 million shares of our common stock at the offering price, which had fair value of approximately $0.1 million as of the grant date. On August 1, 2019, the Distribution Agreement was amended to, among other things, (i) add additional sales agents under the ATM Program, and (ii) restore the aggregate offering price under the ATM Program to the original amount of $500.0 million. During the year ended December 31, 2019, we did not sell any ATM Shares.

In November 2018, we issued 28.8 million shares of our common stock in a public offering at a price of $17.32 per share for net proceeds of approximately $489.2 million. To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 2.9 million shares of our common stock at the public offering price, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 3.25% risk-free rate, a 8.61% dividend yield, 17.50% volatility and a 10-year term.

In February 2019, we issued 46.0 million shares of our common stock in a public offering at a price to the public of $16.50 per share for net proceeds of approximately $751.7 million. To compensate the Manager for its successful efforts in raising capital for us, in connection with this offering, we granted options to the Manager relating to 4.6 million shares of our common stock at the public offering price, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.40% risk-free rate, a 9.30% dividend yield, 19.26% volatility and a 10-year term.

On August 20, 2019, we announced that our board of directors had authorized the repurchase of up to $200.0 million of our common stock through December 31, 2020. Repurchases may be made at any time and from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Exchange Act, by means of one or more tender offers, or otherwise, in each case, as permitted by securities laws and other legal and contractual requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of our shares, trading volume, capital availability, our performance and general economic and market conditions. The share repurchase program may be suspended or discontinued at any time. No share repurchases have been made as of the filing of this report. Repurchases may impact our financial results, including fees paid to our Manager.

As of December 31, 2019, our outstanding options had a weighted average exercise price of $16.33. Our outstanding options as of December 31, 2019 were summarized as follows:



Held by the Manager	10,511,167
Issued to the Manager and subsequently assigned to certain of the Manager’s employees	2,290,749
Issued to the independent directors	7,000
Total	12,808,916

Accumulated Other Comprehensive Income (Loss)

During the year ended December 31, 2019, our accumulated other comprehensive income changed due to the following factors (in thousands):



	Total Accumulated Other Comprehensive Income
Accumulated other comprehensive income, December 31, 2018	$	417,023
Net unrealized gain (loss) on securities	445,943
Reclassification of net realized (gain) loss on securities into earnings	(180,815		)
Accumulated other comprehensive income, December 31, 2019	$	682,151

Our GAAP equity changes as our real estate securities portfolio is marked to market each quarter, among other factors. The primary causes of mark to market changes are changes in interest rates and credit spreads. During the year ended December 31, 2019, we recorded unrealized losses on our real estate securities primarily caused by performance, liquidity and other factors related specifically to certain investments, coupled with a net widening of credit spreads. We recorded OTTI charges of $25.2 million with respect to real estate securities and realized gains of $206.0 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.

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Common Dividends

We are organized and intend to conduct our operations to qualify as a REIT for U.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 for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our repurchase agreements and other debt payable. If our cash available for distribution is less than our taxable income, we could be required to sell assets or raise capital to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

We make distributions based on a number of factors, including an estimate of taxable earnings per common share. Dividends distributed and taxable and GAAP earnings will typically differ due to items such as fair value adjustments, differences in premium amortization and discount accretion, other differences in method of accounting, non-deductible general and administrative expenses, taxable income arising from certain modifications of debt instruments, and investments held in TRSs. Our quarterly dividend per share may be substantially different than our quarterly taxable earnings and GAAP earnings per share.



Common Dividends Declared for the Period Ended	Paid/Payable	Amount Per Share
March 31, 2018	April 2018	$	0.50
June 30, 2018	July 2018	$	0.50
September 30, 2018	October 2018	$	0.50
December 31, 2018	January 2019	$	0.50
March 31, 2019	April 2019	$	0.50
June 30, 2019	July 2019	$	0.50
September 30, 2019	October 2019	$	0.50
December 31, 2019	January 2020	$	0.50

Cash Flow

Operating Activities

2019 vs. 2018

Net cash flows provided by operating activities decreased approximately $2.9 billion for the year ended December 31, 2019 as compared to the year ended December 31, 2018. Operating cash inflows for the year ended December 31, 2019 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of $25.4 billion, servicing fees received of $1.1 billion, net interest income received of $945.8 million, net funding of servicer advances receivable of $218.2 million, and distributions of earnings from equity method investees of $17.6 million. Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of $8.6 billion, loan originations of $19.4 billion, incentive compensation and management fees paid to the Manager of $173.1 million, income taxes paid of $1.5 million, subservicing fees paid of $367.8 million, and other outflows of approximately $700.9 million including general and administrative costs and loan servicing fees.

2018 vs. 2017

Net cash flows provided by operating activities decreased approximately $329.4 million for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Operating cash inflows for the year ended December 31, 2018 primarily consisted of proceeds from sales and principal repayments of purchased residential mortgage loans, held-for-sale of $6.7 billion, servicing fees received of $601.9 million, net funding of servicer advances receivable of $381.4 million, collections on receivables and other assets of $45.2 million, net interest income received of $1.1 billion, and distributions of earnings from equity method investees of $17.2 million. Operating cash outflows primarily consisted of purchases of residential mortgage loans, held-for-sale of $5.8 billion, originations of $3.4 billion, incentive compensation and management fees paid to the Manager of $142.9 million, income taxes paid of $5.0 million, subservicing fees paid of $285.4 million and other outflows of approximately $318.0 million that primarily consisted of general and administrative costs and loan servicing fees.

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Investing Activities

Cash flows provided by (used in) investing activities were ($10.9 billion), ($5.2 billion) and ($1.8 billion) for the years ended December 31, 2019, 2018 and 2017, respectively. Investing activities consisted primarily of the acquisition of MSRs, real estate securities, and the funding of servicer advances, net of principal repayments from Servicer Advance Investments, MSRs, real estate securities and loans as well as proceeds from the sale of real estate securities, loans and REO, and derivative cash flows.

Financing Activities

Cash flows provided by (used in) financing activities were approximately $12.8 billion, $6.4 billion and ($2.7 billion) during the years ended December 31, 2019, 2018 and 2017, respectively. Financing activities consisted primarily of borrowings net of repayments under debt obligations, equity offerings, capital contributions net of distributions from noncontrolling interests in the equity of consolidated subsidiaries, and payment of dividends.

INTEREST RATE, CREDIT AND SPREAD RISK

We are subject to interest rate, credit and spread risk with respect to our investments. These risks are further described in “Quantitative and Qualitative Disclosures About Market Risk.”

OFF-BALANCE SHEET ARRANGEMENTS

We have material off-balance sheet arrangements related to our non-consolidated securitizations of residential mortgage loans treated as sales in which we retained certain interests. We believe that these off-balance sheet structures presented the most efficient and least expensive form of financing for these assets at the time they were entered, and represented the most common market-accepted method for financing such assets. Our exposure to credit losses related to these non-recourse, off-balance sheet financings is limited to $1.7 billion. As of December 31, 2019, there was $19.6 billion in total outstanding unpaid principal balance of residential mortgage loans underlying such securitization trusts that represent off-balance sheet financings.

We did not have any other off-balance sheet arrangements as of December 31, 2019. 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

As of December 31, 2019, we had the following material contractual obligations (payments in thousands):



Contract		Terms

Debt Obligations

Repurchase Agreements		Described under Note 12 to our Consolidated Financial Statements.

Notes and Bonds Payable		Described under Note 12 to our Consolidated Financial Statements.

Other Contractual Obligations

Management Agreement		For its services, our Manager is entitled to management fees, incentive fees, and reimbursement for certain expenses, as defined in, and in accordance with the terms of, the Management Agreement. Such terms are described in Note 17 to our Consolidated Financial Statements.

Interest Rate Swaps		Described under Note 11 to our Consolidated Financial Statements.

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	Fixed and Determinable Payments Due by Period
Contract	2020		2021 - 2022		2023 - 2024		Thereafter		Total
Debt Obligations
Repurchase Agreements^(A)	$	130,082	$	1,968	$	—	$	—	$	132,050
Notes and Bonds Payable^(A)	217,815		284,032		126,226		544,811		1,172,884
Other Contractual Obligations
Management Agreement^(B)	177,238		170,691		170,691		2,133,642		2,652,262
Total	$	525,135	$	456,691	$	296,917	$	2,678,453	$	3,957,196


(A)	Interest is included based on the expected LIBOR curve that existed at December 31, 2019 and the scheduled maturities of our debt obligations.


(B)	Amounts reflect management fees and full expense reimbursements for the next 30 years, assuming no change in gross equity. Incentive fee is included for the amount currently outstanding as of December 31, 2019.

See Notes 16 and 20 to our Consolidated Financial Statements for information regarding commitments and material contracts entered into subsequent to December 31, 2019, if any. As described in Note 16, we have committed to purchase certain future servicer advances. The actual amount of future advances is subject to significant uncertainty. However, we currently expect that net recoveries of servicer advances will exceed net fundings for the foreseeable future. This expectation is based on judgments, estimates and assumptions, all of which are subject to significant uncertainty as further described in “—Application of Critical Accounting Policies—Servicer Advance Investments.” In addition, the Consumer Loan Companies have invested in loans with an aggregate of $272.1 million of unfunded and available revolving credit privileges as of December 31, 2019. However, under the terms of these loans, requests for draws may be denied and unfunded availability may be terminated at management’s discretion.

INFLATION

Virtually all of our assets and liabilities are financial in nature. As a result, interest rates and other factors affect our performance more so than inflation, although inflation rates can often have a meaningful influence over the direction of interest rates. Furthermore, our financial statements are prepared in accordance with GAAP and our distributions are determined by our board of directors primarily based on our taxable income, and, in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation. See “Quantitative and Qualitative Disclosures About Market Risk—Interest Rate Risk.”

CORE EARNINGS

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 and (iv) our realized and unrealized gains or losses, including any impairment, on our investments, and (v) income from our origination and servicing businesses. “Core earnings” is a non-GAAP measure of our operating performance, excluding the fourth variable above and adjusts the earnings from the consumer loan investment to a level yield basis. Core earnings is used by management to evaluate our performance without taking into account: (i) realized and unrealized gains and losses, which although they represent a part of our recurring operations, are subject to significant variability and are generally limited to a potential indicator of future economic performance; (ii) incentive compensation paid to our Manager; (iii) non-capitalized transaction-related expenses; and (iv) deferred taxes, which are not representative of current operations.

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Our investments in consumer loans are accounted for under ASC No. 310-20 and ASC No. 310-30, including certain non-performing consumer loans with revolving privileges that are explicitly excluded from being accounted for under ASC No. 310-30. Under ASC No. 310-20, the recognition of expected losses on these non-performing consumer loans is delayed in comparison to the level yield methodology under ASC No. 310-30, which recognizes income based on an expected cash flow model reflecting an investment’s lifetime expected losses. The purpose of the Core Earnings adjustment to adjust consumer loans to a level yield is to present income recognition across the consumer loan portfolio in the manner in which it is economically earned, 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.

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compensation measure is intended to reflect all realized results of operations. The Gain on Remeasurement of Consumer Loans Investment was treated as an unrealized gain for the purposes of calculating incentive compensation and was therefore excluded from such calculation.



	Year Ended December 31,
	2019			2018			2017
Net income attributable to common stockholders	$	550,015		$	963,967		$	957,533
Adjustments for Non-Core Earnings:
Impairment	35,344			90,641			86,092
Change in fair value of investments in mortgage servicing rights	171,915			(244,624		)	(282,018		)
Change in fair value of servicer advance investments	(10,288		)	89,332			(84,418		)
Change in fair value of investments in residential mortgage loans	43,009			(74,162		)	—
Change in fair value of derivative instruments	49,699			113,558			2,190
(Gain) loss on settlement of investments, net (Note 2)	(158,640		)	(96,319		)	(10,310		)
Other (income) loss (Note 2)	(27,985		)	11,425			(6,298		)
Other Income and Impairment attributable to non-controlling interests	(13,548		)	(22,247		)	(30,416		)
Non-capitalized transaction-related expenses	56,289			21,946			21,723
Incentive compensation to affiliate (Note 17)	91,892			94,900			81,373
Preferred stock management fee to affiliate	2,642			—			—
Deferred taxes (Note 19)	38,207			(80,054		)	168,518
Interest income on residential mortgage loans, held-for sale	60,689			13,374			13,623
Limit on RMBS discount accretion related to called deals	(19,590		)	(58,581		)	(28,652		)
Adjust consumer loans to level yield	5,239			(21,181		)	(41,250		)
Core earnings of equity method investees:
Excess mortgage servicing rights	11,905			13,183			13,691
Core Earnings	$	886,794		$	815,158		$	861,381

Net Income Per Diluted Share	$	1.34		$	2.81		$	3.15
Core Earnings Per Diluted Share	$	2.17		$	2.38		$	2.83

Weighted Average Number of Shares of Common Stock Outstanding, Diluted	408,990,107			343,137,361			304,381,388

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, credit spreads, foreign currency exchange rates, commodity prices, equity prices and other market based risks. The primary market risks that we are exposed to are interest rate risk, mortgage basis spread risk, prepayment rate risk, and credit risk. These risks are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. All of our market risk sensitive assets, liabilities and derivative positions (other than TBAs) are for non-trading purposes only. For a further discussion of how market risk may affect our financial position or results of operations, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies.”

Beginning with the third quarter of 2019, as a result of refinement of our risk management practices, including expansion of our hedging program, we have adjusted our sensitivity analysis. In prior periods, our sensitivity analysis reported the impact specific to changes in short term interest rates with no changes to discount rate spreads and yields. We have adjusted to report projected changes from a parallel shift in interest rates across all maturities along with corresponding changes in discount rates. In addition,

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based on management’s evaluation of the significance of each market risk exposure to us, we have adjusted our sensitivity analysis to capture changes in mortgage basis spread risk and to remove credit spread risk. These changes resulted in a material impact to the results of our sensitivity analysis and therefore, we have provided summarized comparable information under the new sensitivity analysis for the prior period.

Interest Rate Risk

Changes in interest rates, including changes in expected interest rates or “yield curves,” affect our investments in various ways, the most significant of which are discussed below.

Fair Value Impact

Changes in the level of interest rates also affect the yields required by the marketplace on interest rate instruments. Increasing interest rates would decrease the value of the fixed rate assets we hold at the time because higher required yields result in lower prices on existing fixed rate assets in order to adjust their yield upward to meet the market.

Changes in unrealized gains or losses resulting from changes in market interest rates do not directly affect our cash flows, or our ability to pay a dividend, to the extent the related assets are expected to be held and continue to perform as expected, as their fair value is not relevant to their underlying cash flows. Changes in unrealized gains or losses would impact our ability to realize gains on existing investments if they were sold. Furthermore, with respect to changes in unrealized gains or losses on investments which are carried at fair value, changes in unrealized gains or losses would impact our net book value and, in certain cases, our net income.

Changes in interest rates can also have ancillary impacts on our investments. Generally, in a declining interest rate environment, residential mortgage loan prepayment rates increase which in turn would cause the value of MSRs, MSR financing receivables, Excess MSRs and the rights to the basic fee components of MSRs to decrease, because the duration of the cash flows we are entitled to receive becomes shortened, and the value of loans and Non-Agency RMBS to increase, because we generally acquired these investments at a discount whose recovery would be accelerated. With respect to a significant portion of our investments in MSRs and Excess MSRs, we have recapture agreements, as described in Notes 5 and 6 to our Consolidated Financial Statements. These recapture agreements help to protect these investments from the impact of increasing prepayment rates. In addition, to the extent that the loans underlying our investments in MSRs, MSR financing receivables, Excess MSRs and the rights to the basic fee components of MSRs are well-seasoned with credit-impaired borrowers who may have limited refinancing options, we believe the impact of interest rates on prepayments would be reduced. Conversely, in an increasing interest rate environment, prepayment rates decrease which in turn would cause the value of MSRs, MSR financing receivables, Excess MSRs and the rights to the basic fee components of MSRs to increase and the value of loans and Non-Agency RMBS to decrease. To the extent we do not hedge against changes in interest rates, our balance sheet, results of operations and cash flows would be susceptible to significant volatility due to changes in the fair value of, or cash flows from, our investments as interest rates change. However, rising interest rates could result from more robust market conditions, which could reduce the credit risk associated with our investments. The effects of such a decrease in values on our financial position, results of operations and liquidity are discussed below under “—Prepayment Rate Exposure.”

Changes in the value of our assets could affect our ability to borrow and access capital. Also, if the value of our assets subject to short term financing were to decline, it could cause us to fund margin, or repay debt, and affect our ability to refinance such assets upon the maturity of the related financings, adversely impacting our rate of return on such investments.

We are subject to margin calls on our repurchase agreements. Furthermore, we may, from time to time, be a party to derivative agreements or financing arrangements that are subject to margin calls, or mandatory repayment, based on the value of such instruments. We seek to maintain adequate cash reserves and other sources of available liquidity to meet any margin calls, or required repayments, resulting from decreases in value related to a reasonably possible (in our opinion) change in interest rates but there can be no assurance that our cash reserves will be sufficient.

In addition, changes in interest rates may impact our ability to exercise our call rights and to realize or maximize potential profits from them. A significant portion of the residential mortgage loans underlying our call rights bear fixed rates and may decline in value during a period of rising market interest rates. Furthermore, rising rates could cause prepayment rates on these loans to decline, which would delay our ability to exercise our call rights. These impacts could be at least partially offset by potential declines in the value of Non-Agency RMBS related to the call rights, which could then be acquired more cheaply, and in credit spreads, which could offset the impact of rising market interest rates on the value of fixed rate loans to some degree. Conversely, declining interest rates could increase the value of our call rights by increasing the value of the underlying loans.

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We believe our consumer loan investments generally have limited interest rate sensitivity given that our portfolio is mostly composed of very seasoned loans with credit-impaired borrowers who are paying fixed rates, who we believe are relatively unlikely to change their prepayment patterns based on changes in interest rates.

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control.

LIBOR and other indices which are deemed “benchmarks” are the subject of recent national, international, and other regulatory guidance and proposals for reform, and it appears likely that LIBOR will be phased out or the methodology for determining LIBOR will be modified by 2021. We currently have agreements that are indexed to LIBOR and are monitoring related reform proposals and evaluating the related risks; however, it is not possible to predict the effects of any of these developments, and any future initiatives to regulate, reform or change the manner of administration of LIBOR could result in adverse consequences to the rate of interest payable and receivable on, market value of and market liquidity for LIBOR-based financial instruments. See Part I, Item 1A, Risk Factors—Risks Related to Our Business—Changes in banks’ inter-bank lending rate reporting practices or how the method pursuant to which LIBOR is determined may adversely affect the value of the financial obligations to be held or issued by us that are linked to LIBOR.

The table below provides comparative estimated changes in our book value based on a parallel shift in the yield curve (assuming an unchanged mortgage basis) including changes in our book value resulting from potential related changes in discount rates.



	December 31, 2019	December 31, 2018
Interest rate change (bps)	Estimated Change in Fair Value ($mm)	Estimated Change in Fair Value ($mm)
+50bps	+12.4	+56.2
+25bps	+13.7	+30.3
-25bps	-28.7	-34.7
-50bps	-72.4	-73.7

Mortgage Basis Spread Risk

Mortgage basis measures the spread between the yield on current coupon mortgage backed securities and benchmark rates including treasuries and swaps. The level of mortgage basis is driven by demand and supply of mortgage backed instruments relative to other rate-sensitive assets. Changes in the mortgage basis have an impact on prepayment rates driven by the ability of borrowers underlying our portfolio to refinance. A lower mortgage basis would imply a lower mortgage rate which would increase prepayment speeds due to higher refinance activity and, therefore, lower fair value of our mortgage portfolio. The mortgage basis is also correlated with other spread products such as corporate credit, and in the crisis of the last decade it was at a generational wide not seen before or since. The table below provides comparative estimated changes in our book value based on changes in mortgage basis.



	December 31, 2019	December 31, 2018
Mortgage Basis change (bps)	Estimated Change in Fair Value ($mm)	Estimated Change in Fair Value ($mm)
+20bps	+31.4	+98.6
+10bps	+15.8	+49.6
-10bps	-16.1	-50.3
-20bps	-32.6	-101.4

Prepayment Rate Exposure

Prepayment rates significantly affect the value of MSRs, MSR financing receivables, Excess MSRs, the basic fee component of MSRs (which we own as part of our Servicer Advance Investments), Non-Agency RMBS and loans, including consumer loans. Prepayment rate is the measurement of how quickly borrowers pay down the UPB of their loans or how quickly loans are otherwise brought current, modified, liquidated or charged off. The price we pay to acquire certain investments will be based on, among other things, our projection of the cash flows from the related pool of loans. Our expectation of prepayment rates is a significant assumption underlying those cash flow projections. If the fair value of MSRs, MSR financing receivables, Excess MSRs or the basic fee component of MSRs decreases, we would be required to record a non-cash charge, which would have a negative impact on our financial results. Furthermore, a significant increase in prepayment rates could materially reduce the ultimate cash flows we receive from MSRs, MSR financing receivables, Excess MSRs or our right to the basic fee component of MSRs, and we could

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ultimately receive substantially less than what we paid for such assets. Conversely, a significant decrease in prepayment rates with respect to our loans or RMBS could delay our expected cash flows and reduce the yield on these investments.

We seek to reduce our exposure to prepayment through the structuring of our investments. For example, in our MSR and Excess MSR investments, we seek to enter into “recapture agreements” whereby our MSR or Excess MSR is retained if the applicable servicer or subservicer originates a new loan the proceeds of which are used to repay a loan underlying an MSR or Excess MSR in our portfolio. We seek to enter into such recapture agreements in order to protect our returns in the event of a rise in voluntary prepayment rates.

Please refer to the table in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Application of Critical Accounting Policies—Excess MSRs” for an analysis of the sensitivity of these investments to changes in certain market factors.

Credit Risk

We are subject to varying degrees of credit risk in connection with our assets. Credit risk refers to the ability of each individual borrower underlying our investments in MSRs, MSR financing receivables, Excess MSRs, Servicer Advance Investments, securities and loans to make required interest and principal payments on the scheduled due dates. If delinquencies increase, then the amount of servicer advances we are required to make will also increase, as would our financing cost thereof. We may also invest in loans and Non-Agency RMBS which represent “first loss” pieces; in other words, they do not benefit from credit support although we believe they predominantly benefit from underlying collateral value in excess of their carrying amounts. We do not expect to encounter credit risk in our Agency RMBS, and we do anticipate credit risk related to Non-Agency RMBS, residential mortgage loans and consumer loans.

We seek to reduce credit risk through prudent asset selection, actively monitoring our asset portfolio and the underlying credit quality of our holdings and, where appropriate and achievable, repositioning our investments to upgrade their credit quality. Our pre-acquisition due diligence and processes for monitoring performance include the evaluation of, among other things, credit and risk ratings, principal subordination, prepayment rates, delinquency and default rates, and vintage of collateral.

For our MSRs, MSR financing receivables, and Excess MSRs on Agency collateral and our Agency RMBS, delinquency and default rates have an effect similar to prepayment rates. Our Excess MSRs on Non-Agency portfolios are not directly affected by delinquency rates because the servicer continues to advance principal and interest until a default occurs on the applicable loan, so delinquencies decrease prepayments therefore having a positive impact on fair value, while increased defaults have an effect similar to increased prepayments. For our Non-Agency RMBS and loans, higher default rates can lead to greater loss of principal. For our call rights, higher delinquencies and defaults could reduce the value of the underlying loans, therefore reducing or eliminating the related potential profit.

Market factors that could influence the degree of the impact of credit risk on our investments include (i) unemployment and the general economy, which impact borrowers’ ability to make payments on their loans, (ii) home prices, which impact the value of collateral underlying residential mortgage loans, (iii) the availability of credit, which impacts borrowers’ ability to refinance, and (iv) other factors, all of which are beyond our control.

Liquidity Risk

The assets that comprise our asset portfolio are generally not publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions.

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Investment Specific Sensitivity Analyses

Excess MSRs

The following table summarizes the estimated change in fair value of our interests in the Agency Excess MSRs owned directly as of December 31, 2019 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars in thousands):



Fair value at December 31, 2019	$	209,633

Discount rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	222,538		$	215,887		$	203,745		$	198,192
Change in estimated fair value:
Amount	$	12,905		$	6,254		$	(5,888	)	$	(11,441	)
%	6.2		%	3.0		%	(2.8		)%	(5.5		)%

Prepayment rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	218,502		$	213,760		$	205,974		$	202,694
Change in estimated fair value:
Amount	$	8,869		$	4,127		$	(3,659	)	$	(6,939	)
%	4.2		%	2.0		%	(1.7		)%	(3.3		)%

Delinquency rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	209,930		$	209,781		$	209,485		$	209,337
Change in estimated fair value:
Amount	$	297		$	148		$	(148	)	$	(296	)
%	0.1		%	0.1		%	(0.1		)%	(0.1		)%

Recapture rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	204,578		$	207,106		$	212,161		$	214,688
Change in estimated fair value:
Amount	$	(5,055	)	$	(2,527	)	$	2,528		$	5,055
%	(2.4		)%	(1.2		)%	1.2		%	2.4		%

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The following table summarizes the estimated change in fair value of our interests in the Non-Agency Excess MSRs owned directly as of December 31, 2019 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars in thousands):



Fair value at December 31, 2019	$	170,114

Discount rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	182,306		$	176,012		$	164,670		$	159,546
Change in estimated fair value:
Amount	$	12,192		$	5,898		$	(5,444	)	$	(10,568	)
%	7.2		%	3.5		%	(3.2		)%	(6.2		)%

Prepayment rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	180,417		$	174,964		$	165,771		$	161,866
Change in estimated fair value:
Amount	$	10,303		$	4,850		$	(4,343	)	$	(8,248	)
%	6.1		%	2.9		%	(2.6		)%	(4.8		)%

Delinquency rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	170,118		$	170,116		$	170,113		$	170,111
Change in estimated fair value:
Amount	$	4		$	2		$	(1	)	$	(3	)
%	—		%	—		%	—		%	—		%

Recapture rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	167,605		$	168,860		$	171,369		$	172,623
Change in estimated fair value:
Amount	$	(2,509	)	$	(1,254	)	$	1,255		$	2,509
%	(1.5		)%	(0.7		)%	0.7		%	1.5		%

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The following table summarizes the estimated change in fair value of our interests in the Agency Excess MSRs owned through equity method investees as of December 31, 2019 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars in thousands):



Fair value at December 31, 2019	$	125,596

Discount rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	132,583		$	128,983		$	122,407		$	119,399
Change in estimated fair value:
Amount	$	6,987		$	3,387		$	(3,189	)	$	(6,197	)
%	5.6		%	2.7		%	(2.5		)%	(4.9		)%

Prepayment rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	129,989		$	127,617		$	123,840		$	122,290
Change in estimated fair value:
Amount	$	4,393		$	2,021		$	(1,756	)	$	(3,306	)
%	3.5		%	1.6		%	(1.4		)%	(2.6		)%

Delinquency rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	125,833		$	125,715		$	125,478		$	125,360
Change in estimated fair value:
Amount	$	237		$	119		$	(118	)	$	(236	)
%	0.2		%	0.1		%	(0.1		)%	(0.2		)%

Recapture rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	122,715		$	124,156		$	127,037		$	128,478
Change in estimated fair value:
Amount	$	(2,881	)	$	(1,440	)	$	1,441		$	2,882
%	(2.3		)%	(1.1		)%	1.1		%	2.3		%

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MSRs

The following table summarizes the estimated change in fair value of our interests in the Agency MSRs, including MSR financing receivables, owned as of December 31, 2019 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars in thousands):



Fair value at December 31, 2019	$	3,866,386
Discount rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	4,092,509		$	3,975,729		$	3,761,706		$	3,663,443
Change in estimated fair value:
Amount	$	226,123		$	109,343		$	(104,680	)	$	(202,943	)
%	5.8		%	2.8		%	(2.7		)%	(5.2		)%

Prepayment rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	4,107,324		$	3,979,458		$	3,762,759		$	3,669,370
Change in estimated fair value:
Amount	$	240,938		$	113,072		$	(103,627	)	$	(197,016	)
%	6.2		%	2.9		%	(2.7		)%	(5.1		)%

Delinquency rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	3,894,823		$	3,880,231		$	3,851,052		$	3,836,467
Change in estimated fair value:
Amount	$	28,437		$	13,845		$	(15,334	)	$	(29,919	)
%	0.7		%	0.4		%	(0.4		)%	(0.8		)%

Recapture rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	3,750,387		$	3,808,014		$	3,923,267		$	3,980,894
Change in estimated fair value:
Amount	$	(115,999	)	$	(58,372	)	$	56,881		$	114,508
%	(3.0		)%	(1.5		)%	1.5		%	3.0		%

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The following table summarizes the estimated change in fair value of our interests in the Non-Agency MSRs, including MSR financing receivables, owned as of December 31, 2019 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars in thousands):



Fair value at December 31, 2019	$	1,191,205
Discount rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	1,297,395		$	1,242,035		$	1,144,323		$	1,101,029
Change in estimated fair value:
Amount	$	106,190		$	50,830		$	(46,882	)	$	(90,176	)
%	8.9		%	4.3		%	(3.9		)%	(7.6		)%

Prepayment rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	1,242,457		$	1,215,165		$	1,170,536		$	1,153,244
Change in estimated fair value:
Amount	$	51,252		$	23,960		$	(20,669	)	$	(37,961	)
%	4.3		%	2.0		%	(1.7		)%	(3.2		)%

Delinquency rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	1,237,748		$	1,208,944		$	1,151,319		$	1,122,500
Change in estimated fair value:
Amount	$	46,543		$	17,739		$	(39,886	)	$	(68,705	)
%	3.9		%	1.5		%	(3.3		)%	(5.8		)%

Recapture rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	1,175,287		$	1,183,233		$	1,199,126		$	1,207,073
Change in estimated fair value:
Amount	$	(15,918	)	$	(7,972	)	$	7,921		$	15,868
%	(1.3		)%	(0.7		)%	0.7		%	1.3		%

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The following table summarizes the estimated change in fair value of our interests in the Ginnie Mae MSRs, owned as of December 31, 2019 given several parallel shifts in the discount rate, prepayment rate, delinquency rate and recapture rate (dollars in thousands):



Fair value at December 31, 2019	$	628,642
Discount rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	669,493		$	648,353		$	610,223		$	592,976
Change in estimated fair value:
Amount	$	40,851		$	19,711		$	(18,419	)	$	(35,666	)
%	6.5		%	3.1		%	(2.9		)%	(5.7		)%

Prepayment rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	688,871		$	656,702		$	603,773		$	581,508
Change in estimated fair value:
Amount	$	60,229		$	28,060		$	(24,869	)	$	(47,134	)
%	9.6		%	4.5		%	(4.0		)%	(7.5		)%

Delinquency rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	641,371		$	635,006		$	622,277		$	615,914
Change in estimated fair value:
Amount	$	12,729		$	6,364		$	(6,365	)	$	(12,728	)
%	2.0		%	1.0		%	(1.0		)%	(2.0		)%

Recapture rate shift in %	-20%			-10%			10%			20%
Estimated fair value	$	595,876		$	612,259		$	645,025		$	661,408
Change in estimated fair value:
Amount	$	(32,766	)	$	(16,383	)	$	16,383		$	32,766
%	(5.2		)%	(2.6		)%	2.6		%	5.2		%

Each of the preceding sensitivity analyses is hypothetical and should be used with caution. In particular, the results are calculated by stressing a particular economic assumption independent of changes in any other assumption; in practice, changes in one factor may result in changes in another, which might counteract or amplify the sensitivities. Also, changes in the fair value based on a 10% variation in an assumption generally may not be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear.

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Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements:

Report of Independent Registered Public Accounting Firm

Report on Internal Control Over Financial Reporting of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2019 and 2018

Consolidated Statements of Income for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017

Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017

Notes to Consolidated Financial Statements

All schedules have been omitted because either the required information is included in our consolidated financial statements and notes thereto or it is not applicable.

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of New Residential Investment Corp. and Subsidiaries

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of New Residential Investment Corp. and Subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 19, 2020, expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Valuation of servicing related assets



Description of the Matter	The Company invests in servicing related assets comprising of Excess Mortgage Servicing Rights (“EMSR”), Mortgage Servicing Rights and Mortgage Servicing Rights Financing Receivables (collectively “MSR”) and Servicer Advance investments totaling $505 million, $5,686 million and $582 million, respectively, as of December 31, 2019 as included in Notes 5, 6 and 7 to the consolidated financial statements. The Company records servicing related assets at fair value on a recurring basis with changes in fair value recognized in the income statement. These fair value estimates are based on valuation techniques used to estimate future cash flows that incorporate significant unobservable inputs and assumptions which include discount rates, servicing costs, prepayment rates, recapture rates and the projection of advance balances. Auditing management’s fair value of the servicing related assets and related changes in fair value is complex because the valuation is driven by significant assumptions that are judgmental and are unobservable in nature. Additionally, selecting and applying audit procedures to address the estimation uncertainty involves auditor subjectivity and industry-specific knowledge of servicing related assets including the current market conditions considered by a market participant.

How We Addressed the Matter in Our Audit	We evaluated and tested the Company's processes and the design and operating effectiveness of internal controls addressing the valuation of servicing related assets. This included, among others, management’s independent review of significant assumptions including discount rates, servicing costs, prepayment speeds, recapture rates and the projection of servicer advance balances against historical results and available market information, management’s review of internally developed fair values in comparison to independent fair value ranges obtained from an independent valuation firm to evaluate the reasonableness of the fair values developed by the Company and management’s review of model functionality and changes. We also tested management’s controls to validate that the data used in the valuation was complete and accurate. In order to test the valuation of servicing related assets, our audit procedures included testing significant assumptions by comparing to historical results, current industry, market and economic trends, evaluating the Company’s use of the discounted cash flow valuation technique, validating the accuracy and completeness of model objective inputs by agreeing these inputs to the Company’s underlying mortgage records and evaluating the competence and objectivity of management’s independent valuation firm engaged to evaluate the reasonableness of the fair values developed by the Company. We also performed a sensitivity analysis of the significant assumptions to evaluate the changes in fair value of the servicing related assets from these assumptions. We involved an internal valuation specialist to test management’s assumptions and identify potential sources of contrary information. We evaluated the Company’s fair value disclosures included in Note 13 for consistency with US GAAP.

127

Valuation of Non-Agency Real Estate Securities, available-for-sale



Description of the Matter	The Company invests in non-agency Residential Mortgage Backed Securities (“RMBS”) which are classified as available-for-sale on the balance sheet. As disclosed in Note 8 to the consolidated financial statements, the Company determined that the fair value of these non-agency RMBS approximates $7,958 million, as of December 31, 2019. As explained in Note 13 to the consolidated financial statements, the Company utilizes pricing service quotations or broker quotations obtained from third-party pricing services and brokers engaged by New Residential (collectively “valuation providers”) in the fair value measurement of these Level 3 assets. Significant unobservable inputs are used in these fair value measurements which include discount rates, expected prepayment rates, expected default rates and expected loss severities. Auditing management’s fair value of the non-agency RMBS is complex because determining the fair value is judgmental and involves using assumptions that are not directly observable in the market, including discount rates, expected prepayment rates, expected default rates and expected loss severities. Additionally, selecting and applying audit procedures to address the estimation uncertainty involves auditor subjectivity and industry-specific knowledge of non-agency RMBS including the current market conditions considered by a market participant.

How We Addressed the Matter in Our Audit	We evaluated and tested the Company's processes and the design and operating effectiveness of internal controls addressing the valuation of non-agency RMBS. This included controls over the review of valuation methodologies used by the valuation providers, management’s fair value analysis applied to select one of the multiple quotes obtained from the valuation providers which is believed to most accurately reflect fair value and management’s evaluation of the pricing information obtained from the valuation providers. As management used valuation providers to develop its fair value estimate, our audit procedures included selecting a sample of securities to determine whether the final price provided by the pricing source agrees to the price used by management. With the support of an internal valuation specialist, we independently developed a range of fair value for a sample of securities and compared management’s estimates to our ranges. We developed the ranges of fair value by using a cash flow model and inputting cash flow and yield assumptions based on our independently obtained information. We also considered market transaction data for similar securities, if available, to develop our independent ranges to be compared to management’s fair value estimate. We evaluated the Company’s fair value disclosures included in Note 13 for consistency with US GAAP.

128

Valuation of Residential Mortgage Loans (RMLs), held-for-sale, at fair value



Description of the Matter	The Company holds conforming and nonconforming mortgage loans acquired and identified for securitization to investors which are classified as held-for-sale, at fair value on the balance sheet as included in Note 9 to the consolidated financial statements. These RMLs are valued using internal pricing models to forecast loan level cash flows using subjective inputs such as default rates, prepayments speeds and discount rates. As the internal pricing model is based on these subjective, unobservable inputs, the Company classifies these valuations as Level 3 in the fair value hierarchy. The fair value of these loans was $3,024 million as included in Note 13 to the consolidated financial statements as of December 31, 2019. Auditing management’s fair value of the RMLs classified as Level 3 in the fair value hierarchy, was complex because valuation is driven by significant assumptions that are judgmental and are unobservable in nature. Additionally, selecting and applying audit procedures to address the estimation uncertainty involves auditor subjectivity and industry-specific knowledge of RMLs including the current market conditions considered by a market participant.

How We Addressed the Matter in Our Audit	We evaluated and tested the Company's processes and the design and operating effectiveness of internal controls addressing the valuation of RMLs. This included, among others, management’s independent review of significant assumptions including default rates, prepayments speeds and discount rates against historical results and available market information, management’s review of internally developed fair values in comparison to independent fair value marks obtained from third parties to evaluate the reasonableness of the fair values developed by the Company, and management’s review of model functionality and changes. We also tested management’s controls to validate that the data used in the valuation was complete and accurate. In order to test the valuation of RMLs, our audit procedures included, among others, testing significant assumptions by comparing to historical results, current industry, market and economic trends, evaluating the Company’s use of the discounted cash flow valuation technique and validating the accuracy and completeness of model objective inputs. With the support of an internal valuation specialist, we independently developed a range of fair value for a sample of loan pools and compared management’s estimates to our ranges. We developed the ranges based on collateral characteristics of the pools selected for testing and consideration of market transaction data for similar collateral, where available. We evaluated the Company’s fair value disclosures included in Note 13 for consistency with US GAAP.

129

Accounting for the acquisition of assets and liabilities from Ditech Holding Corporation and

Ditech Financial LLC (‘Ditech’)



Description of the Matter	On October 1, 2019, the Company acquired certain assets and assumed certain liabilities from Ditech primarily comprising of MSRs, related servicer advances receivables, RMLs and other assets core to the origination and servicing operations, for a total purchase consideration of $1.2 billion, as disclosed in Note 3 to the consolidated financial statements. In addition, the Company also assumed certain office spaces and added approximately 1,100 employees from Ditech as part of the above transaction. The transaction was accounted for as a business combination under ASC No. 805, Business Combinations which resulted in the recognition of a $49.5 million bargain purchase gain. Auditing the Company’s accounting for the acquisition is complex because the valuation of certain assets acquired including MSRs, RMLs and servicer advance receivables are driven by significant assumptions that are judgmental and are unobservable in nature. Selecting and applying audit procedures to address the estimation uncertainty involves auditor subjectivity and industry-specific knowledge of these assets including the current market conditions considered by a market participant.

How We Addressed the Matter in Our Audit	We evaluated and tested the Company's processes and the design and operating effectiveness of internal controls addressing the accounting for the business combination such as controls over the recognition and measurement of assets acquired, liabilities assumed, and consideration paid. This included controls over the approval of the transaction, review and documentation of accounting considerations, management’s independent review of significant assumptions including discount rates, servicing costs, prepayment speeds, recapture rates, advance recoveries and loss severities against historical results and available market information, management’s review of internally developed fair values for certain assets in comparison to independent fair value ranges obtained from an independent valuation firm to evaluate the reasonableness of the fair values developed by the Company, and management’s review of model functionality for certain assets. We also tested the Company’s controls over evaluating the completeness and accuracy of the information obtained to record the assets acquired and liabilities assumed. In order to test the business combination our audit procedures included testing the amount of consideration paid, testing the recognition of the assets acquired and liabilities assumed at fair value and determining if intangible assets were properly identified. We performed procedures to test the significant assumptions used in the determination of fair value for certain assets acquired including discount rates, servicing costs, prepayment rates, recapture rates, advance recoveries and loss severities by comparing to historical results, current industry, market and economic trends, evaluating the Company’s valuation techniques applied for each asset class acquired and validating the accuracy and completeness of model objective inputs. In addition, we performed procedures to evaluate the competence and objectivity of management’s independent valuation firms. We involved an internal valuation specialist to test management’s assumptions and identify potential sources of contrary information related to MSRs and RMLs acquired. We evaluated the Company’s disclosures included in Note 3 for consistency with US GAAP.

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2012.

New York, New York

February 19, 2020

130

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of New Residential Investment Corp. and Subsidiaries

Opinion on Internal Control over Financial Reporting

We have audited New Residential Investment Corp. and Subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, New Residential Investment Corp. and Subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of New Residential Investment Corp. and Subsidiaries as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019 and the related notes of the Company and our report dated February 19, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

New York, New York

February 19, 2020

131

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)



	December 31,
	2019		2018
Assets
Investments in:
Excess mortgage servicing rights (“MSRs”), at fair value	$	379,747	$	447,860
Excess mortgage servicing rights, equity method investees, at fair value	125,596		147,964
Mortgage servicing rights, at fair value	3,967,960		2,884,100
Mortgage servicing rights financing receivables, at fair value	1,718,273		1,644,504
Servicer advance investments, at fair value^(A)	581,777		735,846
Real estate and other securities, available-for-sale	19,477,728		11,636,581
Residential mortgage loans, held-for-investment (includes $484,443 and $121,088 at fair value at December 31, 2019 and December 31, 2018, respectively)^(A)	925,706		735,329
Residential mortgage loans, held-for-sale	1,429,052		932,480
Residential mortgage loans, held-for-sale, at fair value	4,613,612		2,808,529
Consumer loans, held-for-investment^(A)	827,545		1,072,202
Cash and cash equivalents^(A)	528,737		251,058
Restricted cash	162,197		164,020
Servicer advances receivable	3,301,374		3,277,796
Trades receivable	5,256,014		3,925,198
Deferred tax asset, net	8,669		65,832
Other assets (includes $172,336 and $121,602 in residential mortgage loans subject to repurchase at December 31, 2019 and December 31,2018, respectively)	1,559,467		961,714
	$	44,863,454	$	31,691,013

Liabilities and Equity

Liabilities
Repurchase agreements	$	27,916,225	$	15,553,969
Notes and bonds payable (includes $659,738 and $117,048 at fair value at December 31, 2019 and December 31, 2018, respectively)^(A)	7,720,148		7,102,266
Trades payable	902,081		2,048,348
Due to affiliates	103,882		101,471
Dividends payable	211,732		184,552
Accrued expenses and other liabilities^(A) (includes $172,336 and $121,602 in residential mortgage loans repurchase liabilities at December 31, 2019 and December 31,2018, respectively)	773,126		612,112
	37,627,194		25,602,718

Commitments and Contingencies

Equity
Preferred Stock, par value of $0.01 per share, 100,000,000 shares authorized:
7.50% Series A Preferred Stock, $0.01 par value, 11,500,000 shares authorized, 6,210,000 and 0 issued and outstanding at December 31, 2019 and December 31, 2018, respectively	150,026		—
7.125% Series B Preferred Stock, $0.01 par value, 11,500,000 shares authorized, 11,300,000 and 0 issued and outstanding at December 31, 2019 and December 31, 2018, respectively	273,418		—
Common Stock, $0.01 par value, 2,000,000,000 shares authorized, 415,520,780 and 369,104,429 issued and outstanding at December 31, 2019 and December 31, 2018, respectively	4,156		3,692
Additional paid-in capital	5,498,226		4,746,242
Retained earnings	549,733		830,713
Accumulated other comprehensive income (loss)	682,151		417,023
Total New Residential stockholders’ equity	7,157,710		5,997,670
Noncontrolling interests in equity of consolidated subsidiaries	78,550		90,625
Total Equity	7,236,260		6,088,295
	$	44,863,454	$	31,691,013


(A)	See Note 14 regarding consolidated VIEs.

See notes to consolidated financial statements.

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(dollars in thousands, except share and per share data)



	Year Ended December 31,
	2019			2018			2017
Interest income	$	1,766,130		$	1,664,223		$	1,519,679
Interest expense	933,751			606,433			460,865
Net Interest Income	832,379			1,057,790			1,058,814

Impairment
Other-than-temporary impairment (OTTI) on securities	25,174			30,017			10,334
Valuation and loss provision, net on loans and real estate owned (REO)	10,403			60,624			75,758
	35,577			90,641			86,092

Net interest income after impairment	796,802			967,149			972,722

Servicing revenue, net of change in fair value of $(712,950), $(191,245), and $(67,672), respectively	385,159			528,595			424,349
Gain on originated mortgage loans, held-for-sale, net	475,455			96,145			—
Other Income
Change in fair value of investments in excess mortgage servicing rights	(10,505		)	(58,656		)	4,322
Change in fair value of investments in excess mortgage servicing rights, equity method investees	6,800			8,357			12,617
Change in fair value of investments in mortgage servicing rights financing receivables	(189,023		)	31,550			66,394
Change in fair value of servicer advance investments	10,288			(89,332		)	84,418
Change in fair value of investments in residential mortgage loans	(70,914		)	69,820			—
Change in fair value of derivative investments	(56,143		)	(108,234		)	(2,190		)
Gain (loss) on settlement of investments, net	225,687			95,085			10,310
Earnings from investments in consumer loans, equity method investees	(1,438		)	10,803			25,617
Other income (loss), net	44,149			(10,778		)	6,298
	(41,099		)	(51,385		)	207,786

Operating Expenses
General and administrative expenses	538,035			231,579			67,159
Management fee to affiliate	79,472			62,594			55,634
Incentive compensation to affiliate	91,892			94,900			81,373
Loan servicing expense	31,737			43,547			52,330
Subservicing expense	227,482			176,784			166,081
	968,618			609,404			422,577

Income Before Income Taxes	647,699			931,100			1,182,280
Income tax (benefit) expense	41,766			(73,431		)	167,628
Net Income	$	605,933		$	1,004,531		$	1,014,652
Noncontrolling Interests in Income of Consolidated Subsidiaries	$	42,637		$	40,564		$	57,119
Dividends on Preferred Stock	$	13,281		$	—		$	—
Net Income Attributable to Common Stockholders	$	550,015		$	963,967		$	957,533

Net Income Per Share of Common Stock
Basic	$	1.35		$	2.82		$	3.17
Diluted	$	1.34		$	2.81		$	3.15

Weighted Average Number of Shares of Common Stock Outstanding
Basic	408,789,642			341,268,923			302,238,065
Diluted	408,990,107			343,137,361			304,381,388

Dividends Declared per Share of Common Stock	$	2.00		$	2.00		$	1.98

See notes to consolidated financial statements.

132

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in thousands)



	December 31,
	2019			2018			2017
Comprehensive income (loss), net of tax
Net income	$	605,933		$	1,004,531		$	1,014,652
Other comprehensive income (loss)
Net unrealized gain (loss) on securities	445,943			(7,397		)	248,412
Reclassification of net realized (gain) loss on securities into earnings	(180,815		)	59,953			(10,308		)
	265,128			52,556			238,104
Total comprehensive income	$	871,061		$	1,057,087		$	1,252,756
Comprehensive income attributable to noncontrolling interests	$	42,637		$	40,564		$	57,119
Dividends on preferred stock	$	13,281		$	—		$	—
Comprehensive income attributable to common stockholders	$	815,143		$	1,016,523		$	1,195,637

See notes to consolidated financial statements.

133

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2019, 2018 and 2017

(dollars in thousands)



			Common Stock
	Preferred Stock		Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Total New Residential Stockholders’ Equity			Noncontrolling Interests in Equity of Consolidated Subsidiaries			Total Equity
Balance at December 31, 2016	$	—	250,773,117	$	2,507	$	2,920,730		$	210,500		$	126,363		$	3,260,100		$	208,077		$	3,468,177
Dividends declared	—		—	—		—			(608,557		)	—			(608,557		)	—			(608,557		)
Capital distributions	—		—	—		—			—			—			—			(84,196		)	(84,196		)
Issuance of common stock	—		56,545,787	566		833,963			—			—			834,529			—			834,529
Purchase of noncontrolling interests in the Buyer	—		—	—		9,183			—			—			9,183			(75,043		)	(65,860		)
Option exercise	—		—	—		(1,386		)	—			—			(1,386		)	—			(1,386		)
Director share grants	—		42,405	1		698			—			—			699			—			699
Comprehensive income (loss)
Net income (loss)	—		—	—		—			957,533			—			957,533			57,119			1,014,652
Net unrealized gain (loss) on securities	—		—	—		—			—			248,412			248,412			—			248,412
Reclassification of net realized gain (loss) on securities into earnings	—		—	—		—			—			(10,308		)	(10,308		)	—			(10,308		)
Total comprehensive income (loss)															1,195,637			57,119			1,252,756
Balance at December 31, 2017	$	—	307,361,309	$	3,074	$	3,763,188		$	559,476		$	364,467		$	4,690,205		$	105,957		$	4,796,162
Dividends declared	—		—	—		—			(692,730		)	—			(692,730		)	—			(692,730		)
Capital distributions	—		—	—		—			—			—			—			(64,559		)	(64,559		)
Issuance of common stock	—		57,991,659	580		981,482			—			—			982,062			—			982,062
Option exercise	—		3,694,228	37		(37		)	—			—			—			—			—
Purchase of noncontrolling interests in the Buyer	—		—	—		653			—			—			653			8,663			9,316
Other dilution	—		—	—		(63		)	—			—			(63		)	—			(63		)
Director share grants	—		57,233	1		1,019			—			—			1,020			—			1,020
Comprehensive income (loss)
Net income (loss)	—		—	—		—			963,967			—			963,967			40,564			1,004,531
Net unrealized gain (loss) on securities	—		—	—		—			—			(7,397		)	(7,397		)	—			(7,397		)
Reclassification of net realized gain (loss) on securities into earnings	—		—	—		—			—			59,953			59,953			—			59,953
Total comprehensive income (loss)															1,016,523			40,564			1,057,087
Balance at December 31, 2018	$	—	369,104,429	$	3,692	$	4,746,242		$	830,713		$	417,023		$	5,997,670		$	90,625		$	6,088,295
Dividends declared on common stock	—		—	—		—			(830,995		)	—			(830,995		)	—			(830,995		)
Dividends declared on preferred stock	—		—	—		—			(13,281		)	—			(13,281		)	—			(13,281		)
Capital distributions	—		—	—		—			—			—			—			(54,712		)	(54,712		)
Issuance of common stock	—		46,000,000	460		750,933			—			—			751,393			—			751,393
Issuance of preferred stock	423,444		—	—		—			—			—			423,444			—			423,444
Option exercise	—		348,613	3		(3		)	—			—			—			—			—
Purchase of noncontrolling interests in the Buyer	—		—	—		—			—			—			—			—			—
Director share grants	—		67,738	1		1,054			—			—			1,055			—			1,055
Comprehensive income (loss)
Net income (loss)	—		—	—		—			563,296			—			563,296			42,637			605,933
Net unrealized gain (loss) on securities	—		—	—		—			—			445,943			445,943			—			445,943
Reclassification of net realized (gain) loss on securities into earnings	—		—	—		—			—			(180,815		)	(180,815		)	—			(180,815		)
Total comprehensive income (loss)															828,424			42,637			871,061
Balance at December 31, 2019	$	423,444	415,520,780	$	4,156	$	5,498,226		$	549,733		$	682,151		$	7,157,710		$	78,550		$	7,236,260

See notes to consolidated financial statements.

134

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)

	Year Ended December 31,
	2019			2018			2017

Cash Flows From Operating Activities
Net income	$	605,933		$	1,004,531		$	1,014,652
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Change in fair value of investments in excess mortgage servicing rights	10,505			58,656			(4,322		)
Change in fair value of investments in excess mortgage servicer rights, equity method investees	(6,800		)	(8,357		)	(12,617		)
Change in fair value of investments in mortgage servicing rights financing receivables	189,023			(31,550		)	(66,394		)
Change in fair value of servicer advance investments	(10,288		)	89,332			(84,418		)
Change in fair value of residential mortgage loans, at fair value, and notes and bonds payable, at fair value	50,244			(68,929		)	—
(Gain) / loss on settlement of investments, net	(225,687		)	(95,085		)	(10,310		)
Gain on sale of originated mortgage loans, held-for-sale, net	(475,455		)	(96,145		)	—
Bargain Purchase Gain	(49,539		)	—			—
Earnings from investments in consumer loans, equity method investees	1,438			(10,803		)	(25,617		)
Change in fair value of derivative instruments	56,143			108,234			2,190
Changes in fair value of contingent consideration	10,487			1,581			—
Unrealized (gain) / loss on other ABS	(2,101		)	(10,283		)	(2,883		)
(Gain) / loss on transfer of loans to REO	(11,842		)	(19,519		)	(22,938		)
(Gain) / loss on transfer of loans to other assets	1,144			1,977			(488		)
(Gain) / loss on Excess MSR recapture agreements	(2,294		)	(979		)	(2,384		)
(Gain) / loss on Ocwen common stock	(174		)	10,860			(5,346		)
Accretion and other amortization	(379,129		)	(701,967		)	(1,031,384		)
Other-than-temporary impairment	25,174			30,017			10,334
Valuation and loss provision on loans and real estate owned	10,403			60,624			75,758
Non-cash portions of servicing revenue, net	712,950			191,245			67,672
Non-cash directors’ compensation	1,055			1,020			699
Deferred tax provision	52,991			(80,054		)	168,518
Changes in:
Servicer advances receivable, net	218,217			381,400			(30,688		)
Other assets	(338,300		)	(193,681		)	(32,174		)
Due to affiliates	2,411			12,510			41,613
Accrued expenses and other liabilities	182,153			186,311			26,081
Other operating cash flows:
Interest received from excess mortgage servicing rights	34,050			45,947			79,612
Interest received from servicer advance investments	28,437			33,821			168,595
Interest received from Non-Agency RMBS	264,694			219,704			211,599
Interest received from PCD residential mortgage loans, held-for-investment	8,485			8,962			8,021
Interest received from PCD consumer loans, held-for-investment	30,588			36,660			52,372
Distributions of earnings from excess mortgage servicing rights, equity method investees	8,999			11,059			13,668
Distributions of earnings from consumer loan equity method investees	8,607			6,176			6,240
Purchases of residential mortgage loans, held-for-sale	(8,610,511		)	(5,767,172		)	(5,135,700		)
Origination of residential mortgage loans, held-for-sale	(19,411,150		)	(3,385,868		)	—
Proceeds from sales of purchased and originated residential mortgage loans, held-for-sale	24,968,751			6,546,613			3,514,108
Principal repayments from purchased residential mortgage loans, held-for-sale	417,840			194,038			106,213
Net cash provided by (used in) operating activities	(1,622,548		)	(1,229,114		)	(899,718		)

135

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)

	Year Ended December 31,
	2019		2018		2017

Cash Flows From Investing Activities
Business Acquisitions, net of cash acquired	(1,223,233	)	(123,185	)	—
Purchase of servicer advance investments	(1,622,808	)	(2,306,043	)	(12,168,519	)
Purchase of MSRs, MSR financing receivables and servicer advance receivables	(1,450,375	)	(1,194,467	)	(1,661,608	)
Purchase of Agency RMBS	(35,479,893	)	(10,200,299	)	(9,165,868	)
Purchase of Non-Agency RMBS	(885,629	)	(2,969,308	)	(2,570,753	)
Purchase of residential mortgage loans	—		(85,778	)	(609,627	)
Purchase of derivatives	—		—		(2,350	)
Purchase of real estate owned and other assets	(68,024	)	(33,377	)	(38,127	)
Purchase of investment in consumer loans, equity method investees	(64,499	)	(308,050	)	(470,344	)
Purchase of commercial real estate, equity method investees	—		(75,000	)	—
Draws on revolving consumer loans	(54,375	)	(63,971	)	(56,321	)
Payments for settlement of derivatives	(300,771	)	(172,152	)	(164,025	)
Return of investments in excess mortgage servicing rights	48,444		53,055		172,395
Return of investments in excess mortgage servicing rights, equity method investees	20,169		21,099		21,972
Return of investments in consumer loans, equity method investees	92,748		300,056		393,722
Principal repayments from servicer advance investments	1,786,394		2,421,334		13,820,019
Principal repayments from Agency RMBS	2,085,283		111,202		107,666
Principal repayments from Non-Agency RMBS	1,294,010		939,690		815,451
Principal repayments from residential mortgage loans	113,602		147,403		94,807
Proceeds from sale of residential mortgage loans	41,622		25,511		13,313
Principal repayments from consumer loans	261,456		311,222		401,403
Principal repayments from MSRs and MSR financing receivables	51,470		—		—
Proceeds from sale of mortgage servicing rights	1,539		5,776		—
Proceeds from sale of mortgage servicing rights financing receivables	22,989		7,472		—
Proceeds from sale of excess mortgage servicing rights	10,095		19,064		13,505
Proceeds from sale of Agency RMBS	22,173,505		7,528,490		8,880,766
Proceeds from sale of Non-Agency RMBS	1,950,384		86,443		182,384
Proceeds from settlement of derivatives	108,472		242,422		126,319
Proceeds from sale of real estate owned	138,910		140,301		86,241
Net cash used in investing activities	(10,948,515	)	(5,171,090	)	(1,777,579	)

136

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(dollars in thousands)



	Year Ended December 31,
	2019			2018			2017
Cash Flows From Financing Activities
Repayments of repurchase agreements	(230,954,107		)	(93,214,286		)	(54,289,124		)
Margin deposits under repurchase agreements and derivatives	(4,567,677		)	(1,934,868		)	(1,056,408		)
Repayments of notes and bonds payable	(9,307,033		)	(9,892,659		)	(8,971,523		)
Payment of deferred financing fees	(6,705		)	(12,498		)	(6,610		)
Common stock dividends paid	(807,788		)	(661,859		)	(570,232		)
Preferred shareholders stock dividends paid	(9,334		)	—			—
Borrowings under repurchase agreements	243,316,628			99,662,678			57,762,563
Return of margin deposits under repurchase agreements and derivatives	4,365,946			1,733,387			1,058,791
Borrowings under notes and bonds payable	9,706,864			9,770,909			8,057,720
Issuance of preferred stock	423,444			—			—
Issuance of common stock	752,217			983,149			835,465
Costs related to issuance of common stock	(824		)	(1,087		)	(936		)
Noncontrolling interest in equity of consolidated subsidiaries - contributions	—			—			—
Noncontrolling interest in equity of consolidated subsidiaries - distributions	(54,712		)	(64,559		)	(84,196		)
Payment of contingent consideration	(10,000		)	—			—
Purchase of noncontrolling interests in the Buyer	—			925			(65,860		)
Net cash provided by financing activities	12,846,919			6,369,232			2,669,650

Net Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash	275,856			(30,972		)	(7,647		)

Cash, Cash Equivalents, and Restricted Cash, Beginning of Period	415,078			446,050			453,697

Cash, Cash Equivalents, and Restricted Cash, End of Period	$	690,934		$	415,078		$	446,050

Supplemental Disclosure of Cash Flow Information
Cash paid during the period for interest	$	902,466		$	564,722		$	442,287
Cash paid during the period for income taxes	1,479			5,012			5,021

Supplemental Schedule of Non-Cash Investing and Financing Activities
Dividends declared but not paid	$	211,732		$	184,552		$	153,681
Purchase of Agency and Non-Agency RMBS, settled after year end	902,081			2,048,348			1,169,896
Sale of investments, primarily Agency RMBS, settled after year end	5,256,014			3,925,198			1,030,850
Transfer from residential mortgage loans to real estate owned and other assets	95,640			109,527			141,968
Transfer from residential mortgage loans, held-for-investment to residential mortgage loans, held-for-sale	9,136			23,080			23,080
Non-cash distributions from LoanCo	—			25,739			44,587
MSR purchase price holdback	(25,245		)	(697		)	40,854
Shellpoint Acquisition purchase price holdback	—			8,173			—
Shellpoint Acquisition contingent consideration	—			39,300			—
Guardian Acquisition contingent consideration	13,893			—			—
Ditech effective settlement of Preexisting Relationships	4,919			—			—
Real estate securities retained from loan securitizations	1,171,959			900,491			403,270
Residential mortgage loans subject to repurchase	172,336			121,602			—
Ocwen transaction (Note 6) - excess mortgage servicing rights	—			638,567			71,982
Ocwen transaction (Note 6) - servicer advance investments	—			3,175,891			481,220
Ocwen transaction (Note 6) - mortgage servicing rights financing receivables, at fair value	—			1,017,993			64,450

See notes to consolidated financial statements.

137

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

1. ORGANIZATION

New Residential Investment Corp. (together with its subsidiaries, “New Residential”, or “the Company”) is a Delaware corporation that was formed as a limited liability company in September 2011 for the purpose of making real estate related investments and commenced operations on December 8, 2011. New Residential is an independent publicly traded real estate investment trust (“REIT”) primarily focused on investing in residential mortgage related assets. New Residential is listed on the New York Stock Exchange (“NYSE”) under the symbol “NRZ.”

New Residential has elected and intends to qualify to be taxed as a REIT for U.S. federal income tax purposes. As such, New Residential will generally not be subject to U.S. federal corporate income tax on that portion of its net income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements. See Note 19 - Income Taxes, for additional information regarding New Residential’s taxable REIT subsidiaries.

New Residential, through its wholly-owned subsidiaries New Residential Mortgage LLC (“NRM”) and NewRez LLC (“NewRez”), is licensed or otherwise eligible to service residential mortgage loans in all states within the United States and the District of Columbia. Each of NRM and NewRez is also approved to service mortgage loans on behalf of investors, including the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) (collectively, Government Sponsored Enterprises or “GSEs”) and, solely in the case of NewRez, Government National Mortgage Association (“Ginnie Mae”). NewRez is also eligible to perform servicing on behalf of other servicers (subservicing).

NewRez originates, sells and securitizes conventional (conforming to the underwriting standards of Fannie Mae or Freddie Mac; collectively referred to as “Agency” loans), government-insured (Federal Housing Administration (“FHA”) and Department of Veterans Affairs (“VA”)), and U.S. Department of Agriculture (“USDA”) and non-qualified (“Non-QM”) residential mortgage loans. The GSEs or Ginnie Mae guarantee securitizations completed under their applicable policies and guidelines. New Residential generally retains the right to service the underlying residential mortgage loans sold and securitized by NewRez. NRM and NewRez are required to conduct aspects of their operations in accordance with applicable policies and guidelines published by FHA, Fannie Mae and Freddie Mac in order to maintain those approvals.

New Residential has entered into a management agreement (the “Management Agreement”) with FIG LLC (the “Manager”), an affiliate of Fortress Investment Group LLC (“Fortress”), pursuant to which the Manager provides a management team and other professionals who are responsible for implementing New Residential’s business strategy, subject to the supervision of New Residential’s board of directors. For its services, the Manager is entitled to management fees and incentive compensation, both defined in, and in accordance with the terms of, the Management Agreement.

As of December 31, 2019, New Residential conducted its business through the following segments: (i) Origination, (ii) Servicing, (iii) MSR Related Investments, (iv) Residential Securities and Loans, (v) Consumer Loans and (vi) Corporate.

Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, as of December 31, 2019. In addition, Fortress, through its affiliates, held options relating to approximately 10.5 million shares of New Residential’s common stock as of December 31, 2019.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting — The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP’’ or “US GAAP”). The consolidated financial statements include the accounts of New Residential and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated. New Residential consolidates those entities in which it has control over significant operating, financial and investing decisions of the entity, as well as those entities deemed to be variable interest entities (“VIEs”) in which New Residential is determined to be the primary beneficiary. For entities over which New Residential exercises significant influence, but which do not meet the requirements for consolidation, New Residential uses the equity method of accounting whereby it records its share of the underlying income of such entities. Distributions from equity method investees are classified in the Statements of Cash Flows based on the cumulative earnings approach, where all distributions up to cumulative earnings are classified as distributions of earnings. Certain prior period amounts have been reclassified to conform to the current period’s presentation.

138

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Risks and Uncertainties — In the normal course of business, New Residential encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on New Residential’s investments that results from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments due to changes in prepayment rates, interest rates, spreads or other market factors, including risks that impact the value of the collateral underlying New Residential’s investments. New Residential believes that the carrying values of its investments are reasonable taking into consideration these risks along with estimated prepayments, financings, collateral values, payment histories, and other information. Furthermore, for each of the periods presented, a significant portion of New Residential’s assets are dependent on its servicers’ and subservicers’ ability to perform their obligations servicing the loans underlying New Residential’s Excess MSRs, MSRs, MSR Financing Receivables, Servicer Advance Investments, Non-Agency RMBS and loans. If a servicer is terminated, New Residential’s right to receive its portion of the cash flows related to interests in servicing related assets may also be terminated.

Additionally, New Residential is subject to significant tax risks. If New Residential were to fail to qualify as a REIT in any taxable year, New Residential would be subject to U.S. federal corporate income tax (including any applicable alternative minimum tax), which could be material. Unless entitled to relief under certain statutory provisions, New Residential would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost.

Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Comprehensive Income — Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners. For New Residential’s purposes, comprehensive income represents net income, as presented in the Consolidated Statements of Income, adjusted for unrealized gains or losses on securities available for sale.

INCOME RECOGNITION

Investments in Excess Mortgage Servicing Rights — Excess MSRs are aggregated into pools as applicable; each pool of Excess MSRs is accounted for in the aggregate. Interest income for Excess MSRs is accreted into interest income on an effective yield or “interest” method, based upon the expected excess mortgage servicing amount through the expected life of the underlying mortgages. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded in the period in which the change in expected cash flows occurs. Under the retrospective method, the interest income recognized for a reporting period is measured as the difference between the amortized cost basis at the end of the period and the amortized cost basis at the beginning of the period, plus any cash received during the period. The amortized cost basis is calculated as the present value of estimated future cash flows using an effective yield, which is the yield that equates all past actual and current estimated future cash flows to the initial investment. In addition, New Residential’s policy is to recognize interest income only on its Excess MSRs in existing eligible underlying mortgages. The difference between the fair value of Excess MSRs and their amortized cost basis is recorded as “Change in fair value of investments in excess mortgage servicing rights.” Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the Excess MSRs, and therefore may differ from their effective yields.

Investments in MSRs — MSRs are aggregated into pools as applicable; each pool of MSRs is accounted for in the aggregate. Income from MSRs is recorded in “Servicing revenue, net” and is comprised of three components: (i) income receivable from the MSRs, less (ii) amortization of the basis of the MSRs, plus or minus (iii) the mark-to-market on the MSRs. Amortization of the basis of the MSRs is based on the remaining UPB of the residential mortgage loans underlying the MSRs relative to their UPB at acquisition. Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the MSRs.

Investments in MSR Financing Receivables — In certain cases, New Residential has legally purchased MSRs or the right to the economic interest in MSRs; however, New Residential has determined that the purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential records an investment in mortgage servicing rights financing receivables. Income from this investment (net of subservicing fees) is recorded as interest income, and New

139

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Residential has elected to measure the investment at fair value, with changes in fair value flowing through change in fair value of investments in mortgage servicing rights financing receivables in the Consolidated Statements of Income.

Servicer Advance Investments — New Residential accounts for its Servicer Advance Investments similarly to its investments in Excess MSRs. Interest income for Servicer Advance Investments is accreted into interest income on an effective yield or “interest” method, based upon the expected aggregate cash flows of the Servicer Advance Investments, including the basic fee component of the related MSR (but excluding any Excess MSR component) through the expected life of the underlying mortgages, net of a portion of the basic fee component of the MSR that New Residential remits to the servicer as compensation for the servicer’s servicing activities. Changes to expected cash flows result in a cumulative retrospective adjustment, which will be recorded in the period in which the change in expected cash flows occurs. Refer to “—Investments in Excess Mortgage Servicing Rights” for a description of the retrospective method. Fair value is generally determined by discounting the expected future cash flows using discount rates that incorporate the market risks and liquidity premium specific to the Servicer Advance Investments, and therefore may differ from their effective yields.

Investments in Real Estate and Other Securities — Discounts or premiums are accreted into interest income on an effective yield or “interest” method, based upon a comparison of actual and expected cash flows, through the expected maturity date of the security. For securities acquired at a discount for credit quality (i.e., where it is probable at acquisition that New Residential will not collect all contractually required interest and principal repayments), the difference between contractual cash flows and expected cash flows at acquisition is not accreted (non-accretable difference). For these securities, the excess of expected cash flows over the carrying value (accretable yield) is recognized as interest income on an effective yield basis.

Depending on the nature of the investment, changes to expected cash flows may result in a prospective change to yield or a retrospective change which would include a catch up adjustment. Deferred fees and costs, if any, are recognized as an adjustment to the interest income over the terms of the securities using the interest method. Upon settlement of securities, the specific identification method is used to determine the excess (or deficiency) of net proceeds over the net carrying value of such security recognized as a realized gain (or loss) in the period of settlement.

Investments in Residential Mortgage Loans, REO and Consumer Loans — New Residential evaluates the credit quality of its loans, as of the acquisition date, for evidence of credit quality deterioration. Loans with evidence of credit deterioration since their origination, and where it is probable that New Residential will not collect all contractually required principal and interest payments, are Purchased Credit Deteriorated (“PCD”) loans. At acquisition, New Residential aggregates PCD loans into pools based on common risk characteristics and the aggregated loans are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows. The excess of the total cash flows (both principal and interest) expected to be collected over the carrying value of the PCD loans is referred to as the accretable yield. This amount is not reported on New Residential’s Consolidated Balance Sheets but is accreted into interest income at a level rate of return over the remaining estimated life of the pool of loans.

Loans where New Residential expects to collect all contractually required principal and interest payments are considered performing loans. Interest income on performing loans is accrued and recognized as interest income at their effective yield, which includes contractual interest and the amortization of purchase price discount or premium and deferred fees or expenses, and considers anticipated prepayment rates.

Loans acquired with the intent to sell and loans not acquired with the intent to sell that New Residential decides to sell are classified as held-for-sale. Loans held-for-sale are measured at the lower of cost or fair value, with valuation changes recorded in impairment. Purchase price discounts or premiums are deferred in a contra loan account until the related loan is sold. The deferred discounts or premiums are an adjustment to the basis of the loan and are included in the quarterly determination of the lower of cost or fair value adjustments and/or the gain or loss recognized at the time of sale.

Residential mortgage loans, held-for-sale, at fair value are originated or acquired loans for which New Residential has elected to account for at fair value. Accordingly, we estimate the fair value of the residential mortgage loans, held-for-sale, at fair value at each reporting date and reflect the change in the fair value in the Consolidated Statements of Income.

For originated residential mortgage loans measured at fair value, we report the change in the fair value within gain on originated mortgage loans, held-for-sale, net in the consolidated statements of income. Fair value is generally determined using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to

140

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

approximate the fair value of a whole mortgage loan, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted for credit risk and other individual loan characteristics.

For acquired residential mortgage loans measured at fair value, we report the change in the fair value within change in fair value of investments in residential mortgage loans in the consolidated statements of income. Fair value is generally determined by discounting the expected future cash flows using inputs such as default rates, prepayment speeds and discount rates.

Interest earned on residential mortgage loans measured at fair value are reported in other income.

Real estate owned (“REO”) assets are those individual properties acquired by New Residential or where New Residential receives the property in satisfaction of a debt (e.g., by taking legal title or physical possession). New Residential measures REO assets at the lower of cost or fair value, with valuation changes recorded in other income or impairment, as applicable.

Impairment of Securities — Securities are considered to be impaired when it is probable that New Residential will be unable to collect all principal or interest when due according to the contractual terms of the original agreements, or for securities purchased at a discount for credit quality or that represent retained beneficial interests in securitizations, when New Residential determines that it is probable that it will be unable to collect as anticipated.

The evaluation of a security’s estimated cash flows includes the following, as applicable: (i) review of the credit of the issuer or borrower, (ii) review of the credit rating of the security, (iii) review of the key terms of the security or underlying loans, (iv) review of the performance of the underlying loans, including debt service coverage and loan to value ratios, (v) analysis of the value of the underlying loans, (vi) analysis of the effect of local, industry and broader economic factors, and (vii) analysis of historical and anticipated trends in defaults, loss severities and prepayments for similar securities or underlying loans. New Residential must record a write down if it has the intent to sell a given security in an unrealized loss position, or if it is more likely than not that it will be required to sell such a security. Upon determination of impairment, New Residential records a direct write down for securities based on the estimated fair value of the security or underlying collateral using a discounted cash flow analysis or based on an observable market value. Subsequent to a determination of impairment, and a related write down, income on securities is accrued on an effective yield method from the new carrying value to the related expected cash flows, with cash received treated as a reduction of basis.

Impairment of Loans — To the extent that they are classified as held-for-investment, New Residential must periodically evaluate each of these loans or loan pools for possible impairment. Impairment is indicated when it is deemed probable that New Residential will be unable to collect all amounts due according to the contractual terms of the loan, or for PCD loans, when it is deemed probable that New Residential will be unable to collect as anticipated. Upon determination of impairment, New Residential establishes an allowance for loan losses with a corresponding charge to earnings.

Performing loans are aggregated into pools for the evaluation of impairment based on like characteristics, such as loan type and acquisition date. Pools of loans are evaluated based on criteria such as an analysis of borrower performance, credit ratings of borrowers, loan to value ratios, the estimated value of the underlying collateral, if any, the key terms of the loans and historical and anticipated trends in defaults and loss severities for the type and seasoning of loans being evaluated. This information is used to estimate provisions for estimated unidentified incurred losses on pools of loans. Significant judgment is required in determining impairment and in estimating the resulting loss allowance.

For PCD loans, New Residential estimates the total cash flows expected to be collected over the remaining life of each pool. Probable decreases in expected cash flows trigger the recognition of impairment. Impairments are recognized through the provision for loans and an increase in the allowance for loan losses. Probable and significant increases in expected cash flows would first reverse any previously recorded allowance for loan losses with any remaining increases recognized prospectively as a yield adjustment over the remaining estimated lives of the underlying loans.

A loan is determined to be past due when a monthly payment is due and unpaid for 30 days or more. Loans, other than PCD loans, are placed on nonaccrual status and considered non-performing when full payment of principal and interest is in doubt, which generally occurs when principal or interest is 120 days or more past due unless the loan is both well secured and in the process of collection. A loan may be returned to accrual status when repayment is reasonably assured and there has been demonstrated performance under the terms of the loan or, if applicable, the terms of the restructured loan. New Residential’s ability to recognize

141

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

interest income on nonaccrual loans as cash interest payments are received rather than as a reduction of the carrying value of the loans is based on the recorded loan balance being deemed fully collectible.

Loans held-for-sale are subject to the nonaccrual policy described above, however, as loans held-for-sale are recognized at the lower of cost or fair value, New Residential’s allowance for loan losses and charge-off policies do not apply to these loans.

Accretion and Other Amortization — As reflected on the consolidated statements of cash flows, this item is comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Accretion of net discount on securities and loans^(A)	$	323,652		$	452,500		$	398,213
Accretion of servicer advances receivable discount and servicer advance investments	28,094			214,876			542,983
Accretion of excess mortgage servicing rights income	32,647			44,440			103,053
Amortization of deferred financing costs	(4,019		)	(7,795		)	(12,076		)
Amortization of discount on notes and bonds payable	(1,245		)	(2,054		)	(789		)
	$	379,129		$	701,967		$	1,031,384

(A) Includes accretion of the accretable yield on PCD loans.

Other Income (Loss), Net — This item is comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Unrealized gain (loss) on other ABS	$	2,101		$	10,283		$	2,883
Unrealized gain (loss) on notes and bonds payable	(1,236		)	(684		)	—
Unrealized gain (loss) on contingent consideration	(10,487		)	(1,581		)	—
Gain (loss) on transfer of loans to REO	11,842			19,519			22,938
Gain (loss) on transfer of loans to other assets	(1,144		)	(1,977		)	488
Gain (loss) on Excess MSR recapture agreements	2,294			979			2,384
Gain (loss) on Ocwen common stock	174			(10,860		)	5,346
Bargain Purchase Gain^(A)	49,539			—			—
Rental and Ancillary Revenue	21,181			—			—
Other income (loss)	(30,115		)	(26,457		)	(27,741		)
	$	44,149		$	(10,778	)	$	6,298

(A) Partly driven by certain transition, integration, relocation and training costs incurred by the Ditech Acquisition (Note 3).

142

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Gain (Loss) on Settlement of Investments, Net — This item is comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Gain (loss) on sale of real estate securities, net	$	205,989		$	(29,936	)	$	20,642
Gain (loss) on sale of acquired residential mortgage loans, net	153,174			(7,677		)	39,731
Gain (loss) on settlement of derivatives	(129,923		)	54,867			(39,214		)
Gain (loss) on liquidated residential mortgage loans	(4,872		)	(3,734		)	(10,201		)
Gain (loss) on sale of REO	(11,521		)	(12,424		)	(9,215		)
Gains on settlement of investments in excess MSRs and servicer advance investments	—			113,002			11,320
Other gains (losses)	12,840			(19,013		)	(2,753		)
	$	225,687		$	95,085		$	10,310

EXPENSE RECOGNITION

Interest Expense — New Residential finances certain investments using floating rate repurchase agreements and loans. Interest is expensed as incurred.

General and Administrative Expenses, Loan Servicing Expense and Subservicing Expense — General and administrative expense primarily include employee compensation, legal fees, audit fees, insurance premiums, and other costs, as well as loan servicing and subservicing expenses, and are expensed as incurred. General and Administrative Expenses is comprised of the following:



	Year Ended December 31,
	2019		2018		2017
Compensation and benefits expense, servicing	$	121,004	$	47,084	$	184
Compensation and benefits expense, origination	164,485		62,786		—
Legal and professional expense	89,489		45,234		40,182
Loan origination expense	59,418		16,050		—
Occupancy expense	19,388		8,868		—
Other^(A)	84,251		51,557		26,793
	$	538,035	$	231,579	$	67,159

(A) Represents miscellaneous general and administrative expenses.

Management Fee and Incentive Compensation to Affiliate — These represent amounts due to the Manager pursuant to the Management Agreement. For further information on the Management Agreement, see Note 17.

BALANCE SHEET MEASUREMENT

Investments in Servicing Related Assets — Servicing related assets consist of New Residential’s Excess MSRs, MSRs, MSR Financing Receivables, and Servicer Advance Investments. Upon acquisition, New Residential has elected to record each of such investments at fair value. New Residential elected to record its investments at fair value in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on servicing related assets. Under this election, New Residential records a valuation adjustment on its investments in servicing related assets on a quarterly basis to recognize the changes in fair value in net income as described in “Income Recognition — Investments in Excess Mortgage Servicing Rights,” “Income Recognition — Investments in MSRs” and “Income Recognition — Servicer Advance Investments.”

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The Company recognizes MSRs created through the sale of loans it originates. Under the accounting guidance for transfers and servicing, the Company initially measures a mortgage servicing asset that qualifies for separate recognition at fair value on the date of transfer.

Investments in Real Estate and Other Securities — New Residential has classified its investments in real estate and other securities as available for sale. Securities available for sale are carried at market value with the net unrealized gains or losses reported as a separate component of accumulated other comprehensive income, to the extent impairment losses are considered temporary. At disposition, the net realized gain or loss is determined on the basis of the amortized cost of the specific investments and is included in earnings. Unrealized losses on securities are charged to earnings if they reflect a decline in value that is other-than-temporary.

Investments in Residential Mortgage Loans and Consumer Loans — Loans for which New Residential has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are classified as held-for-investment. Performing loans held-for-investment are presented at the aggregate unpaid principal balance adjusted for any unamortized premium or discount, deferred fees or expenses, an allowance for loan losses, charge-offs and write-down for impaired loans. PCD loans held-for-investment are initially recorded at their purchase price at acquisition and are subsequently measured net of any allowance for loan losses. To the extent that the loans are classified as held-for-investment, New Residential periodically evaluates such loans for possible impairment as described in “—Impairment of Loans.”

Loans which New Residential does not have the intent or the ability to hold into the foreseeable future are considered held-for-sale and are either carried at (i) the lower of their amortized cost basis or fair value or (ii) fair value where elected. New Residential discontinues the accretion of discounts or amortization of premiums on loans if they are reclassified from held-for-investment to held-for-sale.

Mortgage Loan Repurchases — NewRez, as an approved issuer of Ginnie Mae MBS, originates, sells and securitizes government-insured residential mortgage loans into Ginnie Mae guaranteed securitizations and NewRez retains the right to service the underlying residential mortgage loans. As the servicer, NewRez, holds an option to repurchase delinquent loans from the securitization at its discretion (the “Ginnie Mae Buy-Back Option”). In accordance with the accounting guidance in ASC 860, NewRez recognizes any delinquent loans subject to the Ginnie Mae Buy-Back Option and an offsetting repurchase liability on its balance sheet regardless of whether NewRez executes its option to repurchase.

Cash and Cash Equivalents and Restricted Cash — New Residential considers all highly liquid short-term investments with maturities of 90 days or less when purchased to be cash equivalents. Substantially all amounts on deposit with major financial institutions exceed insured limits. As of December 31, 2019 and 2018, New Residential held: (i) $64.0 million and $60.0 million, respectively, of restricted cash related to the financing of servicer advances that has been pledged to the note holders for interest and fees payable, (ii) $0.0 million and $1.9 million, respectively, of restricted cash related to financing requirements of the corporate notes secured by Excess MSRs (Note 12), (iii) $4.7 million and $4.1 million, respectively, of restricted cash related to Ginnie Mae Excess MSRs, (iv) $32.4 million and $37.6 million, respectively, of restricted cash related to the financing of consumer loans, and (v) $61.1 million and $60.4 million, respectively, of restricted cash related to MSRs.

Servicer Advances Receivable — Represents servicer advances due to New Residential’s servicer subsidiary, NRM (Note 6). The servicer advances receivable purchased in conjunction with MSRs are recorded with purchase discounts. Subsequent advances are recorded at cost, subject to impairment. Any related purchase discounts are accreted into servicing revenue, net (MSRs) or interest income (MSR financing receivables) on a straight-line basis over the estimated weighted average life of the advances.

Income Taxes — New Residential operates so as to qualify as a REIT under the requirements of the Internal Revenue Code of 1986, as amended. Requirements for qualification as a REIT include various restrictions on ownership of New Residential’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders (subject to certain adjustments). Distributions may extend until timely filing of New Residential’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

Certain activities of New Residential are conducted through taxable REIT subsidiaries (“TRSs”) and therefore are subject to federal and state income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases upon the change in tax status. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable

144

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

New Residential recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes on the consolidated statements of operations.

Other Assets and Other Liabilities — Other assets and liabilities are comprised of the following:



	Other Assets					Accrued Expenses and Other Liabilities
	December 31,					December 31,
	2019		2018			2019		2018
Margin receivable, net^(A)	$	280,176	$	145,857	MSRs purchase price holdback	75,348		100,593
Servicing fee receivables	159,607		105,563		Interest payable	68,668		49,352
Due from servicers	163,961		95,261		Accounts payable	119,771		75,591
Principal and interest receivable	85,191		76,015		Derivative liabilities (Note 11)	6,885		29,389
Equity investment^(B)	114,763		74,323		Due to servicers	127,846		95,419
Other receivables	117,045		23,723		Residential mortgage loan repurchase liability	172,336		121,602
Real Estate Owned	93,672		113,410		Contingent Consideration	55,222		40,842
Single-family rental properties	24,133		—		Accrued Compensation and Benefits	41,228		17,656
Residential mortgage loans subject to repurchase	172,336		121,602		Excess spread financing, at fair value	31,777		39,304
Consumer loans, equity method investees (Note 10)	—		38,294		Operating lease liability	38,520		—
Goodwill	29,737		24,645		Reserve for sales recourse	12,549		5,880
Notes Receivable^(D)	37,001		—		Other liabilities	22,976		36,484
Warrants	28,042		—			$	773,126	$	612,112
Recovery asset^(E)	23,100		—
Property and equipment	18,018		11,263
Receivable from government agency^(C)	19,670		20,795
Intangible assets	40,963		18,708
Prepaid expenses	19,249		29,165
Operating lease right-of-use asset	32,120		—
Derivative assets (Note 11)	41,501		10,893
Ocwen common stock, at fair value	7,952		7,778
Other assets	51,230		44,419
	$	1,559,467	$	961,714


(A)	Represents collateral posted primarily as a result of changes in fair value of our 1) real estate securities securing our repurchase agreements and 2) derivative instruments.


(B)	Represents equity investments in funds that invest in 1) a commercial redevelopment project and 2) operating companies in the single family housing industry. The indirect investments are accounted for at fair value based on the net asset value (“NAV”) of New Residential’s investment and as an equity method investment, respectively.


(C)	Represents claims receivable from the FHA on EBO and reverse mortgage loans for which foreclosure has been completed and for which New Residential has made or intends to make a claim on the FHA guarantee.


(D)	Represents a four-year subordinated debt facility to Covius (Note 3).


(E)	Represents post loan charge off deficiency balances acquired through the Ditech Acquisition (Note 3).

Goodwill — As a result of the Shellpoint and Guardian acquisitions, New Residential recorded goodwill for the consideration transferred in excess of the fair value of the net identifiable assets acquired. New Residential performs an annual assessment of

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

goodwill on October 1 and in interim periods in case of events or circumstances that make it more likely than not that an impairment may have occurred. New Residential did not recognize any impairment this year.

Intangible Assets — As a result of the Shellpoint, Guardian and Ditech acquisitions, New Residential identified intangible assets in the form of licenses, customer relationships, business relationships, and tradename. New Residential recorded the intangible assets at fair value at the acquisition date and will amortize the value of finite lived intangibles into expense over the expected useful life. The licenses acquired as part of the Shellpoint acquisition and the tradename acquired as part of the Guardian acquisition were deemed to have an indefinite useful life and will be evaluated for impairment on a quarterly basis and the fair value will be assessed annually and in interim periods if indicators of impairment exist. New Residential performs an annual assessment of impairment on October 1 and in interim periods in case of events or circumstances that make it more likely than not that an impairment may have occurred. New Residential did not recognize any impairment this year.

Repurchase Agreements and Notes and Bonds Payable — New Residential’s repurchase agreements are generally short-term debt that expire within one year. Such agreements and notes and bonds payable are carried at their contractual amounts, as specified by each repurchase or financing agreement, and generally treated as collateralized financing transactions.

Mortgage Origination Reserves — 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, NewRez provides representations and warranties regarding certain attributes of the loans and, subsequent to the sale, if it is determined that a sold loan is in breach of these representations and warranties, NewRez generally has an obligation to cure the breach. If NewRez is unable to cure the breach, the purchaser may require NewRez to repurchase the loan. New Residential records a reserve for sales recourse at the time of sale to cover all potential recourse obligations based on the outstanding balance of mortgage loans subject to recourse as well as historical and estimated future loss rates. New Residential evaluates the ongoing adequacy of the reserve based on actual experience and changing circumstances, making adjustments to the reserve as deemed necessary.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. The standard: (i) requires that certain equity investments be measured at fair value, and modifies the assessment of impairment for certain other equity investments, (ii) changes certain disclosure requirements related to the fair value of financial instruments measured at amortized cost, (iii) changes certain disclosure requirements related to liabilities measured at fair value, (iv) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and (v) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 was effective for New Residential in the first quarter of 2018. The adoption of ASU No. 2016-01 resulted in the fair valuation of an equity investment on its consolidated balance sheet where New Residential did not have significant influence on its consolidated balance sheet and did not have a material impact on its consolidated statement of income.

In February 2016, the FASB issued ASU No. 2016-02, Leases. The standard requires that lessees recognize a right-of-use asset and corresponding lease liability on the balance sheet for most leases. The guidance applied by a lessor under ASU No. 2016-02 is substantially similar to existing GAAP. ASU No. 2016-02 is effective for New Residential in the first quarter of 2019. Early adoption is permitted upon issuance. An entity should apply ASU No. 2016-02 by means of a modified retrospective transition method for all leases existing at, or entered into after, the date of initial application. The adoption of ASU No. 2016-02 did not have a material impact on the consolidated financial statements, and the amount of New Residential future lease commitments has been deemed as immaterial (see Note 16 for details).

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The standard requires that a financial asset measured at amortized cost basis be presented at the net amount expected to be collected, net of an allowance for all expected (rather than incurred) credit losses. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The standard also changes the accounting for purchased credit deteriorated assets and available-for-sale securities, which will require the recognition of credit losses through a valuation allowance when fair value is less than amortized cost, regardless of whether the impairment is considered to be other-than-temporary. ASU No. 2016-13 is effective for New Residential in the first quarter of 2020, and early adoption was permitted beginning in 2019. An entity should apply ASU No. 2016-13 by means of a cumulative-effect adjustment to the balance sheet as

146

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

of the beginning of the fiscal year of adoption. New Residential is still evaluating and expects to recognize a cumulative-effect adjustment to the balance sheet upon adoption. The standard provides an option to elect fair value option for certain investments as an alternative to adopting ASU No. 2016-13. New Residential expects to elect fair value option on its residential mortgage and consumer loans portfolios, and expects to record a positive adjustments of $5.9 million to retained earnings, comprised of a decrease of $6.0 million due to the change in fair value of residential mortgage loans, and an increase of $11.9 million due to the change in fair value of consumer loans, net of noncontrolling interests.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory. The standard requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU No. 2016-16 was effective for New Residential in the first quarter of 2018. The adoption of ASU No. 2016-16 did not have a material impact on its consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (Topic 805). The standard simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test. Under the new guidance, an impairment charge, if triggered, is calculated as the difference between a reporting unit’s carrying value and fair value, but it is limited to the carrying value of goodwill. ASU No. 2017-04 is effective for New Residential in the first quarter of 2020 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. New Residential is early adopting the standard for 2019. The adoption of ASU No. 2017-04 did not have a material impact on the financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The standard: (i) adds incremental requirements for entities to disclose (a) the amount of total gains or losses for the period recognized in other comprehensive income that is attributable to fair value changes in assets and liabilities held as of the balance sheet date and categorized within Level 3 of the fair value hierarchy, (b) the range and weighted average used to develop significant unobservable inputs and (c) how the weighted average was calculated for fair value measurements categorized within Level 3 of the fair value hierarchy and (ii) eliminates disclosure requirements for (a) transfers between Level 1 and Level 2 and (b) valuation processes for Level 3 fair value measurements. ASU No. 2018-13 is effective for New Residential in the first quarter of 2020 and early adoption is permitted for interim or annual periods beginning with the third quarter of 2018. The adoption of ASU No. 2018-13 is not expected to have a material impact on its consolidated financial statements.

On December 18, 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part of its overall simplification initiative. Amendments include removal of certain exceptions to the general principles of ASC 740, Income Taxes, and simplification in several areas including accounting for franchise taxes and step-up in tax basis goodwill. While not required to be adopted until 2021, New Residential is early adopting this guidance in 2019. The adoption of ASU No. 2019-12 did not have a material impact on the consolidated financial statements.

3. BUSINESS ACQUISITIONS

New Residential completed the Shellpoint acquisition in 2018 and the Guardian and Ditech acquisitions in 2019 as part of its strategy to expand its residential origination, servicing and asset management capabilities. New Residential accounted for these transactions using the acquisition method which requires, among other things, that the assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. In a business combination, the initial allocation of the purchase price is considered preliminary and therefore subject to change until the end of the measurement period (up to one year from the acquisition date). Goodwill is calculated as the excess of the purchase price over the net assets recognized and represents synergies and benefits expected to result from combining operations and adding in-house servicing, asset origination and recapture capabilities.

147

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Purchase Price Allocation

New Residential has performed an allocation of the total consideration paid to acquire the assets and liabilities of the companies acquired, as set forth below.



	2019								2018
	Ditech			Guardian		Total			Shellpoint
Total Consideration ($ in millions)	$	1,218.2		$	21.5	$	1,239.7		$	425.5
Assets
Mortgage servicing rights, at fair value^(A)	$	387.2		$	—	$	387.2		$	286.6
Residential mortgage loans, held-for-investment, at fair value	—			—		—			125.3
Residential mortgage loans, held-for-sale, at fair value	627.4			—		627.4			488.2
Residential mortgage loans subject to repurchase	—			—		—			121.4

Cash and cash equivalents	—			1.8		1.8			79.2
Restricted cash	—			—		—			9.9
Servicer Advance Receivable	238.0			—		238.0			22.4
Intangible assets^{(B) (C) (D)}	10.5			11.7		22.2			18.4
Other assets^(E)	64.8			6.6		71.4			59.1
Total Assets Acquired	$	1,327.9		$	20.1	$	1,348.0		$	1,210.5

Liabilities
Repurchase agreements	$	—		$	—	$	—		$	439.6
Notes and bonds payable	—			—		—			20.7
Mortgage-backed securities issued, at fair value	—			—		—			120.7
Residential mortgage loans repurchase liability	—			—		—			121.4
Excess spread financing, at fair value	—			—		—			48.3
Accrued expenses and other liabilities	60.2			3.7		63.9			50.6
Total Liabilities Assumed	$	60.2		$	3.7	$	63.9		$	801.3

Noncontrolling Interest	$	—		$	—	$	—		$	8.3

Net Assets	$	1,267.7		$	16.4	$	1,284.1		$	400.9

Goodwill (Bargain Purchase Gain)	$	(49.5	)	$	5.1	$	(44.4	)	$	24.6


(A)	Includes $135.3 million of Ginnie Mae MSRs related to the Shellpoint acquisition where New Residential acquired the rights to the economic value of the servicing rights from Shellpoint prior to the acquisition date.


(B)	Includes intangible assets acquired as part of the Ditech acquisition in the form of correspondent customer relationships and servicing contracts tied to the recovery of defaulted loans. These intangibles will be amortized over a finite life of three years based on the expected useful life of these intangibles.

(C)

Includes intangible assets acquired as part of the Guardian acquisition in the form of customer relationships and a tradename. Customer relationships will be amortized over a finite life of seven years based on the expected useful life of these intangibles. New Residential has determined that the tradename has an indefinite useful life and will be evaluated for impairment given no legal, regulatory, contractual, competitive or economic factors that would limited useful life.

(D)

Includes intangible assets acquired as part of the Shellpoint acquisition in the form of mortgage origination and servicing licenses, internally developed software and a tradename. New Residential determined that mortgage origination and servicing licenses have an indefinite useful life and will be evaluated for impairment given no legal, regulatory, contractual, competitive or economic factors that would limit the useful life. Internally developed software will be amortized over a

148

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

finite useful life of five years and tradenames were fully amortized over six months, respectively, based on the expected software development timeline and New Residential’s determination of the time to change a tradename with limited value.


(E)	Includes post loan charge off deficiency balances acquired through the Ditech Acquisition.

Throughout the measurement period for the Ditech and Guardian acquisitions, the allocation of total consideration may differ from the amounts included herein to reflect new information obtained, primarily related to the valuation of intangible assets acquired as part of both acquisitions. Any measurement period adjustments that New Residential identifies and determines to be material will be applied retrospectively to the period of acquisition, as well as any applicable subsequent periods.

Acquisition of select Assets and Liabilities from Ditech Holding Corporation

On June 17, 2019, New Residential, entered into a “stalking-horse” Asset Purchase Agreement (the “APA”) with Ditech Holding Corporation, a Maryland corporation (“Holding”), and Ditech Financial LLC, a Delaware limited liability company (“Financial” and together with Holding, the “Sellers” or “Ditech”) to acquire certain assets and assume certain liabilities under the APA based on the value of the acquired assets and assumed liabilities as calculated in accordance with the terms of the APA, subject to certain adjustments. Ditech filed voluntary petitions for relief under Chapter 11 of the Bankruptcy code, in the United States Bankruptcy Court for the Southern District of New York (“Bankruptcy Court”).

The proposed sale was conducted through a Bankruptcy Court-supervised process, subject to Bankruptcy Court-approved bidding procedures, with the potential receipt of higher or better offers from competing bidders at auction, the approval of the sale by the Bankruptcy Court, and the satisfaction of certain conditions. As the stalking horse bidder, the Company’s offer to acquire the assets and assume the liabilities, as set forth in the APA, set the standard by which any other qualifying bids would be evaluated. Upon conclusion of the competitive bidding process, Ditech decided to proceed with New Residential’s stalking horse bid, as amended and sought the Bankruptcy Court’s approval.

On October 1, 2019, New Residential Investment Corp (“Ditech Purchaser”) completed the acquisition (“Ditech Acquisition”) contemplated by the APA dated June 17, 2019, as amended, by and among the Ditech Purchaser and Ditech. Pursuant to the APA, Ditech sold, transferred, and assigned to the Ditech Purchaser (and its certain designated subsidiaries) the acquired assets, as defined in the APA, and the Ditech Purchaser (and its certain designated subsidiaries) assumed the liabilities, as defined in the APA, for cash consideration of $1.2 billion.

The acquisition included certain Fannie Mae, Ginnie Mae and non-agency MSRs, the servicer advance receivables relating to such MSRs and other assets core to certain origination and servicing businesses at Ditech. Additionally, New Residential assumed certain Ditech office spaces and added approximately 1,100 Ditech employees to support the increase in volume to its existing origination and servicing operations.

The acquisition of assets from the bankruptcy estate of Ditech along with the subsequent hiring of Ditech employees was accounted for as a business acquisition rather than an asset acquisition. Upon completing the Ditech Acquisition, the consideration transferred by the Ditech Purchaser for the acquired assets and assumed liabilities was determined to be less than the net assets acquired from Ditech resulting in an economic gain (“Bargain Purchase”). New Residential completed the required reassessment to validate that all assets acquired and liabilities assumed on the acquisition date had been identified and appropriately measured in accordance with ASC 805. Based on the reassessment, the transaction resulted in a Bargain Purchase gain of $49.5 million, which has been included in Other income (loss), net within the Consolidated Statements of Income for the year ended December 31, 2019. The Bargain Purchase gain resulted from certain transition, integration, relocation and training costs that were factored into the purchase price and identified as future liabilities, of which approximately $22.9 million were incurred during the year ended December 31, 2019. The results of Ditech’s operations have been included in New Residential’s Consolidated Statements of Income for the year ended December 31, 2019 from the date of acquisition and represent $134.5 million and $104.7 million of revenue and net income, respectively.

149

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The acquisition date fair value of the consideration transferred includes $1.2 billion in cash consideration and $4.9 million in effective settlement of preexisting relationships. The total consideration is summarized as follows:



Total Consideration (in millions)	Amount
Cash Consideration	$	1,213.3
Effective Settlement of Preexisting Relationships^(A)	4.9
Total Consideration	$	1,218.2

(A)

Represents the effective settlement of preexisting relationships between New Residential and Ditech related to operating accounts receivable and payable existing prior to the acquisition date. The effective settlement of these preexisting relationships had no impact to New Residential’s Consolidated Statements of Income. New Residential recognized the effective settlement of preexisting relationships separately from the acquisition of assets and assumption of liabilities in the business combination.

Unaudited Supplemental Pro Forma Financial Information — The following table presents unaudited pro forma combined Servicing and Origination Revenue, which is comprised of 1) servicing revenue, net and 2) gain on originated mortgage loans, held-for-sale, net, and Income Before Income Taxes for the years ended December 31, 2019 and 2018 prepared as if the Ditech Acquisition had been consummated on January 1, 2018.



	Years Ended December 31,
	2019		2018
Pro Forma (in millions)
Servicing and Origination Revenue	$	1,104.0	$	1,238.1
Income Before Income Taxes	552.8		923.3

The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the Ditech Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the Ditech Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the Ditech Acquisition occurred on January 1, 2018.

Acquisition of Guardian Asset Management

On August 19, 2019, NRZ Guardian Purchaser LLC (“Guardian Purchaser”), entered into an agreement to acquire 100% of the shares of DDG RE Investments LLC d/b/a Guardian Asset Management (“Guardian”).

On September 3, 2019, the Guardian Purchaser acquired 100% of the outstanding interests of Guardian for cash consideration of $7.6 million (“Guardian Acquisition”). As additional consideration for the Guardian Acquisition, the Guardian Purchaser may make up to four cash earnout payments, which will be calculated as the amount of cumulative Guardian earnings on specified contracts in excess of certain thresholds up to a maximum of $17.5 million (the “Guardian Earnout Payments”). The Guardian Earnout Payments are classified as contingent consideration recorded at fair value at the acquisition date and included in the total consideration transferred for the Guardian Acquisition. The contingent consideration is subsequently measured at fair value on a quarterly basis with changes in fair value recorded in Other income (loss), net.

Guardian is a field services and asset management business and provides New Residential with in-house property management, inspection and repair service capabilities. The results of Guardian's operations have been included in New Residential's Consolidated Statements of Income for the year ended December 31, 2019 from the date of acquisition and represent $14.4 million and $2.9 million of revenue and net income, respectively.

150

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The acquisition date fair value of the consideration transferred includes $7.6 million in cash consideration and $13.9 million in contingent consideration. The total consideration is summarized as follows:



Total Consideration (in millions)	Amount
Cash Consideration	$	7.6
Earnout Payment^(A)	13.9
Total Consideration	$	21.5


(A)	The range of outcomes for this contingent consideration is from $0 to $17.5 million dependent on the performance of Guardian.

The goodwill of $5.1 million primarily includes the benefits expected to result from adding in-house property management and repair services has been allocated to the Servicing reporting segment. The full amount of goodwill of $5.1 million is expected to be deductible for tax purposes. New Residential will assess the goodwill annually on October 1 and in interim periods in case of events or circumstances make it more likely than not that an impairment may have occurred. Based on New Residential’s assessment performed, there were no indicators of impairment as of December 31, 2019.

Unaudited Supplemental Pro Forma Financial Information — The following table presents unaudited pro forma combined Income Before Income Taxes for the years ended December 31, 2019 and 2018 prepared as if the Guardian Acquisition had been consummated on January 1, 2018.



	Years Ended December 31,
	2019		2018
Pro Forma (in millions)
Income Before Income Taxes	$	651.5	$	932.2

The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the Guardian Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the Guardian Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the Guardian Acquisition occurred on January 1, 2018.

Acquisition of Shellpoint Partners LLC

On November 29, 2017, NRM Acquisition LLC (the “Shellpoint Purchaser”), a Delaware limited liability company and a wholly owned subsidiary of New Residential, entered into a Securities Purchase Agreement (the “Shellpoint SPA”) to acquire Shellpoint Partners LLC, a Delaware limited liability company (“Shellpoint”). Shellpoint is a vertically integrated mortgage platform with established origination and servicing capabilities and provides New Residential with in-house servicing, asset origination and recapture capabilities.

On July 3, 2018, the Shellpoint Purchaser acquired 100% of the outstanding equity interests of Shellpoint for a cash purchase price of $212.3 million (the “Shellpoint Acquisition”). As additional consideration for the Shellpoint Acquisition, the Shellpoint Purchaser may make up to three cash earnout payments, which will be calculated following each of the first three anniversaries of the Shellpoint closing as a percentage of the amount by which the pre-tax income of certain of Shellpoint’s businesses exceeds certain specified thresholds, up to an aggregate maximum amount of $60.0 million (the “Shellpoint Earnout Payments”). The Shellpoint Earnout Payments are classified as contingent consideration recorded at fair value at the acquisition date and included in the total consideration transferred for the Shellpoint Acquisition. The contingent consideration is subsequently measured at fair value on a quarterly basis with changes in fair value recorded in Other income (loss), net. As of December 31, 2019, New Residential had paid out $10.0 million of the Shellpoint Earnout Payments and is expected to pay the remaining amounts by September 2021. Once a payment has been made the sellers have no requirement to refund the payment even if the business does not exceed the specified thresholds in subsequent periods.

151

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The results of Shellpoint’s operations have been included in the Company’s Consolidated Statements of Income for the years ended December 31, 2019 and 2018 and represent $780.7 million and $177.4 million of revenue and $359.0 million and $26.8 million of net income, respectively.

The acquisition date fair value of the consideration transferred includes $212.3 million in cash consideration, $39.3 million in contingent consideration and $173.9 million in effective settlement of preexisting relationships. The total consideration is summarized as follows:



Total Consideration (in millions)	Amount
Cash Consideration	$	212.3
Earnout Payment^(A)	39.3
Effective Settlement of Preexisting Relationships^(B)	173.9
Total Consideration	$	425.5

(A)

The range of outcomes for this contingent consideration is from $0 to $60.0 million, dependent on the performance of Shellpoint. At acquisition date, New Residential derived a fair value of the remaining contingent consideration payment in three years of $39.3 million. This amount excludes contingent payments to the long-term employee incentive plans that require continuing employment and are recognized as compensation expense within General and Administrative expenses in the post-acquisition consolidated financial statements separate from New Residential’s acquisition of assets and assumption of liabilities in the business combination. As of December 31, 2019, the contingent consideration had a fair value of $40.9 million.


(B)	Represents the effective settlement of preexisting relationships between New Residential and Shellpoint. The effective settlement of these preexisting relationships had no impact to New Residential’s Consolidated Statements of Income.

The final amount and allocation of total consideration reflects certain measurement period adjustments identified during the fourth quarter of 2018, including the effect on earnings that would have been recorded during the third quarter of 2018 had the accounting been completed at the acquisition date. Such measurement period adjustments included 1) a decrease of $3.5 million in the amount of contingent consideration based upon finalization of the internal valuation, 2) a decrease of $6.4 million to consideration transferred for the effective settlement of existing relationships, 3) an increase of $14.1 million to the fair value of identifiable intangible assets based upon receipt of the final valuation report from a third-party valuation firm, and 4) an increase of $0.3 million to other assets due to a decrease in the fair value discount on certain servicing advance receivables. These measurement period adjustments resulted in a corresponding decrease to goodwill in the amount of $24.3 million.

The goodwill of $24.6 million primarily includes the synergies and benefits expected to result from combining operations with Shellpoint and adding in-house servicing, asset origination and recapture capabilities and has been allocated to the Servicing and Origination reporting segment. The full amount of goodwill for tax purposes of $24.6 million is expected to be deductible. New Residential will assess the goodwill annually on October 1 and in interim periods in case of events or circumstances make it more likely than not that an impairment may have occurred. Based on New Residential’s assessment performed, there were no indicators of impairment as of December 31, 2019.

Certain transactions were recognized separately from New Residential’s acquisition of assets and assumption of liabilities in the business combination. These separately recognized transactions include 1) contingent payments to Shellpoint’s employees and 2) effective settlement of preexisting relationships discussed above, including 1) MSR acquisitions, 2) a note payable and 3) operating accounts receivable and payable existing prior to the acquisition date.

152

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Unaudited Supplemental Pro Forma Financial Information — The following table presents unaudited pro forma combined Servicing and Origination Revenue, which is comprised of 1) servicing revenue, net and 2) gain on originated mortgage loans, held-for-sale, net, and Income Before Income Taxes for the years ended December 31, 2018 and 2017 prepared as if the Shellpoint Acquisition had been consummated on January 1, 2017.



	Years Ended December 31,
	2018		2017
Pro Forma (in millions)
Servicing and Origination Revenue	$	767.0	$	749.0
Income Before Income Taxes	948.1		1,197.5

The unaudited supplemental pro forma financial information has not been adjusted for transactions other than the Shellpoint Acquisition, or for the conforming of accounting policies. The unaudited supplemental pro forma financial information does not include any anticipated synergies or other anticipated benefits of the Shellpoint Acquisition and, accordingly, the unaudited supplemental pro forma financial information is not necessarily indicative of either future results of operations or results that might have been achieved had the Shellpoint Acquisition occurred on January 1, 2017.

Strategic Investment in Covius Holdings Inc.

On May 1, 2019, New Residential made a strategic investment in Covius, a leading provider of technology-enabled services to the mortgage industry. Covius provides settlement and title, document and letter fulfillment, regulatory compliance, quality assurance, commercial and residential loan due diligence and business process automation services. New Residential invested $27.3 million in common stock for a non-controlling interest in Covius, with an option to increase its ownership position through specified future investments and $35.0 million in a four-year subordinated debt facility.

New Residential determined that the investment should be accounted for under the equity method of accounting since it has the ability to exercise significant influence over the investee’s operating and financial policies. As the consideration transferred for the investment was greater than the net equity of the investment (“basis differences”), the company allocated the basis difference in a manner consistent with business combination accounting resulting in goodwill of $11.8 million, and intangible assets primarily in the form of customer backlog and tradename of $3.6 million. Goodwill and intangibles are included as part of Equity investments within Other assets on the Consolidated Balance Sheets. The results of the investment have been included in New Residential's Consolidated Statements of Income for the year ended December 31, 2019 from the date of the Company’s investment.

The goodwill of $11.8 million primarily includes the benefits expected to result from having a significant investment in the service provider and has been allocated to the MSR Related Investments reporting segment. None of the goodwill is expected to be deductible for tax purposes. New Residential will assess the goodwill annually on October 1 and in interim periods in case of events or circumstances make it more likely than not that an impairment may have occurred. Based on New Residential’s assessment performed, there were no indicators of impairment as of December 31, 2019.

4. SEGMENT REPORTING

New Residential’s portfolio consists of the following segments: (i) Origination, (ii) Servicing, (iii) MSR Related Investments, (iv) Residential Securities and Loans, (v) Consumer Loans and (vi) Corporate, organized based on differences in services and products. The corporate segment consists primarily of general and administrative expenses, management fees and incentive compensation related to the Management Agreement, corporate cash and related interest income.

During the fourth quarter of 2019, due to the acquisition of select assets and liabilities from Ditech Holding Corporation that are core to the forward origination and servicing businesses of NewRez, New Residential reevaluated the composition of its reportable segments based on the significance of certain business activities to its operations and performance evaluation, which drive resource allocation. The change to reportable segments is primarily the disaggregation of the origination and servicing businesses from the MSR Related Investments. The new Origination segment includes the origination activities of NewRez and its related title and appraisal ancillary businesses, Avenue 365 and eStreet. The new Servicing segment includes the servicing activities of NewRez. The MSR Related Investments segment includes MSRs, MSR Financing Receivables, Excess MSRs, Servicer Advances Receivable and Servicer Advance Investments, as well as investments in servicing related businesses, including Covius and Guardian. Segment

153

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

information for prior periods have been restated to reflect this change. Securities owned by New Residential that are collateralized by servicer advances and consumer loans are included in the MSR Related Investments and Consumer Loans segments, respectively. Secured corporate loans effectively collateralized by Excess MSRs are included in the MSR Related Investments segment.

Summary financial data on New Residential’s segments is given below, together with a reconciliation to the same data for New Residential as a whole:



	Servicing and Origination														Residential Securities and Loans
	Origination			Servicing		MSR Related Investments			Elimination^(A)			Total Servicing and Origination			Real Estate Securities		Residential Mortgage Loans			Consumer Loans			Corporate			Total
Year Ended December 31, 2019
Interest income	$	42,166		$	34,013	$	530,225		$	—		$	606,404		$	744,145	$	249,673		$	165,877		$	31		$	1,766,130
Interest expense	41,949			1,043		246,294			—			289,286			453,609		158,298			32,558			—			933,751
Net interest income (expense)	217			32,970		283,931			—			317,118			290,536		91,375			133,319			31			832,379
Impairment	—			—		—			—			—			25,174		(20,607		)	31,010			—			35,577
Servicing revenue, net	(1,605		)	184,763		250,580			(48,579		)	385,159			—		—			—			—			385,159
Gain on originated mortgage loans, held-for-sale, net	397,252			1,029		52,991			(51,360		)	399,912			—		75,543			—			—			475,455
Other income (loss)	9,340			5,859		(144,231		)	—			(129,032		)	20,929		75,385			(9,999		)	1,618			(41,099		)
Operating expenses	258,729			145,813		344,430			(48,579		)	700,393			3,160		52,745			22,540			189,780			968,618
Income (Loss) Before Income Taxes	146,475			78,808		98,841			(51,360		)	272,764			283,131		210,165			69,770			(188,131		)	647,699
Income tax (benefit) expense	39,768			21,396		23,744			(14,179		)	70,729			—		(28,461		)	(502		)	—			41,766
Net Income (Loss)	$	106,707		$	57,412	$	75,097		$	(37,181	)	$	202,035		$	283,131	$	238,626		$	70,272		$	(188,131	)	$	605,933
Noncontrolling interests in income (loss) of consolidated subsidiaries	$	6,231		$	—	$	4,255		$	—		$	10,486		$	—	$	—		$	32,151		$	—		$	42,637
Dividends on Preferred Stock	$	—		$	—	$	—		$	—		$	—		$	—	$	—		$	—		$	13,281		$	13,281
Net income (loss) attributable to common stockholders	$	100,476		$	57,412	$	70,842		$	(37,181	)	$	191,549		$	283,131	$	238,626		$	38,121		$	(201,412	)	$	550,015



	Servicing and Origination										Residential Securities and Loans
	Origination		Servicing		MSR Related Investments		Elimination^(A)		Total Servicing and Origination		Real Estate Securities		Residential Mortgage Loans		Consumer Loans		Corporate			Total
December 31, 2019
Investments	$	1,414,528	$	—	$	6,773,353	$	—	$	8,187,881	$	19,477,728	$	5,843,983	$	827,545	$	—		$	34,337,137
Cash and cash equivalents	77,237		32,225		318,714		—		428,176		87,359		1,180		6,514		5,508			528,737
Restricted cash	6,730		15,769		107,328		—		129,827		—		—		32,370		—			162,197
Other assets	250,709		204,723		3,420,122		—		3,875,554		5,590,456		174,940		78,740		85,956			9,805,646
Goodwill	11,836		12,809		5,092		—		29,737		—		—		—		—			29,737
Total assets	$	1,761,040	$	265,526	$	10,624,609	$	—	$	12,651,175	$	25,155,543	$	6,020,103	$	945,169	$	91,464		$	44,863,454
Debt	$	1,304,621	$	33,412	$	6,646,159	$	—	$	7,984,192	$	22,151,110	$	4,676,849	$	824,222	$	—		$	35,636,373
Other liabilities	117,328		51,264		451,629		—		620,221		980,415		55,121		16,795		318,269			1,990,821
Total liabilities	1,421,949		84,676		7,097,788		—		8,604,413		23,131,525		4,731,970		841,017		318,269			37,627,194
Total equity	339,091		180,850		3,526,821		—		4,046,762		2,024,018		1,288,133		104,152		(226,805		)	7,236,260
Noncontrolling interests in equity of consolidated subsidiaries	11,354		—		45,025		—		56,379		—		—		22,171		—			78,550
Total New Residential stockholders’ equity	$	327,737	$	180,850	$	3,481,796	$	—	$	3,990,383	$	2,024,018	$	1,288,133	$	81,981	$	(226,805	)	$	7,157,710
Investments in equity method investees	$	—	$	—	$	165,848	$	—	$	165,848	$	—	$	—	$	—	$	—		$	165,848

154

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



	Servicing and Origination^(B)														Residential Securities and Loans
	Origination			Servicing		MSR Related Investments			Elimination^(A)			Total Servicing and Origination			Real Estate Securities			Residential Mortgage Loans			Consumer Loans		Corporate			Total
Year Ended December 31, 2018
Interest income	$	12,430		$	8,148	$	703,387		$	—		$	723,965		$	573,539		$	158,892		$	206,321	$	1,506		$	1,664,223
Interest expense	10,018			264		232,063			—			242,345			240,615			80,910			42,563		—			606,433
Net interest income (expense)	2,412			7,884		471,324			—			481,620			332,924			77,982			163,758		1,506			1,057,790
Impairment	—			—		—			—			—			30,017			12,061			48,563		—			90,641
Servicing revenue, net	(450		)	63,006		476,224			(10,185		)	528,595			—			—			—		—			528,595
Gain on originated mortgage loans, held-for-sale, net	100,160			—		4,396			(17,168		)	87,388			—			8,757			—		—			96,145
Other income (loss)	2,067			—		12,216			—			14,283			(72,926		)	7,699			9,965		(10,406		)	(51,385		)
Operating expenses	96,724			52,251		222,099			(10,185		)	360,889			1,554			32,424			35,230		179,307			609,404
Income (Loss) Before Income Taxes	7,465			18,639		742,061			(17,168		)	750,997			228,427			49,953			89,930		(188,207		)	931,100
Income tax (benefit) expense	—			—		(8,364		)	—			(8,364		)	—			(65,279		)	212		—			(73,431		)
Net Income (Loss)	$	7,465		$	18,639	$	750,425		$	(17,168	)	$	759,361		$	228,427		$	115,232		$	89,718	$	(188,207	)	$	1,004,531
Noncontrolling interests in income (loss) of consolidated subsidiaries	$	1,599		$	—	$	1,978		$	—		$	3,577		$	—		$	—		$	36,987	$	—		$	40,564
Dividends on Preferred Stock	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	—
Net income (loss) attributable to common stockholders	$	5,866		$	18,639	$	748,447		$	(17,168	)	$	755,784		$	228,427		$	115,232		$	52,731	$	(188,207	)	$	963,967



	Servicing and Origination										Residential Securities and Loans
	Origination		Servicing		MSR Related Investments		Elimination^(A)		Total Servicing and Origination		Real Estate Securities		Residential Mortgage Loans		Consumer Loans		Corporate			Total
December 31, 2018
Investments	$	608,701	$	—	$	5,860,274	$	—	$	6,468,975	$	11,636,581	$	4,102,649	$	1,110,496	$	—		$	23,318,701
Cash and cash equivalents	40,741		35,886		160,244		—		236,871		49		927		8,279		4,932			251,058
Restricted cash	4,292		2,416		119,693		—		126,401		—		—		37,619		—			164,020
Other assets	43,412		84,432		3,382,348		—		3,510,192		4,080,202		131,282		64,802		146,111			7,932,589
Goodwill	11,836		12,809		—		—		24,645		—		—		—		—			24,645
Total assets	$	708,982	$	135,543	$	9,522,559	$	—	$	10,367,084	$	15,716,832	$	4,234,858	$	1,221,196	$	151,043		$	31,691,013
Debt	$	555,423	$	28,639	$	6,080,273	$	—	$	6,664,335	$	11,615,364	$	3,342,636	$	1,033,900	$	—		$	22,656,235
Other liabilities	468		4,591		515,156		—		520,215		2,111,868		8,916		13,572		291,912			2,946,483
Total liabilities	555,891		33,230		6,595,429		—		7,184,550		13,727,232		3,351,552		1,047,472		291,912			25,602,718
Total equity	153,091		102,313		2,927,130		—		3,182,534		1,989,600		883,306		173,724		(140,869		)	6,088,295
Noncontrolling interests in equity of consolidated subsidiaries	7,998		—		52,066		—		60,064		—		—		30,561		—			90,625
Total New Residential stockholders’ equity	$	145,093	$	102,313	$	2,875,064	$	—	$	3,122,470	$	1,989,600	$	883,306	$	143,163	$	(140,869	)	$	5,997,670
Investments in equity method investees	$	—	$	—	$	147,964	$	—	$	147,964	$	—	$	—	$	38,294	$	—		$	186,258


(A)	Elimination of intercompany transactions related primarily to servicing fees, loan sales, and MSR recaptures.


(B)	Includes results from July 3, 2018, the date of Shellpoint Acquisition (Note 3).

155

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



	Servicing and Origination										Residential Securities and Loans
	Origination		Servicing		MSR Related Investments		Elimination		Total Servicing and Origination		Real Estate Securities			Residential Mortgage Loans		Consumer Loans		Corporate			Total
Year Ended December 31, 2017
Interest income	$	—	$	—	$	713,413	$	—	$	713,413	$	431,706		$	110,087	$	263,844	$	629		$	1,519,679
Interest expense	—		—		233,587		—		233,587		122,997			51,473		52,808		—			460,865
Net interest income (expense)	—		—		479,826		—		479,826		308,709			58,614		211,036		629			1,058,814
Impairment	—		—		—		—		—		10,334			12,593		63,165		—			86,092
Servicing revenue, net	—		—		424,349		—		424,349		—			—		—		—			424,349
Gain on originated mortgage loans, held-for-sale, net	—		—		—		—		—		—			—		—		—			—
Other income (loss)	—		—		174,561		—		174,561		(16,371		)	16,175		28,075		5,346			207,786
Operating expenses	—		—		186,330		—		186,330		1,471			31,529		43,552		159,695			422,577
Income (Loss) Before Income Taxes	—		—		892,406		—		892,406		280,533			30,667		132,394		(153,720		)	1,182,280
Income tax (benefit) expense	—		—		166,186		—		166,186		—			1,272		170		—			167,628
Net Income (Loss)	$	—	$	—	$	726,220	$	—	$	726,220	$	280,533		$	29,395	$	132,224	$	(153,720	)	$	1,014,652
Noncontrolling interests in income of consolidated subsidiaries	$	—	$	—	$	11,227	$	—	$	11,227	$	—		$	—	$	45,892	$	—		$	57,119
Dividends on Preferred Stock	$	—	$	—	$	—	$	—	$	—	$	—		$	—	$	—	$	—		$	—
Net income (loss) attributable to common stockholders	$	—	$	—	$	714,993	$	—	$	714,993	$	280,533		$	29,395	$	86,332	$	(153,720	)	$	957,533

5. INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

Direct Investments in Excess MSRs

The following table presents activity related to the carrying value of New Residential’s direct investments in Excess MSRs:



	Servicer
	Mr. Cooper			SLS^(A)			Ocwen^(B)			Total
Balance as of December 31, 2017	$	532,233		$	2,913		$	638,567		$	1,173,713
Purchases	—			—			—			—
Interest income	44,386			54			—			44,440
Other income	6,444			—			40,417			46,861
Proceeds from repayments	(100,215		)	(632		)	(26,946		)	(127,793		)
Proceeds from sales	(19,084		)	—			—			(19,084		)
Change in fair value	(18,436		)	197			(40,417		)	(58,656		)
Ocwen Transaction (Note 6)	—			—			(611,621		)	(611,621		)
Balance as of December 31, 2018	445,328			2,532			—			447,860
Purchases	—			—			—			—
Interest income	32,587			60			—			32,647
Other income	3,851			—			—			3,851
Proceeds from repayments	(83,612		)	(419		)	—			(84,031		)
Proceeds from sales	(10,075		)	—			—			(10,075		)
Change in fair value	(10,387		)	(118		)	—			(10,505		)
Balance as of December 31, 2019	$	377,692		$	2,055		$	—		$	379,747


(A)	Specialized Loan Servicing LLC (“SLS”).


(B)	Ocwen Loan Servicing LLC, a subsidiary of Ocwen Financial Corporation (together with its subsidiaries, including Ocwen Loan Servicing LLC, “Ocwen”), services the loans underlying the Excess MSRs and Servicer Advance Investments.

Mr. Cooper or SLS, as applicable, as servicer performs all of the servicing and advancing functions, and retains the ancillary income, servicing obligations and liabilities as the servicer of the underlying loans in the portfolio.

New Residential has entered into a “recapture agreement” with respect to each of the direct Excess MSR investments serviced by Mr. Cooper and SLS. Under such arrangements, New Residential is generally entitled to a pro rata interest in the Excess MSRs on any refinancing by Mr. Cooper of a loan in the original portfolio. These recapture agreements do not apply to New Residential’s Servicer Advance Investments (Note 7).

New Residential elected to record its direct investments in Excess MSRs at fair value pursuant to the fair value option for financial instruments in order to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors on the Excess MSRs.

156

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following is a summary of New Residential’s direct investments in Excess MSRs:



	December 31, 2019
	UPB of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years^(A)	Amortized Cost Basis^(B)		Carrying Value^(C)
			New Residential^(D)	Fortress-managed funds	Mr. Cooper
Agency
Original and Recaptured Pools	$	43,310,917	32.5% - 66.7% (53.3%)	0.0% - 40.0%	20.0% - 35.0%	5.5	$	178,603	$	209,633

Non-Agency^(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools	$	45,034,320	33.3% - 100.0% (59.4%)	0.0% - 50.0%	0.0% - 33.3%	6.5	$	124,875	$	170,114
Total	$	88,345,237				5.9	$	303,478	$	379,747



	December 31, 2018
	UPB of Underlying Mortgages		Interest in Excess MSR			Weighted Average Life Years^(A)	Amortized Cost Basis^(B)		Carrying Value^(C)
			New Residential^(D)	Fortress-managed funds	Mr. Cooper
Agency
Original and Recaptured Pools	$	52,368,290	32.5% - 66.7% (53.3%)	0.0% - 40.0%	20.0% - 35.0%	5.6	$	218,797	$	257,387

Non-Agency^(E)
Mr. Cooper and SLS Serviced:
Original and Recaptured Pools	$	54,058,073	33.3% - 100.0% (59.4%)	0.0% - 50.0%	0.0% - 33.3%	5.8	$	142,530	$	190,473
Total	$	106,426,363				6.1	$	361,327	$	447,860


(A)	Represents the weighted average expected timing of the receipt of expected cash flows for this investment.


(B)	The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.


(C)	Carrying Value represents the fair value of the pools and recapture agreements, as applicable.


(D)	Amounts in parentheses represent weighted averages.


(E)	New Residential is also invested in related Servicer Advance Investments, including the basic fee component of the related MSR as of December 31, 2019 and 2018 (Note 7) on $31.4 billion and $40.1 billion UPB, respectively, underlying these Excess MSRs.

Changes in fair value recorded in other income is comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Original and Recaptured Pools	$	(10,505	)	$	(58,656	)	$	4,322

157

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Excess MSR Joint Ventures

New Residential entered into investments in joint ventures (“Excess MSR joint ventures”) jointly controlled by New Residential and Fortress-managed funds investing in Excess MSRs. New Residential elected to record these investments at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of prepayment risk and other market factors.

The following tables summarize the financial results of the Excess MSR joint ventures, accounted for as equity method investees, held by New Residential:



	December 31,
	2019			2018
Excess MSR assets	$	226,843		$	269,203
Other assets	25,035			27,411
Other liabilities	(687		)	(687		)
Equity	$	251,191		$	295,927
New Residential’s investment	$	125,596		$	147,964

New Residential’s ownership	50.0		%	50.0		%



	Year Ended December 31,
	2019			2018			2017
Interest income	$	23,872		$	26,363		$	27,450
Other income (loss)	(10,208		)	(9,649		)	(2,149		)
Expenses	(64		)	—			(68		)
Net income	$	13,600		$	16,714		$	25,233

New Residential’s investments in equity method investees changed during the years ended December 31, 2019 and 2018 as follows:



	2019			2018
Balance at beginning of period	$	147,964		$	171,765
Contributions to equity method investees	—			—
Distributions of earnings from equity method investees	(8,999		)	(11,059		)
Distributions of capital from equity method investees	(20,169		)	(21,099		)
Change in fair value of investments in equity method investees	6,800			8,357
Balance at end of period	$	125,596		$	147,964

The following is a summary of New Residential’s Excess MSR investments made through equity method investees:



	December 31, 2019
	Unpaid Principal Balance		Investee Interest in Excess MSR^(A)	New Residential Interest in Investees	Amortized Cost Basis^(B)		Carrying Value^(C)		Weighted Average Life (Years)^(D)
Agency
Original and Recaptured Pools	$	33,592,554	66.7%	50.0%	$	168,807	$	226,843	5.4

158

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



	December 31, 2018
	Unpaid Principal Balance		Investee Interest in Excess MSR^(A)	New Residential Interest in Investees	Amortized Cost Basis^(B)		Carrying Value^(C)		Weighted Average Life (Years)^(D)
Agency
Original and Recaptured Pools	$	41,707,963	66.7%	50.0%	$	198,261	$	269,203	5.5


(A)	The remaining interests are held by Mr. Cooper.


(B)	Represents the amortized cost basis of the equity method investees in which New Residential holds a 50% interest. The amortized cost basis of the recapture agreements is determined based on the relative fair values of the recapture agreements and related Excess MSRs at the time they were acquired.


(C)	Represents the carrying value of the Excess MSRs held in equity method investees, in which New Residential holds a 50% interest. Carrying value represents the fair value of the pools and recapture agreements, as applicable.


(D)	Represents the weighted average expected timing of the receipt of cash flows of each investment.

6. INVESTMENTS IN MORTGAGE SERVICING RIGHTS AND MSR FINANCING RECEIVABLES

A subsidiary of New Residential, New Residential Mortgage LLC (“NRM”), engages third party licensed mortgage servicers as subservicers to perform the operational servicing duties in connection with the MSRs it acquires, in exchange for a subservicing fee which is recorded as “Subservicing expense” on New Residential’s Consolidated Statements of Income. As of December 31, 2019, these subservicers include PHH, Mr. Cooper, LoanCare, Ditech and Flagstar, which subservice 23.5%, 19.9%, 17.9%, 9.1%, and 1.0% of the underlying UPB of the related mortgages, respectively (includes both Mortgage Servicing Rights and MSR Financing Receivables). The remaining 28.6% of the underlying UPB of the related mortgages is subserviced by the servicing division of NewRez.

New Residential has entered into recapture agreements with respect to each of its MSR investments subserviced by PHH, LoanCare, Flagstar, Mr. Cooper, and NewRez. Under the recapture agreements, New Residential is generally entitled to the MSRs on any initial or subsequent refinancing by PHH, LoanCare, Flagstar, Mr. Cooper, or NewRez of a loan in the original portfolios.

In certain cases where New Residential has legally purchased MSRs or the right to the economic interest in MSRs, New Residential has determined that the purchase agreement would not be treated as a sale under GAAP. Therefore, rather than recording an investment in MSRs, New Residential has recorded an investment in MSR financing receivables (“MSR Financing Receivables”). Income from these investments, net of subservicing fees, are recorded as Interest income with changes in fair value flowing through Change in fair value of investments in MSR financing receivables in the Consolidated Statements of Income.

New Residential records its investments in MSRs and MSR Financing Receivables at fair value at acquisition and has elected to subsequently measure at fair value pursuant to the fair value measurement method.

159

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following table presents activity related to the carrying value of New Residential’s investments in MSRs and MSR Financing Receivables:



	MSRs			MSR Financing Receivables			Total
Balance as of December 31, 2017	$	1,735,504		$	598,728		$	2,334,232
Purchases, net^(A)	1,042,933			128,357			1,171,290
Transfers^(B)	124,652			(124,652		)	—
New Ocwen Agreements	—			1,017,993			1,017,993
Shellpoint Acquisition (Note 3)^(C)	151,312			—			151,312
Originations^(D)	35,311			—			35,311
Proceeds from sales	(5,776		)	(7,472		)	(13,248		)
Amortization of servicing rights^(F)	(258,068		)	(197,703		)	(455,771		)
Change in valuation inputs and assumptions^(G)	61,149			230,036			291,185
(Gain)/loss on sales	(2,917		)	(783		)	(3,700		)
Balance as of December 31, 2018	$	2,884,100		$	1,644,504		$	4,528,604
Purchases, net^(A)	690,049			735,152			1,425,201
Transfers^(B)	367,121			(367,121		)	—
Other transfers^(H)	(410		)	—			(410		)
Ditech Acquisition (Note 3)	387,170			—			387,170
Originations^(D)	374,450			—			374,450
Prepayments^(E)	(11,625		)	(82,250		)	(93,875		)
Proceeds from sales	(1,539		)	(22,989		)	(24,528		)
Amortization of servicing rights^(F)	(537,111		)	(203,732		)	(740,843		)
Change in valuation inputs and assumptions^(G)	(187,530		)	21,094			(166,436		)
(Gain)/loss on sales	3,285			(6,385		)	(3,100		)
Balance as of December 31, 2019	$	3,967,960		$	1,718,273		$	5,686,233


(A)	Net of purchase price adjustments.


(B)	Represents MSRs previously accounted for as MSR Financing Receivables. As a result of the length of the initial term of the related subservicing agreement between NRM and PHH, although the MSRs were legally sold, solely for accounting purposes, the purchase agreement was not treated as a sale under GAAP through June 30, 2019.


(C)	Includes $48.3 million of MSRs legally sold by NewRez treated as a secured borrowing as it did not meet the criteria for sale treatment. New Residential elected to record the excess spread financing liability at fair value pursuant to the fair value option.


(D)	Represents MSRs retained on the sale of originated mortgage loans.


(E)	Represents purchase price fully reimbursable from sellers as a result of prepayment protection.


(F)	Based on the ratio of the current UPB of the underlying residential mortgage loans relative to the original UPB of the underlying residential mortgage loans.


(G)	Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.


(H)	Represents Ginnie Mae MSRs repurchased.

160

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Servicing revenue, net recognized by New Residential related to its investments in MSRs was comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Servicing fee revenue	$	899,623		$	589,546		$	412,971
Ancillary and other fees	198,486			130,294			79,050
Servicing fee revenue and fees	1,098,109			719,840			492,021
Amortization of servicing rights^(A)	(530,031		)	(256,915		)	(223,167		)
Change in valuation inputs and assumptions^{(B) (C)}	(186,204		)	68,587			155,495
(Gain)/loss on sales^(D)	3,285			(2,917		)	—
Servicing revenue, net	$	385,159		$	528,595		$	424,349


(A)	Includes $7.1 million, $1.2 million and $0.0 million of amortization to Excess spread financing for the years ended December 31, 2019, 2018, and 2017, respectively.


(B)	Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.


(C)	Includes $1.3 million, $7.4 million and $0.0 million of fair value adjustment to Excess spread financing for the years ended December 31, 2019, 2018, and 2017, respectively.


(D)	Represents the realization of unrealized gain/(loss) as a result of sales.

Interest income from investments in MSR Financing Receivables was comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Servicing fee revenue	$	513,172		$	705,812		$	94,945
Ancillary and other fees	119,570			146,829			17,313
Less: subservicing expense	(196,726		)	(251,184		)	(33,686		)
Interest income, investments in MSR financing receivables	$	436,016		$	601,457		$	78,572

Change in fair value of investments in MSR Financing Receivables was comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Amortization of servicing rights	$	(203,732	)	$	(197,703	)	$	(43,190	)
Change in valuation inputs and assumptions^(A)	21,094			230,036			109,584
(Gain)/loss on sales^(B)	(6,385		)	(783		)	—
Change in fair value of investments in MSR financing receivables	$	(189,023	)	$	31,550		$	66,394


(A)	Change in valuation inputs and assumptions includes changes in inputs or assumptions used in the valuation model and other changes due to the realization of expected cash flows.


(B)	Represents the realization of unrealized gain/(loss) as a result of sales.

161

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following is a summary of New Residential’s investments in MSRs and MSR Financing Receivables as of December 31, 2019 and 2018:



	UPB of Underlying Mortgages		Weighted Average Life (Years)^(A)	Amortized Cost Basis		Carrying Value^(B)
2019
MSRs:
Agency^(C)	$	315,427,933	5.1	$	3,179,556	$	3,319,035
Non-Agency	6,402,833		5.4	12,437		20,283
Ginnie Mae^(D)	52,019,295		4.6	614,855		628,642
MSR Financing Receivables:
Agency^(C)	54,866,978		4.7	582,600		547,351
Non-Agency	76,117,892		7.6	808,149		1,170,922
Total	$	504,834,931	5.4	$	5,197,597	$	5,686,233
2018
MSRs:
Agency^(C)	$	226,295,778	6.4	$	2,189,039	$	2,506,676
Non-Agency	2,143,212		6.6	19,982		22,438
Ginnie Mae^(D)	30,023,713		7.4	357,673		354,986
MSR Financing Receivables:
Agency^(C)	42,265,547		5.9	366,946		434,110
Non-Agency	88,251,018		7.2	936,792		1,210,394
Total	$	388,979,268	6.6	$	3,870,432	$	4,528,604


(A)	Represents the weighted average expected timing of the receipt of expected cash flows for this investment.


(B)	Carrying Value represents fair value. As of December 31, 2019 and 2018, weighted average discount rates of 7.8% and 8.7%, respectively, were used to value New Residential’s investments in MSRs, respectively. As of December 31, 2019 and 2018, weighted average discount rates of 8.9% and 10.3%, respectively, were used to value New Residential’s investments in MSR financing receivables.


(C)	Represents Fannie Mae and Freddie Mac MSRs.

(D)

NewRez, as an approved issuer of Ginnie Mae MBS, originates, sells and securitizes government-insured residential mortgage loans into Ginnie Mae guaranteed securitizations and NewRez retains the right to service the underlying residential mortgage loans. As the servicer, NewRez holds an option to repurchase delinquent loans from the securitization at its discretion. As of December 31, 2019 and 2018, New Residential holds approximately $172.3 million and $121.6 million in residential mortgage loans subject to repurchase and residential mortgage loans repurchase liability on its Consolidated Balance Sheets.

Ocwen MSR Financing Receivable Transactions

On July 23, 2017, Ocwen and New Residential entered into a Master Agreement (the “Ocwen Master Agreement”) and a Transfer Agreement (the “Ocwen Transfer Agreement”) pursuant to which Ocwen and New Residential agreed to undertake certain actions to facilitate the transfer from Ocwen to New Residential of Ocwen’s remaining interests in the mortgage servicing rights relating to loans with an aggregate unpaid principal balance of approximately $110.0 billion that are subject to the Original Ocwen Agreements (the “Ocwen Subject MSRs”) and with respect to which New Residential holds the Rights to MSRs (as defined in the Original Ocwen Agreements). New Residential and Ocwen concurrently entered into a subservicing agreement pursuant to which Ocwen will subservice the mortgage loans related to the Ocwen Subject MSRs that are transferred to New Residential pursuant to the Ocwen Master Agreement and Ocwen Transfer Agreement.

On January 18, 2018, New Residential entered into a new agreement regarding the rights to MSRs (the “New Ocwen RMSR Agreement”) including a servicing addendum thereto (the “Ocwen Servicing Addendum”), Amendment No. 1 to Transfer

162

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Agreement (the “New Ocwen Transfer Agreement”) and a Brokerage Services Agreement (the “Ocwen Brokerage Services Agreement” and, collectively, the “New Ocwen Agreements”) with Ocwen. The New Ocwen Agreements amend and supplement the arrangements among the parties set forth in the Original Ocwen Agreements, the Ocwen Master Agreement, the Ocwen Transfer Agreement, and the Ocwen Subservicing Agreement (together with the Original Ocwen Agreements, the Ocwen Master Agreement, and the Ocwen Transfer Agreement, the “Existing Ocwen Agreements”). NRM made a lump-sum “Fee Restructuring Payment” of $279.6 million to Ocwen on January 18, 2018, the date of the New Ocwen RMSR Agreement, with respect to such Existing Ocwen Subject MSRs.

Under the Existing Ocwen Agreements, Ocwen sold and transferred to New Residential certain “Rights to MSRs” and other assets related to mortgage servicing rights for loans with an unpaid principal balance of approximately $86.8 billion as of the opening balances in January 2018 (the “Existing Ocwen Subject MSRs”). The New Ocwen Agreements and NRM’s Fee Restructuring Payment resulted in a new investment structured as a transfer of the full interests and economics of the Ocwen subject MSRs.

Pursuant to the New Ocwen Agreements, Ocwen will continue to service the mortgage loans related to the Existing Ocwen Subject MSRs until the necessary third party consents are obtained in order to transfer the Existing Ocwen Subject MSRs in accordance with the New Ocwen Agreements.

Pursuant to the Ocwen Brokerage Services Agreement, Ocwen will engage NRZ Brokerage to perform brokerage and marketing services for all REO properties serviced by Ocwen pursuant to the Subject Servicing Agreements as defined in the New Ocwen RMSR Agreement. Such REO properties are subject to the Altisource Brokerage Agreement and Altisource Letter Agreement.

As of December 31, 2019, MSRs representing approximately $66.7 billion UPB of underlying loans have been transferred to NRM and NewRez pursuant to the Ocwen Transaction. Economics related to the remaining MSRs subject to the Ocwen Transaction were transferred pursuant to the New Ocwen Agreements. As a result of the length of the initial term of the related subservicing agreement between NRM, NewRez and Ocwen, although the MSRs transferred pursuant to the Ocwen Transaction were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM or NewRez, and that the purchase agreement would not be treated as a sale under GAAP.

As a part of the ongoing integration efforts related to the Ocwen and PHH merger completed on October 4, 2018, Ocwen now conducts its mortgage servicing business under the PHH tradename.

Mr. Cooper MSR Financing Receivable Transaction

On February 28, 2019, NRM entered into an agreement with Mr. Cooper to purchase the MSRs, and related servicer advance receivables, with respect to $9.5 billion in total UPB of seasoned Agency residential mortgage loans. The residential mortgage loans underlying the MSRs acquired by NRM are subserviced by Mr. Cooper pursuant to an existing subservicing agreement with NRM. As a result of the length of the initial term of the related subservicing agreement between NRM and Mr. Cooper, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that substantially all of the risks and rewards inherent in owning the MSRs had not been transferred to NRM, and that the purchase agreement would not be treated as a sale under GAAP.

United Shore MSR Financing Receivable Transactions

On April 2, 2019 and May 21, 2019, NRM entered into agreements with United Shore to purchase the MSRs, and related servicer advance receivables, with respect to $8.2 billion and $23.7 billion in total UPB of seasoned Agency residential mortgage loans, respectively. The residential mortgage loans underlying the MSRs acquired by NRM will be subserviced by NewRez, Mr. Cooper and LoanCare pursuant to existing subservicing agreements with NRM. As a result of the length of term of prepayment protection provided to NRM, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that the transferor retained more than minor protection provisions, and that the purchase agreement would not be treated as a sale under GAAP.

163

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Quicken MSR Financing Receivable Transaction

On August 6, 2019, NRM entered into an agreement with Quicken to purchase the MSRs, and related servicer advance receivables, with respect to $29.1 billion in total UPB of seasoned Agency residential mortgage loans. The residential mortgage loans underlying the MSRs acquired by NRM are subserviced by LoanCare pursuant to an existing subservicing agreement with NRM. As a result of the length of term of prepayment protection provided to NRM, although the MSRs were legally sold, solely for accounting purposes, New Residential determined that the transferor retained more than minor protection provisions, and that the purchase agreement would not be treated as a sale under GAAP.

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the investments in MSRs and MSR Financing Receivables:



	Percentage of Total Outstanding Unpaid Principal Amount
State Concentration	December 31, 2019		December 31, 2018
California	21.9	%	21.7	%
Florida	6.9	%	6.9	%
New York	6.4	%	7.8	%
Texas	5.5	%	5.3	%
New Jersey	4.9	%	5.0	%
Illinois	3.6	%	3.7	%
Massachusetts	3.4	%	3.5	%
Washington	3.3	%	2.3	%
Georgia	3.1	%	3.0	%
Maryland	3.0	%	3.4	%
Other U.S.	38.0	%	37.4	%
	100.0	%	100.0	%

Geographic concentrations of investments expose New Residential to the risk of economic downturns within the relevant states. Any such downturn in a state where New Residential holds significant investments could affect the underlying borrower’s ability to make mortgage payments and therefore could have a meaningful, negative impact on the MSRs.

Mortgage Subservicing

NewRez performs servicing of residential mortgage loans for third parties under subservicing agreements. Mortgage subservicing does not meet the criteria to be recognized as a servicing right asset and, therefore, is not recognized on New Residential’s consolidated balance sheets. The UPB of residential mortgage loans subserviced for others as of December 31, 2019 was $71.2 billion and subservicing revenue of $137.4 million is included within Servicing revenue, net in the Consolidated Statements of Income.

Servicer Advances Receivable

In connection with its investments in MSRs and MSR financing receivables, New Residential generally acquires any related outstanding servicer advances (not included in the purchase prices described above), which it records at fair value within servicer advances receivable upon acquisition.

In addition to receiving cash flows from the MSRs, NRM and NewRez, as servicers, have the obligation to fund future servicer advances on the underlying pool of mortgages (Note 16). These servicer advances are recorded when advanced and are included in Servicer Advances Receivable on the Consolidated Balance Sheets.

164

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following types of advances are included in the Servicer Advances Receivable:



	December 31,
	2019		2018
Principal and interest advances	$	660,807	$	793,790
Escrow advances (taxes and insurance advances)	2,427,384		2,186,831
Foreclosure advances	163,054		199,203
Total^{(A) (B) (C)}	$	3,251,245	$	3,179,824


(A)	Includes $562.2 million and $231.2 million of servicer advances receivable related to Agency MSRs, respectively, recoverable from the Agencies.


(B)	Includes $166.5 million and $41.6 million of servicer advances receivable related to Ginnie Mae MSRs, respectively, recoverable from Ginnie Mae. Reserves for advances associated with Ginnie Mae loans in the MSR portfolio are considered in the MSR fair valuation through a nonreimbursable advance loss assumption.


(C)	Net of $50.1 million and $98.0 million, respectively, in accruals for advance recoveries.

New Residential’s Servicer Advances Receivable related to Non-Agency MSRs generally have the highest reimbursement priority (i.e., “top of the waterfall”) and New Residential is generally entitled to repayment from respective loan or REO liquidation proceeds before any interest or principal is paid on the bonds that were issued by the trust. In the majority of cases, advances in excess of respective loan or REO liquidation proceeds may be recovered from pool-level proceeds. Furthermore, to the extent that advances are not recoverable by New Residential as a result of the subservicer’s failure to comply with applicable requirements in the relevant servicing agreements, New Residential has a contractual right to be reimbursed by the subservicer. New Residential assesses the recoverability of Servicer Advance Receivables periodically and as of December 31, 2019 and December 31, 2018, expected full recovery of the Servicer Advance Receivables.

See Note 12 regarding the financing of MSRs.

7. SERVICER ADVANCE INVESTMENTS

All of New Residential’s Servicer Advance Investments are comprised of outstanding servicer advances, the requirement to purchase all future servicer advances made with respect to a specified pool of residential mortgage loans, and the basic fee component of the related MSR. New Residential elected to record its Servicer Advance Investments, including the right to the basic fee component of the related MSRs, at fair value pursuant to the fair value option for financial instruments to provide users of the financial statements with better information regarding the effects of market factors.

A taxable wholly-owned subsidiary of New Residential is the managing member of Advance Purchaser LLC (the “Buyer”), a joint venture entity, and owned an approximately 73.2% interest in the Buyer as of December 31, 2019. As of December 31, 2019, third-party co-investors, owning the remaining interest in the Buyer, have funded capital commitments to the Buyer of $389.6 million and New Residential has funded capital commitments to the Buyer of $312.7 million. The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of December 31, 2019, the noncontrolling third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $327.8 million and $305.2 million of capital distributed to the third-party co-investors and New Residential, respectively. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer.

The Buyer has purchased servicer advances from Mr. Cooper, is required to purchase all future servicer advances made with respect to this portfolio of loans from Mr. Cooper, and receives cash flows from advance recoveries and the basic fee component of the related MSRs, net of compensation paid back to Mr. Cooper in consideration of Mr. Cooper’s servicing activities. The compensation paid to Mr. Cooper as of December 31, 2019 was approximately 9.2% of the basic fee component of the related MSRs plus a performance fee that represents a portion (up to 100%) of the cash flows in excess of those required for the Buyer to obtain a specified return on its equity.

New Residential has determined that the Buyer is a VIE. See Note 14 for information on the assets and liabilities related to this consolidated VIE.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

New Residential also acquired a portion of the call rights related to this portfolio of loans.

In December 2014, New Residential agreed to acquire (the “SLS Transaction”) 50% of the Excess MSRs and all of the servicer advances and related basic fee portion of the MSR, and a portion of the call rights related to a portfolio of residential mortgage loans which is serviced by SLS. Fortress-managed funds acquired the other 50% of the Excess MSRs. SLS services the loans in exchange for a servicing fee of 10.75 basis points (“bps”) and an incentive fee (the “SLS Incentive Fee”) which is based on the ratio of the outstanding servicer advances to the UPB of the underlying loans.

In April 2015, New Residential acquired Servicer Advance Investments and Excess MSRs in connection with the acquisition of HLSS. Through January 1, 2018, Ocwen serviced the underlying loans in exchange for a servicing fee of 12% times the servicing fee collections of the underlying loans, which as of December 31, 2017 and December 31, 2016 was equal to 6.1 bps and 5.9 bps times the UPB of the underlying loans, respectively, and an incentive fee which was reduced by LIBOR plus 2.75% per annum of the amount, if any, of servicer advances outstanding in excess of a defined target. In July 2017, New Residential entered into the Ocwen Transaction as described in Note 6. Subsequent to the Ocwen Transaction, the Servicer Advance Investments (including the related basic fee portion of the MSR) formerly serviced by Ocwen became reclassified, as described in Note 6, as the underlying MSRs are transferred to NRM.

The following is a summary of New Residential’s Servicer Advance Investments, including the right to the basic fee component of the related MSRs:



	Amortized Cost Basis		Carrying Value^(A)		Weighted Average Discount Rate		Weighted Average Yield		Weighted Average Life (Years)^(B)	Change in Fair Value Recorded in Other Income for Year then Ended
December 31, 2019
Servicer Advance Investments	$	557,444	$	581,777	5.3	%	5.7	%	6.3	$	10,288
December 31, 2018
Servicer Advance Investments	$	721,801	$	735,846	5.9	%	5.8	%	5.7	$	(89,332	)


(A)	Carrying value represents the fair value of the Servicer Advance Investments, including the basic fee component of the related MSRs.


(B)	Weighted Average Life represents the weighted average expected timing of the receipt of expected net cash flows for this investment.

The following is additional information regarding the Servicer Advance Investments and related financing:



									Loan-to-Value (“LTV”)^(A)				Cost of Funds^(C)
	UPB of Underlying Residential Mortgage Loans		Outstanding Servicer Advances		Servicer Advances to UPB of Underlying Residential Mortgage Loans		Face Amount of Notes and Bonds Payable		Gross		Net^(B)		Gross		Net
December 31, 2019
Servicer Advance Investments^(D)	$	31,442,267	$	462,843	1.5	%	$	443,248	88.3	%	87.2	%	3.4	%	2.8	%
December 31, 2018
Servicer Advance Investments^(D)	$	40,096,998	$	620,050	1.5	%	$	574,117	88.3	%	87.2	%	3.7	%	3.1	%


(A)	Based on outstanding servicer advances, excluding purchased but unsettled servicer advances.


(B)	Ratio of face amount of borrowings to par amount of servicer advance collateral, net of any general reserve.


(C)	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.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(D)	The following types of advances are included in the Servicer Advance Investments:



	December 31,
	2019		2018
Principal and interest advances	$	71,574	$	108,317
Escrow advances (taxes and insurance advances)	180,047		238,349
Foreclosure advances	211,222		273,384
Total	$	462,843	$	620,050

Interest income recognized by New Residential related to its Servicer Advance Investments was comprised of the following:



	Year Ended December 31,
	2019			2018			2017
Interest income, gross of amounts attributable to servicer compensation	$	51,940		$	83,807		$	871,506
Amounts attributable to base servicer compensation	(6,209		)	(8,491		)	(227,585		)
Amounts attributable to incentive servicer compensation	(18,065		)	(25,098		)	(115,565		)
Interest income from Servicer Advance Investments	$	27,666		$	50,218		$	528,356

See Note 12 regarding the financing of Servicer Advance Investments.

8. INVESTMENTS IN REAL ESTATE AND OTHER SECURITIES

“Agency” residential mortgage backed securities (“RMBS”) are RMBS issued by a government sponsored enterprise, such as Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”). “Non-Agency” RMBS are issued by either public trusts or private label securitization entities.

Activities related to New Residential’s investments in real estate and other securities were as follows:



	Year Ended December 31, 2019						Year Ended December 31, 2018
	(in millions)						(in millions)
	Treasury		Agency		Non-Agency		Treasury			Agency			Non-Agency
Purchases
Face	$	—	$	33,573.5	$	14,960.4	$	—		$	11,006.7		$	9,194.8
Purchase Price	—		34,335.5		2,059.0		—			11,121.6			3,854.4

Sales
Face	$	—	$	22,746.3	$	2,936.2	$	862.0		$	9,485.0		$	115.0
Amortized Cost	—		23,337.8		1,852.1		858.0			9,590.6			87.7
Sale Price	—		23,449.2		1,949.3		849.8			9,569.2			86.4
Gain (Loss) on Sale	—		111.4		97.2		(8.2		)	(21.4		)	(1.3		)

As of December 31, 2019, New Residential had sold and purchased $5.1 billion and $0.9 billion face amount of Agency RMBS for $5.2 billion and $0.9 billion, respectively, which had not yet been settled. These unsettled sales and purchases were recorded on the balance sheet on trade date as Trades Receivable and Trades Payable.

New Residential has exercised its 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, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New

167

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. Refer to Note 9 for further details on these transactions.

The following is a summary of New Residential’s real estate and other securities, all of which are classified as available-for-sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired and except for securities which New Residential elected to carry at fair value and record changes to valuation through the income statement.



					Gross Unrealized								Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value^(A)		Number of Securities	Rating^(B)	Coupon^(C)		Yield		Life (Years)^(D)	Principal Subordination^(E)
December 31, 2019
Agency RMBS^(F)(G)	$	11,301,603	$	11,474,338	$	57,221	$	(11,616	)	$	11,519,943	43	AAA	3.17	%	2.78	%	6.0	N/A
Non-Agency RMBS^{(H) (I)}	24,857,988		7,307,837		689,158		(39,210		)	7,957,785		997	B+	2.90	%	4.70	%	7.0	11.0	%
Total/Weighted Average	$	36,159,591	$	18,782,175	$	746,379	$	(50,826	)	$	19,477,728	1,040	A+	3.03	%	3.53	%	6.4
December 31, 2018
Agency RMBS^(F)(G)	2,613,395		2,657,917		7,744		(43		)	2,665,618		31	AAA	4.01	%	3.70	%	8.1	N/A
Non-Agency RMBS^{(H) (I)}	19,539,450		8,554,511		517,861		(101,409		)	8,970,963		897	B+	3.40	%	5.63	%	6.9	12.4	%
Total/Weighted Average	$	22,152,845	$	11,212,428	$	525,605	$	(101,452	)	$	11,636,581	928	BB+	3.53	%	5.17	%	7.2


(A)	Fair value, which is equal to carrying value for all securities. See Note 13 regarding the estimation of fair value.

(B)

Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. This excludes the ratings of the collateral underlying 340 bonds with a carrying value of $1,129.3 million which either have never been rated or for which rating information is no longer provided. For each security rated by multiple rating agencies, the lowest rating is used. New Residential used an implied AAA rating for the Agency RMBS. Ratings provided were determined by third party rating agencies, and represent the most recent credit ratings available as of the reporting date and may not be current.


(C)	Excludes residual bonds, and certain other Non-Agency bonds, with a carrying value of $41.0 million and $3.4 million, respectively, for which no coupon payment is expected.


(D)	The weighted average life is based on the timing of expected principal reduction on the assets.


(E)	Percentage of the amortized cost basis of securities that is subordinate to New Residential’s investments, excluding fair value option securities.


(F)	Includes securities issued or guaranteed by U.S. Government agencies such as Fannie Mae or Freddie Mac.


(G)	The total outstanding face amount was $11.3 billion and $2.6 billion for fixed rate securities and $0.0 billion and $0.0 billion for floating rate securities as of December 31, 2019 and 2018, respectively.

(H)

The total outstanding face amount was $5.4 billion (including $3.2 billion of residual and fair value option notional amount) and $3.8 billion (including $1.5 billion of residual and fair value option notional amount) for fixed rate securities and $19.5 billion (including $12.2 billion of residual and fair value option notional amount) and $15.7 billion (including $7.4 billion of residual and fair value option notional amount) for floating rate securities as of December 31, 2019 and 2018, respectively.


(I)	Includes other asset backed securities (“ABS”) consisting primarily of (i) interest-only securities and servicing strips (fair value option securities) which New Residential elected to carry at fair value and record changes to valuation through the income statement, (ii) bonds backed by consumer loans and (iii) corporate debt.

168

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



					Gross Unrealized								Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value		Number of Securities	Rating	Coupon		Yield		Life (Years)	Principal Subordination
December 31, 2019
Corporate debt	$	85,000	$	85,000	$	—	$	(1,262	)	$	83,738	1	B-	8.25	%	8.25	%	5.3	N/A
Consumer loan bonds	25,029		25,688		521		(6,190		)	20,019		6	N/A	N/A		N/A		1.6	N/A
MSR bond	—		—		—		—			—		—	N/A	—	%	—	%	—	N/A
Fair Value Option Securities
Interest-only Securities	11,201,646		308,714		35,882		(19,459		)	325,137		124	AA+	1.37	%	10.49	%	2.9	N/A
Servicing Strips	4,073,792		40,043		2,431		(4,562		)	37,912		46	N/A	0.38	%	4.01	%	5.7	N/A
December 31, 2018
Corporate debt	$	85,000	$	85,000	$	—	$	(12,325	)	$	72,675	1	B-	8.25	%	8.25	%	6.3	N/A
Consumer loan bonds	56,846		57,480		33		(7,075		)	50,438		6	B	5.50	%	20.26	%	1.6	N/A
MSR bond	228,000		228,000		—		(400		)	227,600		2	BBB-	5.24	%	4.89	%	8.8	N/A
Fair Value Option Securities
Interest-only Securities	6,832,353		259,725		23,694		(13,025		)	270,394		79	AA+	1.38	%	6.58	%	3.0	N/A
Servicing Strips	975,048		8,588		1,720		(198		)	10,110		31	N/A	0.21	%	13.23	%	6.0	N/A

Unrealized losses that are considered other-than-temporary and are attributable to credit losses are recognized currently in earnings. During the year ended December 31, 2019, New Residential recorded OTTI charges of $25.2 million with respect to real estate securities. During the year ended December 31, 2018, New Residential recorded OTTI of $30.0 million. During the year ended December 31, 2017, New Residential recorded OTTI of $10.3 million. Any remaining unrealized losses on New Residential’s securities were primarily the result of changes in market factors, rather than issue-specific credit impairment. New Residential performed analyses in relation to such securities, using its best estimate of their cash flows, which support its belief that the carrying values of such securities were fully recoverable over their expected holding period. New Residential has no intent to sell, and is not more likely than not to be required to sell, these securities.

The following table summarizes New Residential’s securities in an unrealized loss position as of December 31, 2019.



			Amortized Cost Basis													Weighted Average
Securities in an Unrealized Loss Position	Outstanding Face Amount		Before Impairment		Other-Than- Temporary Impairment^(A)			After Impairment		Gross Unrealized Losses			Carrying Value		Number of Securities	Rating^(B)	Coupon		Yield		Life (Years)
Less than 12 Months	$	10,805,953	$	4,798,637	$	(1,208	)	$	4,797,429	$	(32,342	)	$	4,765,087	124	AA+	3.02	%	2.86	%	6.8
12 or More Months	1,704,469		210,058		(2,024		)	208,034		(18,484		)	189,550		64	BB+	4.20	%	6.50	%	4.7
Total/Weighted Average	$	12,510,422	$	5,008,695	$	(3,232	)	$	5,005,463	$	(50,826	)	$	4,954,637	188	AA	3.07	%	3.01	%	6.8


(A)	This amount represents OTTI recorded on securities that are in an unrealized loss position as of December 31, 2019.

(B)

The weighted average rating of securities in an unrealized loss position for less than 12 months excludes the rating of 51 bonds which either have never been rated or for which rating information is no longer provided. The weighted average rating of securities in an unrealized loss position for 12 or more months excludes the rating of 15 bonds which either have never been rated or for which rating information is no longer provided.

169

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

New Residential performed an assessment of all of its debt securities that are in an unrealized loss position (an unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:



	December 31, 2019
					Gross Unrealized Losses
	Fair Value		Amortized Cost Basis After Impairment		Credit^(A)			Non-Credit^(B)
Securities New Residential intends to sell^(C)	$	—	$	—	$	—		$	—
Securities New Residential is more likely than not to be required to sell^(D)	—		—		—			N/A
Securities New Residential has no intent to sell and is not more likely than not to be required to sell:
Credit impaired securities	228,228		237,626		(3,232		)	(9,398		)
Non-credit impaired securities	4,726,409		4,767,837		—			(41,428		)
Total debt securities in an unrealized loss position	$	4,954,637	$	5,005,463	$	(3,232	)	$	(50,826	)

(A)

This amount is required to be recorded as OTTI through earnings. In measuring the portion of credit losses, New Residential estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include New Residential’s expectations of prepayment rates, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate.


(B)	This amount represents unrealized losses on securities that are due to non-credit factors and recorded through other comprehensive income.


(C)	A portion of securities New Residential intends to sell have a fair value equal to their amortized cost basis after impairment, and, therefore do not have unrealized losses reflected in other comprehensive income as of December 31, 2019.

(D)

New Residential may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, New Residential must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales.

The following table summarizes the activity related to credit losses on debt securities:



	Year Ended December 31,
	2019			2018
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	52,803		$	23,821
Increases to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income	23,059			16,924
Additions for credit losses on securities for which an OTTI was not previously recognized	2,115			13,093
Reductions for securities for which the amount previously recognized in other comprehensive income was recognized in earnings because the entity intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis	—			—
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date	—			—
Reduction for securities sold/paid off during the period	(18,914		)	(1,035		)
Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income	$	59,063		$	52,803

170

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The table below summarizes the geographic distribution of the collateral securing New Residential’s Non-Agency RMBS:



	December 31,
	2019				2018
Geographic Location^(A)	Outstanding Face Amount		Percentage of Total Outstanding		Outstanding Face Amount		Percentage of Total Outstanding
Western U.S.	$	9,048,847	36.6	%	$	7,318,616	37.7	%
Southeastern U.S.	5,983,966		24.2	%	4,613,314		23.8	%
Northeastern U.S.	5,416,137		21.9	%	3,829,725		19.7	%
Midwestern U.S.	2,562,269		10.4	%	2,063,263		10.6	%
Southwestern U.S.	1,440,467		5.8	%	1,321,853		6.8	%
Other^(B)	296,273		1.1	%	250,833		1.4	%
	$	24,747,959	100.0	%	$	19,397,604	100.0	%


(A)	Excludes $25.0 million and $56.8 million face amount of bonds backed by consumer loans and $85.0 million and $85.0 million face amount of bonds backed by corporate debt as of December 31, 2019 and December 31, 2018, respectively.


(B)	Represents collateral for which New Residential was unable to obtain geographic information.

New Residential evaluates the credit quality of its real estate securities, as of the acquisition date, for evidence of credit quality deterioration. As a result, New Residential identified a population of real estate securities for which it was determined that it was probable that New Residential would be unable to collect all contractually required payments. For securities acquired during the year ended December 31, 2019, excluding residual and fair value option securities, the face amount of these real estate securities was $1,045.4 million, with total expected cash flows of $1,020.2 million and a fair value of $612.3 million on the dates that New Residential purchased the respective securities. For those securities acquired during the year ended December 31, 2018, excluding residual and fair value option securities, the face amount was $1,723.6 million, the total expected cash flows were $1,546.6 million and the fair value was $1,148.7 million on the dates that New Residential purchased the respective securities.

The following is the outstanding face amount and carrying value for securities, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments, excluding residual and fair value option securities:



	Outstanding Face Amount		Carrying Value
December 31, 2019	$	5,701,736	$	3,830,369
December 31, 2018	6,385,306		4,217,242

The following is a summary of the changes in accretable yield for these securities:



	Year Ended December 31,
	2019			2018
Beginning Balance	$	2,245,983		$	2,000,266
Additions	407,864			397,934
Accretion	(239,682		)	(290,014		)
Reclassifications from (to) non-accretable difference	(233,683		)	156,070
Disposals	(298,006		)	(18,273		)
Ending Balance	$	1,882,476		$	2,245,983

See Note 12 regarding the financing of real estate securities.

171

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

9. INVESTMENTS IN RESIDENTIAL MORTGAGE LOANS AND REAL ESTATE OWNED

New Residential accumulated its residential mortgage loan portfolio through various bulk acquisitions and the execution of call rights. As a result of the Shellpoint Acquisition, New Residential, through its wholly owned subsidiary, NewRez, originates residential mortgage loans for sale and securitization to third parties and generally retains the servicing rights on the underlying loans.

Loans are accounted for based on New Residential’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. New Residential accounts for loans based on the following categories:


•	Loans Held-for-Investment (which may include PCD Loans)


•	Loans Held-for-Investment, at fair value


•	Loans Held-for-Sale, at lower of cost or fair value


•	Loans Held-for-Sale, at fair value


•	Real Estate Owned (“REO”)

The following table presents certain information regarding New Residential’s residential mortgage loans outstanding by loan type, excluding REO:



December 31, 2019	Outstanding Face Amount		Carrying Value		Loan Count	Weighted Average Yield		Weighted Average Life (Years)^(A)	Floating Rate Loans as a % of Face Amount		LTV Ratio^(B)		Weighted Avg. Delinquency^(C)		Weighted Average FICO^(D)
Loan Type
Performing Loans^{(G) (J)}	$	858,703	$	859,428	13,627	6.9	%	5.3	8.8	%	76.1	%	15.8	%	646
Purchased Credit Deteriorated Loans^(H)	96,420		66,278		945	8.5	%	3.2	21.8	%	91.1	%	60.0	%	588
Total Residential Mortgage Loans, held-for-investment	$	955,123	$	925,706	14,572	7.1	%	5.1	10.1	%	77.6	%	20.2	%	641

Reverse Mortgage Loans^{(E) (F)}	$	11,628	$	5,844	28	7.9	%	4.6	5.7	%	149.9	%	69.5	%	N/A
Performing Loans^{(G) (I)}	839,141		857,821		12,808	4.5	%	4.0	62.7	%	50.1	%	7.8	%	688
Non-Performing Loans^{(H) (I)}	680,736		565,387		5,032	5.2	%	3.1	11.8	%	73.8	%	77.3	%	587
Total Residential Mortgage Loans, held-for-sale	$	1,531,505	$	1,429,052	17,868	4.9	%	3.6	39.7	%	61.4	%	39.2	%	643

Acquired Loans	3,132,007		3,024,288		19,204	4.0	%	7.0	3.3	%	62.2	%	23.1	%	626
Originated Loans	1,543,799		1,589,324		5,806	3.8	%	28.6	3.5	%	79.0	%	8.2	%	674
Total Residential Mortgage Loans, held-for-sale, at fair value^(K)	$	4,675,806	$	4,613,612	25,010	4.0	%	14.1	3.4	%	67.8	%	18.2	%	642

December 31, 2018
Loan Type
Performing Loans^{(G) (J)}	$	636,874	$	591,264	8,424	8.0	%	4.8	20.3	%	77.7	%	8.9	%	649
Purchased Credit Deteriorated Loans^(H)	191,497		144,065		1,556	7.6	%	3.1	16.4	%	84.6	%	71.5	%	596
Total Residential Mortgage Loans, held-for-investment	$	828,371	$	735,329	9,980	7.9	%	4.4	19.4	%	79.3	%	23.3	%	637

Reverse Mortgage Loans^{(E) (F)}	$	13,807	$	6,557	37	8.1	%	4.8	10.6	%	142.5	%	67.8	%	N/A
Performing Loans^{(G) (I)}	408,724		413,883		7,144	4.4	%	3.9	56.6	%	61.3	%	9.0	%	670
Non-Performing Loans^{(H) (I)}	621,700		512,040		5,029	5.5	%	3.0	14.9	%	88.1	%	72.6	%	588
Total Residential Mortgage Loans, held-for-sale	$	1,044,231	$	932,480	12,210	5.1	%	3.4	31.2	%	78.3	%	47.6	%	621

Acquired Loans	2,295,340		2,153,269		12,873	4.5	%	8.0	7.7	%	75.7	%	14.0	%	626
Originated Loans	638,173		655,260		2,307	5.2	%	28.5	96.3	%	80.0	%	3.8	%	714
Total Residential Mortgage Loans, held-for-sale, at fair value^(K)	$	2,933,513	$	2,808,529	15,180	4.6	%	12.5	27.0	%	76.6	%	11.8	%	645


(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.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

(E)

Represents a 70% participation interest that New Residential holds in a portfolio of reverse mortgage loans. Mr. Cooper holds the other 30% interest and services the loans. The average loan balance outstanding based on total UPB was $0.6 million and $0.5 million at December 31, 2019 and 2018, respectively. Approximately 45.6% and 54.9% of these loans have reached a termination event at December 31, 2019 and 2018, respectively. 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)	Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments. As of December 31, 2019, New Residential has placed Non-Performing Loans, held-for-sale on nonaccrual status, except as described in (J) below.


(I)	Includes $36.0 million and $26.9 million UPB of Ginnie Mae EBO performing and non-performing loans as of December 31, 2019, respectively, on accrual status as contractual cash flows are guaranteed by the FHA. As of December 31, 2018, these amounts were $24.3 million and $51.9 million, respectively.


(J)	Includes $107.7 million and $345.1 million UPB of non-agency mortgage loans underlying the SAFT 2013-1 securitization and MDST Trusts, respectively, which are carried at fair value based on New Residential’s election of the fair value option. Interest earned on loans measured at fair value are reported in other income.


(K)	New Residential elected the fair value option to measure these loans at fair value on a recurring basis. Interest earned on loans measured at fair value are reported in other income.

New Residential generally considers the delinquency status, loan-to-value ratios, and geographic area of residential mortgage loans as its credit quality indicators. Delinquency status is a primary credit quality indicator as loans that are more than 60 days past due provide an early warning of borrowers who may be experiencing financial difficulties. Current LTV ratio is an indicator of the potential loss severity in the event of default. Finally, the geographic distribution of the loan collateral also provides insight as to the credit quality of the portfolio, as factors such as the regional economy, home price changes and specific events will affect credit quality.

The table below summarizes the geographic distribution of the underlying residential mortgage loans:



	Percentage of Total Outstanding Unpaid Principal Amount
	December 31,
State Concentration	2019		2018
California	16.1	%	16.7	%
New York	9.0	%	11.7	%
Florida	8.4	%	8.8	%
Texas	7.1	%	4.7	%
Georgia	4.8	%	2.7	%
New Jersey	4.2	%	5.3	%
Illinois	3.6	%	4.0	%
Maryland	3.3	%	3.6	%
Massachusetts	3.3	%	3.1	%
Pennsylvania	2.9	%	3.1	%
Other U.S.	37.3	%	36.3	%
	100.0	%	100.0	%

See Note 12 regarding the financing of residential mortgage loans and related assets.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Call Rights

New Residential has executed calls with respect to Non-Agency RMBS trusts and purchased performing and non-performing residential mortgage loans and REO assets contained in such trusts prior to their termination. In certain cases, New Residential sold portions of the purchased loans through securitizations, and retained bonds issued by such securitizations. In addition, New Residential received par on the securities issued by the called trusts which it owned prior to such trusts’ termination. For the year ended December 31, 2019, New Residential executed calls on a total of 140 trusts and recognized $54.4 million of interest income on securities held in the collapsed trusts and $156.2 million of gain on securitizations accounted for as sales.

Performing Loans

The following table provides past due information regarding New Residential’s Performing Loans, which is an important indicator of credit quality and the establishment of the allowance for loan losses:



December 31, 2019
Days Past Due	Delinquency Status^(A)
Current	86.5	%
30-59	7.0	%
60-89	2.7	%
90-119^(B)	0.7	%
120+^(C)	3.1	%
	100.0	%


(A)	Represents the percentage of the total principal balance that corresponds to loans that are in each delinquency status.


(B)	Includes loans 90-119 days past due and still accruing interest because they are generally placed on nonaccrual status at 120 days or more past due.


(C)	Represents nonaccrual loans.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Activities related to the carrying value of performing residential mortgage loans held-for-investment were as follows:



	Performing Loans
Balance at December 31, 2017	$	507,615
Shellpoint Acquisition	125,350
Purchases/additional fundings	55,993
Proceeds from repayments	(106,236		)
Accretion of loan discount (premium) and other amortization^(A)	15,773
Provision for loan losses	(1,028		)
Transfer of loans to other assets^(B)	—
Transfer of loans to real estate owned	(5,131		)
Transfers of loans to held for sale	(1,555		)
Fair value adjustment	472
Balance at December 31, 2018	$	591,253
Ditech Acquisition^(C)	381,039
Purchases/additional fundings	—
Proceeds from repayments	(102,340		)
Accretion of loan discount (premium) and other amortization^(A)	12,661
Provision for loan losses	(595		)
Transfer of loans to other assets^(B)	—
Transfer of loans to real estate owned	(6,223		)
Transfers of loans to held for sale	(20,505		)
Fair value adjustment	4,138
Balance at December 31, 2019	$	859,428


(A)	Includes accelerated accretion of discount on loans paid in full and on loans transferred to other assets.


(B)	Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other Assets (Note 2).


(C)	As a result of the Ditech Acquisition, New Residential acquired the servicing on certain residual tranches of Non-Agency RMBS it already owned, and now consolidates the trusts.

Activities related to the valuation and loss provision on reverse mortgage loans and allowance for loan losses on performing loans held-for-investment were as follows:



	Performing Loans
Balance at December 31, 2017	$	196
Provision for loan losses^(A)	1,028
Charge-offs^(B)	(1,224		)
Balance at December 31, 2018	$	—
Provision for loan losses^(A)	595
Charge-offs^(B)	(595		)
Balance at December 31, 2019	$	—

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(A)	Based on an analysis of collective borrower performance, credit ratings of borrowers, loan-to-value ratios, estimated value of the underlying collateral, key terms of the loans and historical and anticipated trends in defaults and loss severities at a pool level.


(B)	Loans, other than PCD loans, are generally charged off or charged down to the net realizable value of the collateral (i.e., fair value less costs to sell), with an offset to the allowance for loan losses, when available information confirms that loans are uncollectible.

Purchased Credit Deteriorated Loans

New Residential determined at acquisition that the PCD loans acquired would be aggregated into pools based on common risk characteristics (FICO score, delinquency status, collateral type, loan-to-value ratio). Loans aggregated into pools are accounted for as if each pool were a single loan with a single composite interest rate and an aggregate expectation of cash flows, including consideration of involuntary prepayments.

Activities related to the carrying value of PCD loans held-for-investment were as follows:



Balance at December 31, 2017	$	183,540
Purchases/additional fundings	29,785
Sales	—
Proceeds from repayments	(38,276		)
Accretion of loan discount and other amortization	24,124
(Allowance) reversal for loan losses^(A)	—
Transfer of loans to real estate owned	(28,060		)
Transfer of loans to held-for-sale	(27,048		)
Balance at December 31, 2018	$	144,065
Purchases/additional fundings	—
Sales	—
Proceeds from repayments	(16,855		)
Accretion of loan discount and other amortization	16,041
(Allowance) reversal for loan losses	(2,332		)
Transfer of loans to real estate owned	(14,487		)
Transfer of loans to held-for-sale	(60,154		)
Balance at December 31, 2019	$	66,278


(A)	An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected. A reversal results from an increase to expected cash flows that reverses a prior allowance.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following is a summary of the changes in accretable yield for these loans:



Balance at December 31, 2017	$	88,631
Additions	15,644
Accretion	(24,124		)
Reclassifications from non-accretable difference^(A)	5,493
Disposals^(B)	(7,257		)
Transfer of loans to held-for-sale^(C)	(9,755		)
Balance at December 31, 2018	$	68,632
Additions	—
Accretion	(16,041		)
Reclassifications from (to) non-accretable difference^(A)	9,361
Disposals^(B)	(11,515		)
Transfer of loans to held-for-sale^(C)	(13,415		)
Balance at December 31, 2019	$	37,022


(A)	Represents a probable and significant increase (decrease) in cash flows previously expected to be uncollectible.


(B)	Includes sales of loans or foreclosures, which result in removal of the loan from the PCD loan pool at its carrying amount.


(C)	Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has the intent to hold for the foreseeable future, or until maturity or payoff.

Loans Held-for-Sale, at Lower of Cost or Fair Value

Activities related to the carrying value of loans held-for-sale, at lower of cost or fair value were as follows:



Balance at December 31, 2017	$	1,725,534
Purchases^(A)	3,653,608
Transfer of loans from held-for-investment^(B)	28,603
Sales	(4,205,375		)
Transfer of loans to other assets^(C)	(9,811		)
Transfer of loans to real estate owned	(54,114		)
Proceeds from repayments	(195,797		)
Valuation (provision) reversal on loans^(D)	(10,168		)
Balance at December 31, 2018	$	932,480
Purchases^(A)	1,124,099
Ditech Acquisition	9,136
Transfer of loans from held-for-investment^(B)	80,659
Sales	(495,925		)
Transfer of loans to other assets^(C)	(10,154		)
Transfer of loans to real estate owned	(49,459		)
Proceeds from repayments	(184,683		)
Valuation (provision) reversal on loans^(D)	22,899
Balance at December 31, 2019	$	1,429,052


(A)	Represents loans acquired with the intent to sell.


(B)	Represents loans not initially acquired with the intent to sell for which New Residential determined that it no longer has the intent to hold for the foreseeable future, or until maturity or payoff.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(C)	Represents loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim with the governmental agency that has guaranteed the loans that are now recognized as claims receivable in Other Assets (Note 2).


(D)	Represents the fair value adjustments to loans upon transfer to held-for-sale and provision recorded on certain purchased held-for-sale loans, including an aggregate of $5.2 million and $59.2 million of provision related to the call transactions executed during the years ended December 31, 2019 and 2018, respectively.

Loans Held-for-Sale, at Fair Value

Activities related to the carrying value of originated loans held-for-sale, at fair value were as follows:



Balance at December 31, 2018	$	655,260
Originations	19,512,072
Ditech Acquisition	618,297
Sales	(19,176,028		)
Proceeds from repayments	(48,626		)
Transfer of loans to other assets	(412		)
Change in fair value	28,761
Balance at December 31, 2019	$	1,589,324

Activities related to the carrying value of acquired loans held-for-sale, at fair value were as follows:



Balance at December 31, 2018	$	2,153,269
Purchases^(A)	7,499,614
Sales	(6,362,077		)
Proceeds from repayments	(187,311		)
Transfer of loans to real estate owned	(4,155		)
Accretion of loan discount and other amortization	—
Change in fair value	(75,052		)
Balance at December 31, 2019	$	3,024,288


(A)	Includes an acquisition date fair value adjustment increase of $13.3 million on loans acquired through call transactions executed during the twelve months ending December 31, 2019.

178

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Net Interest Income



	December 31,
	2019		2018
Interest Income:
Acquired Residential Mortgage Loans, held-for-investment	$	60,301	$	76,129
Acquired Residential Mortgage Loans, held-for-sale	65,926		45,653
Acquired Residential Mortgage Loans, held-for-sale, at fair value	123,446		35,904
Originated Residential Mortgage Loans, held-for-sale, at fair value	52,480		15,658
Total Interest Income on Residential Mortgage Loans	302,153		173,344

Interest Expense:
Acquired Residential Mortgage Loans, held-for-investment	19,381		23,618
Acquired Residential Mortgage Loans, held-for-sale	40,067		35,796
Acquired Residential Mortgage Loans, held-for-sale, at fair value	98,850		21,496
Originated Residential Mortgage Loans, held-for-sale,at fair value	10,873		2,690
Total Interest Expense on Residential Mortgage Loans	169,171		83,600

Total Net Interest Income on Residential Mortgage Loans	$	132,982	$	89,744

Gain on originated mortgage loans, held-for-sale, net

NewRez, a wholly owned subsidiary of New Residential, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The GSEs or Ginnie Mae guarantee conventional and government-insured mortgage securitizations and mortgage investors issue nonconforming private label mortgage securitizations while NewRez generally retains the right to service the underlying residential mortgage loans. In connection with the transfer of loans to the GSEs or mortgage investors, New Residential reports gain on originated mortgage loans, held-for-sale, net in its Consolidated Statements of Income.

Gain on originated mortgage loans, held-for-sale, net is summarized below:



	Year Ended December 31,
	2019			2018^(A)
Gain on loans originated and sold, net^(B)	$	53,554		$	47,172
Gain (loss) on settlement of mortgage loan origination derivative instruments^(C)	(53,374		)	1,234
MSRs retained on transfer of loans^(D)	374,450			35,311
Other^(E)	42,912			14,057
Realized gain on sale of originated mortgage loans, net	$	417,542		$	97,774
Change in fair value of loans	28,761			3,695
Change in fair value of interest rate lock commitments (Note 11)	26,151			23
Change in fair value of derivative instruments (Note 11)	3,001			(5,347		)
Gain on originated mortgage loans, held-for-sale, net	$	475,455		$	96,145


(A)	Includes results from July 3, 2018, the date of acquisition.


(B)	Includes loan origination fees of $421.3 million and $21.8 million in the years ended December 31, 2019 and December 31, 2018, respectively.


(C)	Represents settlement of forward securities delivery commitments utilized as an economic hedge for mortgage loans not included within forward loan sale commitments.


(D)	Represents the initial fair value of the capitalized mortgage servicing rights upon loan sales with servicing retained.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(E)	Includes fees for services associated with the loan origination process.

Real estate owned (REO)

New Residential recognizes REO assets at the completion of the foreclosure process or upon execution of a deed in lieu of foreclosure with the borrower. REO assets are managed for prompt sale and disposition at the best possible economic value.



	Real Estate Owned
Balance at December 31, 2017	$	128,295
Purchases	33,377
Transfer of loans to real estate owned	107,577
Sales^(A)	(152,725		)
Valuation provision on REO	(3,114		)
Balance at December 31, 2018	$	113,410
Purchases	68,024
Transfer of loans to real estate owned	86,167
Sales^(A)	(150,431		)
Valuation (provision) reversal on REO	635
Balance at December 31, 2019	$	117,805


(A)	Recognized when control of the property has transferred to the buyer.

As of December 31, 2019, New Residential had residential mortgage loans that were in the process of foreclosure with an unpaid principal balance of $433.1 million.

In addition, New Residential has recognized $19.1 million in unpaid claims receivable from FHA on Ginnie Mae EBO loans and reverse mortgage loans for which foreclosure has been completed and for which New Residential has made, or intends to make, a claim.

During the first quarter of 2018, New Residential formed entities (the “RPL Borrowers”) that issued securitized debt collateralized by reperforming residential mortgage loans. New Residential evaluated these entities under the VIE model and concluded them to be VIEs. See Note 14 for information on the analysis and assets and liabilities related to these consolidated VIEs.

10. INVESTMENTS IN CONSUMER LOANS

New Residential, through limited liability companies (together, the “Consumer Loan Companies”), has a co-investment in a portfolio of consumer loans. The portfolio includes personal unsecured loans and personal homeowner loans. OneMain is the servicer of the loans and provides all servicing and advancing functions for the portfolio. As of December 31, 2019, New Residential owns 53.5% of the limited liability company interests in, and consolidates, the Consumer Loan Companies.

On June 4, 2019, the Consumer Loan Companies refinanced the outstanding asset-backed notes with an asset-backed securitization for approximately $938.7 million. The proceeds in excess of the refinanced debt of $13.4 million were distributed to the respective co-investors of which New Residential received approximately $7.8 million.

New Residential also purchased certain newly originated consumer loans from a third party (“Consumer Loan Seller”). These loans are not held in the Consumer Loan Companies and have been designated as performing consumer loans, held-for-investment. In addition, see “Equity Method Investees” below.

180

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following table summarizes the investment in consumer loans, held-for-investment held by New Residential:



	Unpaid Principal Balance		Interest in Consumer Loans		Carrying Value		Weighted Average Coupon		Weighted Average Expected Life (Years)^(A)	Weighted Average Delinquency^(B)
December 31, 2019
Consumer Loan Companies
Performing Loans	$	644,676	53.5	%	$	682,310	18.8	%	4.0	4.7	%
Purchased Credit Deteriorated Loans^(C)	170,083		53.5	%	136,633		15.5	%	3.7	10.1	%
Other - Performing Loans	9,158		100.0	%	8,602		15.1	%	0.7	6.1	%
Total Consumer Loans, held-for-investment	$	823,917			$	827,545	18.0	%	3.9	5.9	%
December 31, 2018
Consumer Loan Companies
Performing Loans	$	815,341	53.5	%	$	856,563	18.8	%	3.6	5.4	%
Purchased Credit Deteriorated Loans^(C)	221,910		53.5	%	182,917		16.0	%	3.4	11.6	%
Other - Performing Loans	35,326		100.0	%	32,722		14.2	%	0.8	5.6	%
Total Consumer Loans, held-for-investment	$	1,072,577			$	1,072,202	18.1	%	3.5	6.7	%


(A)	Represents the weighted average expected timing of the receipt of expected cash flows for this investment.


(B)	Represents the percentage of the total unpaid principal balance that is 30+ days delinquent. Delinquency status is the primary credit quality indicator as it provides early warning of borrowers who may be experiencing financial difficulties.


(C)	Includes loans with evidence of credit deterioration since origination where it is probable that New Residential will not collect all contractually required principal and interest payments, which are accounted for as PCD loans.

See Note 12 regarding the financing of consumer loans.

Performing Loans

The following table provides past due information regarding New Residential’s performing consumer loans, held-for-investment, which is an important indicator of credit quality and the establishment of the allowance for loan losses:



December 31, 2019
Days Past Due	Delinquency Status^(A)
Current	95.3	%
30-59	1.8	%
60-89	1.2	%
90-119^(B)	0.7	%
120+^{(B) (C)}	1.0	%
	100.0	%


(A)	Represents the percentage of the total unpaid principal balance that corresponds to loans that are in each delinquency status.


(B)	Includes loans more than 90 days past due and still accruing interest.


(C)	Interest is accrued up to the date of charge-off at 180 days past due.

181

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Activities related to the carrying value of performing consumer loans, held-for-investment were as follows:



	Performing Loans
Balance at December 31, 2017	$	1,137,814
Purchases	—
Additional fundings^(A)	63,971
Proceeds from repayments	(257,182		)
Accretion of loan discount and premium amortization, net	1,940
Gross charge-offs	(56,870		)
Additions to the allowance for loan losses, net	(388		)
Balance at December 31, 2018	$	889,285
Purchases	—
Additional fundings^(A)	54,375
Proceeds from repayments	(213,525		)
Accretion of loan discount and premium amortization, net	186
Gross charge-offs	(38,563		)
Additions to the allowance for loan losses, net	(846		)
Balance at December 31, 2019	$	690,912


(A)	Represents draws on consumer loans with revolving privileges.

Activities related to the allowance for loan losses on performing consumer loans, held-for-investment were as follows:



	Collectively Evaluated^(A)			Individually Impaired^(B)		Total
Balance at December 31, 2017	$	4,429		$	1,676	$	6,105
Provision (reversal) for loan losses	47,839			388		48,227
Net charge-offs^(C)	(49,664		)	—		(49,664		)
Balance at December 31, 2018	$	2,604		$	2,064	$	4,668
Provision (reversal) for loan losses	30,008			846		30,854
Net charge-offs^(C)	(32,057		)	—		(32,057		)
Balance at December 31, 2019	$	555		$	2,910	$	3,465


(A)	Represents smaller-balance homogeneous loans that are not individually considered impaired and are evaluated based on an analysis of collective borrower performance, key terms of the loans and historical and anticipated trends in defaults and loss severities, and consideration of the unamortized acquisition discount.


(B)	Represents consumer loan modifications considered to be troubled debt restructurings (“TDRs”) as they provide concessions to borrowers, primarily in the form of interest rate reductions, who are experiencing financial difficulty. As of December 31, 2019, there are $18.0 million in UPB and $15.9 million in carrying value of consumer loans classified as TDRs.


(C)	Consumer loans, other than PCD loans, are charged off when available information confirms that loans are uncollectible, which is generally when they become 180 days past due. Charge-offs are presented net of $8.6 million and $9.0 million in recoveries of previously charged-off UPB in 2019 and 2018, respectively.

182

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Purchased Credit Deteriorated Loans

A portion of the consumer loans are considered PCD loans. Activities related to the carrying value of PCD consumer loans, held-for-investment were as follows:



Balance at December 31, 2017	$	236,449
(Allowance) reversal for loan losses^(A)	(31		)
Proceeds from repayments	(90,700		)
Accretion of loan discount and other amortization	37,199
Balance at December 31, 2018	$	182,917
(Allowance) reversal for loan losses^(A)	31
Proceeds from repayments	(78,519		)
Accretion of loan discount and other amortization	32,204
Balance at December 31, 2019	$	136,633


(A)	An allowance represents the present value of cash flows expected at acquisition that are no longer expected to be collected. A reversal results from an increase to expected cash flows that reverses a prior allowance.

The following is the unpaid principal balance and carrying value for consumer loans, for which, as of the acquisition date, it was probable that New Residential would be unable to collect all contractually required payments:



	Unpaid Principal Balance		Carrying Value
December 31, 2019	$	170,083	$	136,633
December 31, 2018	221,910		182,917

The following is a summary of the changes in accretable yield for these loans:



Balance at December 31, 2017	$	132,291
Accretion	(37,199		)
Reclassifications from (to) non-accretable difference^(A)	31,426
Balance at December 31, 2018	$	126,518
Accretion	(32,204		)
Reclassifications from (to) non-accretable difference^(A)	10,949
Balance at December 31, 2019	$	105,263


(A)	Represents a probable and significant increase (decrease) in cash flows previously expected to be uncollectible.

Equity Method Investees

In February 2017, New Residential completed a co-investment, through a newly formed entity, PF LoanCo Funding LLC (“LoanCo”), to purchase up to $5.0 billion worth of newly originated consumer loans from Consumer Loan Seller over a two year term. New Residential, along with three co-investors, each acquired 25% membership interests in LoanCo. New Residential accounts for its investment in LoanCo pursuant to the equity method of accounting because it can exercise significant influence over LoanCo but the requirements for consolidation are not met. As of December 31, 2019, LoanCo has distributed all net assets to New Residential and LoanCo co-investors and New Residential’s investment in LoanCo carried a $0.0 balance. The final distribution resulted in a gain of $3.6 million on the investment to New Residential.

In addition, New Residential and the LoanCo co-investors agreed to purchase warrants to purchase up to 177.7 million shares of Series F convertible preferred stock in the Consumer Loan Seller’s parent company (“ParentCo”), which were valued at approximately $75.0 million in the aggregate as of February 2017, through a newly formed entity, PF WarrantCo Holdings, LP

183

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

(“WarrantCo”). New Residential acquired a 23.57% interest in WarrantCo, the remaining interest being acquired by three co-investors. WarrantCo has agreed to purchase a pro rata portion of the warrants each time LoanCo closes on a portion of its consumer loan purchase agreement from Consumer Loan Seller. The holder of the warrants has the option to purchase an equivalent number of shares of Series F convertible preferred stock in ParentCo at a price of $0.01 per share. New Residential and LoanCo co-investors are vested in the warrants to purchase an aggregate of 177.7 million Series F convertible preferred stock in ParentCo as of December 31, 2019. The Series F convertible preferred stock holders have the right to convert such preferred stock to common stock at any time, are entitled to the number of votes equal to the number of shares of common stock into which such shares of convertible preferred stock could be converted, and will have liquidation rights in the event of liquidation. As of December 31, 2019, WarrantCo has distributed all warrants to New Residential and WarrantCo co-investors. The warrants are now held on New Residential’s balance sheet in Other Assets and carried at a $28.0 million. New Residential accounted for its investment in WarrantCo pursuant to the equity method of accounting because it could exercise significant influence over WarrantCo but the requirements for consolidation were not met.

The following tables summarize the investment in LoanCo and WarrantCo held by New Residential:



	December 31, 2019			December 31, 2018^(A)
Consumer loans, at fair value	$	—		$	231,560
Warrants, at fair value	—			103,067
Other assets	—			25,971
Warehouse financing	—			(182,065		)
Other liabilities	—			(1,142		)
Equity	$	—		$	177,391
Undistributed retained earnings	$	—		$	—
New Residential’s investment	$	—		$	42,875
New Residential’s ownership	24.3		%	24.2		%



	Year Ended December 31,
	2019			2018^(A)
Interest income	$	19,912		$	42,920
Interest expense	(6,487		)	(12,258		)
Change in fair value of consumer loans and warrants	(4,596		)	17,491
Gain on sale of consumer loans^(B)	(10,711		)	2,697
Other expenses	(3,871		)	(7,257		)
Net income	$	(5,753	)	$	43,593
New Residential’s equity in net income	$	(1,438	)	$	10,803
New Residential’s ownership	25.0		%	24.8		%


(A)	Data as of, and for the periods ended, November 30, 2018, as a result of the one month reporting lag.


(B)	During the year ended December 31, 2019, LoanCo sold, through securitizations which were treated as sales for accounting purposes, $406.1 million in UPB of consumer loans. LoanCo retained $83.9 million of residual interest in the securitizations and distributed them to the LoanCo co-investors, including New Residential.

184

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

New Residential’s investment in LoanCo and WarrantCo changed as follows:



Balance at December 31, 2018	$	38,294
Contributions to equity method investees	64,499
Distributions of earnings from equity method investees	(8,607		)
Distributions of capital from equity method investees	(92,748		)
Earnings from investments in consumer loans, equity method investees	(1,438		)
Balance at December 31, 2019	$	—

11. DERIVATIVES

New Residential uses interest rate swaps and interest rate caps as economic hedges to hedge a portion of its interest rate risk exposure. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations, as well as other factors. New Residential’s credit risk with respect to economic hedges is the risk of default on New Residential’s investments that results from a borrower’s or counterparty’s inability or unwillingness to make contractually required payments.

As of December 31, 2019, New Residential held to-be-announced forward contract positions (“TBAs”) which were entered into as an economic hedge in order to mitigate New Residential’s interest rate risk on certain specified mortgage backed securities and any amounts or obligations owed by or to New Residential are subject to the right of set-off with the TBA counterparty. As part of executing these trades, New Residential has entered into agreements with its TBA counterparties that govern the transactions for the TBA purchases or sales made, including margin maintenance, payment and transfer, events of default, settlements, and various other provisions. New Residential has fulfilled all obligations and requirements entered into under these agreements.

As of December 31, 2019, New Residential also held interest rate lock commitments (“IRLCs”), which represent a commitment to a particular interest rate provided the borrower is able to close the loan within a specified period, and forward loan sale and securities delivery commitments, which represent a commitment to sell specific mortgage loans at prices which are fixed as of the forward commitment date. New Residential enters into forward loan sale and securities delivery commitments in order to hedge the exposure related to IRLCs and mortgage loans that are not covered by mortgage loan sale commitments.

In addition, as of December 31, 2019, New Residential held 42.0 million in warrants to acquire Series F convertible preferred stock in the Consumer Loan Seller, which were valued at $28.0 million and are reported in Other Assets (Note 2) on the balance sheet.

185

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

New Residential’s derivatives are recorded at fair value on the Consolidated Balance Sheets as follows:



		December 31,
	Balance Sheet Location	2019		2018
Derivative assets
Interest Rate Caps	Other assets	$	—	$	3
Interest Rate Swaps	Other assets	155		—
Interest Rate Lock Commitments	Other assets	41,346		10,851
Forward Loan Sale Commitments	Other assets	—		39
TBAs	Other assets	—		—
		$	41,501	$	10,893
Derivative liabilities
Interest Rate Swaps^(A)	Accrued expenses and other liabilities	$	—	$	5,245
Interest Rate Lock Commitments	Accrued expenses and other liabilities	1,455		223
Forward Loan Sale Commitments	Accrued expenses and other liabilities	27		—
TBAs	Accrued expenses and other liabilities	5,403		23,921
		$	6,885	$	29,389


(A)	Net of $171.8 million and $106.1 million of related variation margin accounts as of December 31, 2019 and December 31, 2018, respectively.

The following table summarizes notional amounts related to derivatives:



	December 31,
	2019			2018
Interest Rate Caps^(A)	$	12,500		$	50,000
Interest Rate Swaps^(B)	4,900,000			4,725,000
Interest Rate Lock Commitments	4,043,935			823,187
Forward Loan Sale Commitments	43,654			30,274
TBAs, short position^(C)	5,048,000			5,904,300
TBAs, long position^(C)	11,692,212		—	5,067,200


(A)	As of December 31, 2019, caps LIBOR at 4.00% for $12.5 million of notional. The weighted average maturity of the interest rate caps as of December 31, 2019 was 11 months.


(B)	Includes $4.0 billion notional of Receive LIBOR/Pay Fixed of 3.2% and $0.9 billion notional of Receive Fixed of 1.9%/Pay LIBOR with weighted average maturities of 36 months and 87 months, respectively, as of December 31, 2019. Includes $4.7 billion notional of Receive LIBOR/Pay Fixed of 3.21% with weighted average maturities of 52 months, as of December 31, 2018.


(C)	Represents the notional amount of Agency RMBS, classified as derivatives.

186

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following table summarizes all income (losses) recorded in relation to derivatives:



	Year Ended December 31,
	2019			2018			2017
Change in fair value of derivative investments^(A)
Interest Rate Caps	$	(3	)	$	431		$	323
Interest Rate Swaps	(58,918		)	(108,098		)	(720		)
Unrealized gains(losses) on Interest Rate Lock Commitments	—			—			—
Forward Loan Sale Commitments	—			—			—
TBAs	2,778			(567		)	(1,793		)
	(56,143		)	(108,234		)	(2,190		)
Gain (loss) on settlement of investments, net
Interest Rate Caps	$	—		$	(603	)	$	(1,911	)
Interest Rate Swaps	(8,671		)	65,823			6,921
TBAs^(B)	(121,252		)	(10,353		)	(44,224		)
	(129,923		)	54,867			(39,214		)
Gain on originated mortgage loans, held for sale, net^(A)
Interest Rate Lock Commitments	$	26,151		$	23		$	—
TBAs	3,067			(5,064		)	—
Forward Loan Sale Commitments	(66		)	(283		)	—
	29,152			(5,324		)	—
Total income (losses)	$	(156,914	)	$	(58,691	)	$	(41,404	)


(A)	Represents unrealized gains (losses).


(B)	Excludes $53.4 million and $1.2 million in loss on settlement included within gain on originated mortgage loans, held-for-sale, net (Note 9) for the years ended December 31, 2019 and 2018, respectively.

187

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

12. DEBT OBLIGATIONS

The following table presents certain information regarding New Residential’s debt obligations:



	December 31, 2019															December 31, 2018
									Collateral
Debt Obligations/Collateral	Outstanding Face Amount		Carrying Value^(A)		Final Stated Maturity^(B)	Weighted Average Funding Cost		Weighted Average Life (Years)	Outstanding Face		Amortized Cost Basis		Carrying Value		Weighted Average Life (Years)	Carrying Value^(A)
Repurchase Agreements^(C)
Agency RMBS^(D)	$	15,481,677	$	15,481,677	Jan-20 to May-20	1.99	%	0.1	$	15,499,156	$	15,810,728	$	15,862,218	4.0	$	4,346,070
Non-Agency RMBS^(E)	7,317,519		7,317,519		Jan-20 to Sep-20	2.76	%	0.1	25,220,620		8,014,409		8,661,349		7.0	7,434,785
Residential Mortgage Loans^(F)	5,054,667		5,053,207		Feb-20 to May-21	3.48	%	0.6	5,778,009		5,847,650		5,577,297		15.4	3,678,246
Real Estate Owned^{(G) (H)}	63,846		63,822		Feb-20 to May-21	3.53	%	0.7	N/A		N/A		77,556		N/A	94,868
Total Repurchase Agreements	27,917,709		27,916,225			2.47	%	0.2								15,553,969
Notes and Bonds Payable
Excess MSRs^(I)	217,300		217,300		Feb-20 to Jul-22	4.45	%	2.6	97,846,949		306,803		394,644		5.9	297,563
MSRs^(J)	2,646,540		2,640,036		Mar-20 to Jul-24	4.16	%	1.6	394,098,370		3,998,060		4,446,855		5.7	2,360,856
Servicer Advances^(K)	3,189,486		3,181,672		Jan-20 to Aug-23	2.90	%	2.1	3,587,593		3,858,818		3,883,151		1.4	3,382,455
Residential Mortgage Loans^(L)	866,001		864,451		Apr-20 to Dec-45	4.63	%	8.3	1,183,625		1,199,326		1,171,201		7.1	124,945
Consumer Loans^(M)	813,808		816,689		Dec-21 to May-36	3.25	%	3.9	823,806		830,900		827,434		3.9	936,447
Total Notes and Bonds Payable	7,733,135		7,720,148			3.60	%	2.8								7,102,266
Total/Weighted Average	$	35,650,844	$	35,636,373		2.71	%	0.8								$	22,656,235


(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 repurchase agreements had approximately $84.1 million of associated accrued interest payable as of December 31, 2019.


(D)	All of the Agency RMBS repurchase agreements have a fixed rate. Collateral amounts include approximately $5.3 billion of related trade and other receivables.

(E)


(F)	All of these repurchase agreements have LIBOR-based floating interest rates.


(G)	All of these repurchase agreements have LIBOR-based floating interest rates.


(H)	Includes financing collateralized by receivables including claims from FHA on Ginnie Mae EBO loans for which foreclosure has been completed and for which New Residential has made or intends to make a claim on the FHA guarantee.


(I)	Includes $217.3 million of corporate loans which bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 2.75%. The outstanding face amount of the collateral represents the UPB of the residential mortgage loans underlying the interests in MSRs that secure these notes.

(J)

(K)

188

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

(L)

Represents: (i) a $5.6 million note payable to Mr. Cooper which includes a $2.1 million receivable from government agency and bears interest equal to one-month LIBOR plus 2.88%, (ii) $105.3 million of SAFT 2013-1 mortgage-backed securities issued with fixed interest rates ranging from 3.50% to 3.76% (see Note 13 for fair value details), (iii) $353.5 million of 2019-RPL1 asset-backed notes held by third parties which include $0.3 million of REO and bear interest equal to 4.59% (see Note 13 for fair value details), (iv) $202.5 million of MDST Trusts asset-backed notes held by third parties which bear interest equal to 6.58% (see Note 13 for fair value details), and (v) $199.1 million of asset-backed notes held by third parties which include $1.5 million of REO and bear interest equal to the sum of (i) a floating rate index equal to one-month LIBOR and (ii) a margin of 1.25%.

(M)

As of December 31, 2019, New Residential had no outstanding repurchase agreements where the amount at risk with any individual counterparty or group of related counterparties exceeded 10% of New Residential’s stockholders' equity. The amount at risk under repurchase agreements is defined as the excess of carrying amount (or market value, if higher than the carrying amount) of the securities or other assets sold under agreement to repurchase, including accrued interest plus any cash or other assets on deposit to secure the repurchase obligation, over the amount of the repurchase liability (adjusted for accrued interest).

General

Certain of the debt obligations included above are obligations of New Residential’s consolidated subsidiaries, which own the related collateral. In some cases, such collateral is not available to other creditors of New Residential.

New Residential has margin exposure on $27.9 billion of repurchase agreements as of December 31, 2019. To the extent that the value of the collateral underlying these repurchase agreements declines, New Residential may be required to post margin, which could significantly impact its liquidity.

189

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Activities related to the carrying value of New Residential’s debt obligations were as follows:



	Excess MSRs			MSRs			Servicer Advances^(A)			Real Estate Securities			Residential Mortgage Loans and REO			Consumer Loans			Total
Balance at December 31, 2017	$	483,978		$	1,157,179		$	4,060,156		$	6,694,454		$	2,108,007		$	1,242,756		$	15,746,530
Repurchase Agreements:
Shellpoint Acquisition	—			—			—			1,957			437,675			—			439,632
Borrowings	—			—			—			90,996,778			8,665,900			—			99,662,678
Repayments	—			—			—			(85,912,169		)	(7,298,734		)	—			(93,210,903		)
Capitalized deferred financing costs, net of amortization	—			—			—			(165		)	589			—			424
Notes and Bonds Payable:
Shellpoint Acquisition	—			20,731			—			—			120,702			—			141,433
Borrowings	350,787			4,212,855			5,207,084			—			183			—			9,770,909
Repayments	(537,227		)	(3,022,785		)	(5,887,384		)	—			(136,947		)	(308,316		)	(9,892,659		)
Discount on borrowings, net of amortization	—			—			41			—			—			1,633			1,674
Unrealized loss on notes, fair value	—			—			—			—			684			—			684
Capitalized deferred financing costs, net of amortization	25			(7,124		)	2,558			—			—			374			(4,167		)
Balance at December 31, 2018	$	297,563		$	2,360,856		$	3,382,455		$	11,780,855		$	3,898,059		$	936,447		$	22,656,235
Repurchase Agreements:
Borrowings	—			—			—			207,138,969			36,177,659			—			243,316,628
Repayments	—			—			—			(196,120,793		)	(34,833,314		)	—			(230,954,107		)
Capitalized deferred financing costs, net of amortization	—			—			—			165			(429		)	—			(264		)
Notes and Bonds Payable:
Ditech Acquisition^(B)	—			—			—			—			209,459			—			209,459
Borrowings	456,741			2,456,410			4,952,585			—			912,445			928,683			9,706,864
Repayments	(537,200		)	(2,178,755		)	(5,149,327		)	—			(383,635		)	(1,054,610		)	(9,303,527		)
Discount on borrowings, net of amortization	—			—			102			—			—			6,169			6,271
Unrealized loss on notes, fair value	—			—			—			—			1,236			—			1,236
Capitalized deferred financing costs, net of amortization	196			1,525			(4,143		)	—			—			—			(2,422		)
Balance at December 31, 2019	$	217,300		$	2,640,036		$	3,181,672		$	22,799,196		$	5,981,480		$	816,689		$	35,636,373


(A)	New Residential net settles daily borrowings and repayments of the Notes and Bonds Payable on its servicer advances.


(B)	As a result of the Ditech Acquisition, New Residential acquired the servicing on certain residual tranches of Non-Agency RMBS it already owned, and now consolidates the respective securities. See Note 9 for the associated loans.

Maturities

New Residential’s debt obligations as of December 31, 2019 had contractual maturities as follows:



Year	Nonrecourse		Recourse		Total
2020	$	527,231	$	29,183,656	$	29,710,887
2021	1,030,932		752,496		1,783,428
2022	1,646,318		217,300		1,863,618
2023	400,000		382,215		782,215
2024	—		389,177		389,177
2025 and thereafter	1,121,519		—		1,121,519
	$	4,726,000	$	30,924,844	$	35,650,844

190

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Borrowing Capacity

The following table represents New Residential’s borrowing capacity as of December 31, 2019:



Debt Obligations/ Collateral	Borrowing Capacity		Balance Outstanding		Available Financing
Repurchase Agreements
Residential mortgage loans and REO	$	6,296,106	$	3,685,133	$	2,610,973
New Loan Originations	4,433,000		1,433,380		2,999,620
Non-Agency RMBS	650,000		529,096		120,904
Notes and Bonds Payable
Excess MSRs	150,000		—		150,000
MSRs	1,575,000		1,309,484		265,516
Servicer advances^(A)	1,645,000		1,289,521		355,479
Residential Mortgage Loans	650,000		199,132		450,868
Consumer loans	150,000		—		150,000
	$	15,549,106	$	8,445,746	$	7,103,360


(A)	New Residential’s unused borrowing capacity is available if New Residential has additional eligible collateral to pledge and meets other borrowing conditions as set forth in the applicable agreements, including any applicable advance rate. New Residential pays a 0.02% fee on the unused borrowing capacity.

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 New Residential’s equity or a failure to maintain a specified tangible net worth, liquidity, or indebtedness to tangible net worth ratio. New Residential was in compliance with all of its debt covenants as of December 31, 2019.

13. FAIR VALUE MEASUREMENT

U.S. GAAP requires the categorization of fair value measurement into three broad levels which form a hierarchy based on the transparency of inputs to the valuation.

Level 1 - Quoted prices in active markets for identical instruments.

Level 2 - Valuations based principally on other observable market parameters, including:


•	Quoted prices in active markets for similar instruments,


•	Quoted prices in less active or inactive markets for identical or similar instruments,


•	Other observable inputs (such as interest rates, yield curves, volatilities, prepayment rates, loss severities, credit risks and default rates), and


•	Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3 - Valuations based significantly on unobservable inputs.

New Residential follows this hierarchy for its fair value measurements. The classifications are based on the lowest level of input that is significant to the fair value measurement.

191

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The carrying values and fair values of New Residential’s assets and liabilities recorded at fair value on a recurring basis, as well as other financial instruments for which fair value is disclosed, as of December 31, 2019 were as follows:



					Fair Value
	Principal Balance or Notional Amount		Carrying Value		Level 1		Level 2		Level 3		Total
Assets:
Investments in:
Excess mortgage servicing rights, at fair value^(A)	$	88,345,237	$	379,747	$	—	$	—	$	379,747	$	379,747
Excess mortgage servicing rights, equity method investees, at fair value^(A)	33,592,554		125,596		—		—		125,596		125,596
Mortgage servicing rights, at fair value^(A)	373,850,061		3,967,960		—		—		3,967,960		3,967,960
Mortgage servicing rights financing receivables, at fair value^(A)	130,984,870		1,718,273		—		—		1,718,273		1,718,273
Servicer advance investments, at fair value	462,843		581,777		—		—		581,777		581,777
Real estate and other securities, available-for-sale	36,159,591		19,477,728		—		11,519,943		7,957,785		19,477,728
Residential mortgage loans, held-for-investment	502,352		441,263		—		—		435,234		435,234
Residential mortgage loans, held-for-sale	1,531,505		1,429,052		—		—		1,438,302		1,438,302
Residential mortgage loans, held-for-sale, at fair value^(B)	4,675,806		4,613,612		—		1,099,230		3,514,382		4,613,612
Residential mortgage loans, held-for-investment, at fair value^(C)	452,771		484,443		—		—		484,443		484,443
Residential mortgage loans subject to repurchase	172,336		172,336		—		172,336		—		172,336
Consumer loans, held-for-investment	823,917		827,545		—		—		849,739		849,739
Derivative assets	8,360,894		41,501		—		155		41,346		41,501
Cash and cash equivalents	528,737		528,737		528,737		—		—		528,737
Restricted cash	162,197		162,197		162,197		—		—		162,197
Other assets^(D)	N/A		60,654		7,952		—		52,703		60,655
			$	35,012,421	$	698,886	$	12,791,664	$	21,547,287	$	35,037,837
Liabilities:
Repurchase agreements	$	27,917,709	$	27,916,225	$	—	$	27,917,709	$	—	$	27,917,709
Notes and bonds payable^(E)	7,733,135		7,720,148		—		—		7,779,060		7,779,060
Residential mortgage loan repurchase liability	172,336		172,336		—		172,336		—		172,336
Derivative liabilities	17,379,407		6,885		—		5,430		1,455		6,885
Excess spread financing	2,962,629		31,777		—		—		31,777		31,777
Contingent consideration	N/A		55,222		—		—		55,222		55,222
			$	35,902,593	$	—	$	28,095,475	$	7,867,514	$	35,962,989


(A)	The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs, MSR financing receivables, and Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.


(B)	Includes $267.7 million in fair value of loans that are 90 days or more past due.


(C)	Includes $21.6 million in fair value of loans that are 90 days or more past due.


(D)	Excludes the indirect equity investment in a commercial redevelopment project that is accounted for at fair value on a recurring basis based on the NAV of New Residential’s investment. The investment had a fair value of $74.0 million as of December 31, 2019.


(E)	Includes the MDST Trusts, SAFT 2013-1 mortgage-backed securities and the 2019-RPL1 asset-backed notes issued for which the fair value option for financial instruments was elected and resulted in a fair value of $659.7 million as of December 31, 2019.

192

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



					Fair Value
	Principal Balance or Notional Amount		Carrying Value		Level 1		Level 2		Level 3		Total
Assets
Investments in:
Excess mortgage servicing rights, at fair value^(A)	$	106,426,363	$	447,860	$	—	$	—	$	447,860	$	447,860
Excess mortgage servicing rights, equity method investees, at fair value^(A)	41,707,963		147,964		—		—		147,964		147,964
Mortgage servicing rights, at fair value^(A)	258,462,703		2,884,100		—		—		2,884,100		2,884,100
Mortgage servicing rights financing receivables, at fair value^(A)	130,516,565		1,644,504		—		—		1,644,504		1,644,504
Servicer advance investments, at fair value	620,050		735,846		—		—		735,846		735,846
Real estate and other securities, available-for-sale	22,152,845		11,636,581		—		2,665,618		8,970,963		11,636,581
Residential mortgage loans, held-for-investment	706,111		614,241		—		—		625,321		625,321
Residential mortgage loans, held-for-sale	1,043,550		932,480		—		—		958,970		958,970
Residential mortgage loans, held-for-sale, at fair value^(B)	2,934,727		2,808,529		—		213,882		2,594,647		2,808,529
Residential mortgage loans, held-for-investment, at fair value^(C)	122,260		121,088		—		—		121,088		121,088
Residential mortgage loans subject to repurchase	121,602		121,602		—		121,602		—		121,602
Consumer loans, held-for-investment	1,072,577		1,072,202		—		—		1,054,820		1,054,820
Derivative assets	840,179		10,893		—		42		10,851		10,893
Cash and cash equivalents	251,058		251,058		251,058		—		—		251,058
Restricted cash	164,020		164,020		164,020		—		—		164,020
Other assets^(D)	N/A		16,991		7,778		—		9,213		16,991
			$	23,609,959	$	422,856	$	3,001,144	$	20,206,147	$	23,630,147
Liabilities:
Repurchase agreements	$	15,555,156	$	15,553,969	$	—	$	15,555,156	$	—	$	15,555,156
Notes and bonds payable	7,117,909		7,102,266		—		—		7,076,400		7,076,400
Residential mortgage loans repurchase liability	121,602		121,602		—		121,602		—		121,602
Derivative liabilities	15,759,782		29,389		—		29,166		223		29,389
Excess spread financing	3,492,587		39,304		—		—		39,304		39,304
Contingent consideration	N/A		40,842		—		—		40,842		40,842
			$	22,887,372	$	—	$	15,705,924	$	7,156,769	$	22,862,693


(A)	The notional amount represents the total unpaid principal balance of the residential mortgage loans underlying the MSRs, MSR financing receivables, and Excess MSRs. New Residential does not receive an excess mortgage servicing amount on non-performing loans in Agency portfolios.


(B)	Includes $88.7 million in fair value of loans that are 90 days or more past due.


(C)	Includes $0.4 million in fair value of loans that are 90 days or more past due.


(D)	Excludes the indirect equity investment in a commercial redevelopment project that is accounted for at fair value on a recurring basis based on the NAV of New Residential’s investment. The investment had a fair value of $74.3 million as of December 31, 2018.

New Residential has various processes and controls in place to ensure that fair value is reasonably estimated. With respect to the broker and pricing service quotations, to ensure these quotes represent a reasonable estimate of fair value, New Residential’s quarterly procedures include a comparison to quotations from different sources, outputs generated from its internal pricing models and transactions New Residential has completed with respect to these or similar assets or liabilities, as well as on its knowledge

193

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

and experience of these markets. With respect to fair value estimates generated based on New Residential’s internal pricing models, New Residential corroborates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters, where available, and models for reasonableness. New Residential believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.

Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value.

New Residential’s assets measured at fair value on a recurring basis using Level 3 inputs changed as follows:



	Level 3
	Excess MSRs^(A)						Excess MSRs in Equity Method Investees^(A)(B)
	Agency			Non-Agency						MSRs^(A)			Mortgage Servicing Rights Financing Receivables^(A)			Servicer Advance Investments			Non-Agency RMBS			Derivatives^(C)		Residential Mortgage Loans			Total

Balance at December 31, 2017	$	324,636		$	849,077		$	171,765		$	1,735,504		$	598,728		$	4,027,379		$	5,974,789		$	—	$	—		$	13,681,878
Transfers^(D)
Transfers from Level 3	—			—			—			—			—			—			—			—		—			—
Transfers to Level 3	—			—			—			—			—			—			—			—		—			—
Shellpoint Acquisition	—			—			—			275,964			(124,652		)	—			—			10,604		179,644			341,560
Gains (losses) included in net income
Included in other-than-temporary impairment on securities^(E)	—			—			—			—			—			—			(24,940		)	—		—			(24,940		)
Included in change in fair value of investments in excess mortgage servicing rights^(E)	(18,099		)	(40,557		)	—			—			—			—			—			—		—			(58,656		)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(E)	—			—			8,357			—			—			—			—			—		—			8,357
Included in servicing revenue, net^(F)	—			—			—			(199,836		)	—			—			—			—		—			(199,836		)
Included in change in fair value of investments in mortgage servicing rights financing receivable^(E)	—			—			—			—			31,550			—			—			—		—			31,550
Included in change in fair value of servicer advance investments	—			—			—			—			—			(89,332		)	—			—		—			(89,332		)
Included in change in fair value of investments in residential mortgage loans	—			—			—			—			—			—			—			—		46,065			46,065
Included in gain (loss) on settlement of investments, net	—			40,417			—			—			—			72,585			(1,288		)	—		—			111,714
Included in other income (loss), net^(E)	6,137			307			—			—			—			—			10,283			24		(175		)	16,576
Gains (losses) included in other comprehensive income^(G)	—			—			—			—			—			—			31,031			—		—			31,031
Interest income	21,936			22,504			—			—			—			50,218			377,018			—		—			471,676
Purchases, sales and repayments
Purchases	—			—			—			1,042,933			128,357			2,332,989			3,854,439			—		2,107,204			9,465,922
Proceeds from sales	(19,084		)	—			—			(5,776		)	(7,472		)	—			(86,448		)	—		—			(118,780		)
Proceeds from repayments	(58,139		)	(69,654		)	(32,158		)	—			—			(2,455,155		)	(1,163,921		)	—		(2,111		)	(3,781,138		)
Originations	—			—			—			35,311			—			—			—			—		—			35,311
Ocwen Transaction (Note 6)	—			(611,621		)	—			—			1,017,993			(3,202,838		)	—			—		—			(2,796,466		)
Balance at December 31, 2018	$	257,387		$	190,473		$	147,964		$	2,884,100		$	1,644,504		$	735,846		$	8,970,963		$	10,628	$	2,330,627		$	17,172,492

194

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



	Level 3
	Excess MSRs^(A)						Excess MSRs in Equity Method Investees^(A)(B)
	Agency			Non-Agency						MSRs^(A)			Mortgage Servicing Rights Financing Receivables^(A)			Servicer Advance Investments			Non-Agency RMBS			Derivatives^(C)		Residential Mortgage Loans			Total
(continued)
Transfers^(D)
Transfers from Level 3	—			—			—			—			—			—			—			—		(32,806		)	(32,806		)
Transfers to Level 3	—			—			—			—			—			—			—			—		315,577			315,577
Ditech Acquisition	—			—			—			387,170			—			—			(178,435		)	—		381,039			589,774
Transfers from investments in mortgage servicing rights financing receivables to investments in mortgage servicing rights	—			—			—			367,121			(367,121		)	—			—			—		—			—
Gains (losses) included in net income
Included in other-than-temporary impairment on securities^(E)	—			—			—			—			—			—			(25,174		)	—		—			(25,174		)
Included in change in fair value of investments in excess mortgage servicing rights^(E)	(7,559		)	(2,946		)	—			—			—			—			—			—		—			(10,505		)
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(E)	—			—			6,800			—			—			—			—			—		—			6,800
Included in servicing revenue, net^(F)	—			—			—			(721,356		)	—			—			—			—		—			(721,356		)
Included in change in fair value of investments in mortgage servicing rights financing receivable^(E)	—			—			—			—			(189,023		)	—			—			—		—			(189,023		)
Included in change in fair value of servicer advance investments	—			—			—			—			—			10,288			—			—		—			10,288
Included in change in fair value of investments in residential mortgage loans	—			—			—			—			—			—			—			—		(63,347		)	(63,347		)
Included in gain (loss) on settlement of investments, net	1,479			30			—			—			—			—			97,191			—		—			98,700
Included in other income (loss), net^(E)	1,523			819			—			—			—						2,101			29,263		—			33,706
Gains (losses) included in other comprehensive income^(G)	—			—			—			—			—						238,217			—		—			238,217
Interest income	14,895			17,752			—			—			—			27,666			302,705			—		—			363,018
Purchases, sales and repayments
Purchases	—			—			—			690,049			735,152			1,622,808			2,058,953			—		11,110,245			16,217,207
Proceeds from sales	(10,018		)	(57		)	—			(1,539		)	(22,989		)	—			(1,949,300		)	—		(10,638,483		)	(12,622,386		)
Proceeds from repayments	(48,074		)	(35,957		)	(29,168		)	(11,625		)	(82,250		)	(1,814,831		)	(1,559,436		)	—		(248,503		)	(3,829,844		)
Originations and other	—			—			—			374,040			—			—						—		844,476			1,218,516
Balance at December 31, 2019	$	209,633		$	170,114		$	125,596		$	3,967,960		$	1,718,273		$	581,777		$	7,957,785		$	39,891	$	3,998,825		$	18,769,854


(A)	Includes the recapture agreement for each respective pool, as applicable.


(B)	Amounts represent New Residential’s portion of the Excess MSRs held by the respective joint ventures in which New Residential has a 50% interest.


(C)	For the purpose of this table, the IRLC asset and liability positions are shown net.


(D)	Transfers are assumed to occur at the beginning of the respective period.


(E)	The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates and realized gains (losses) recorded during the period.


(F)	The components of Servicing revenue, net are disclosed in Note 6.


(G)	These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of Comprehensive Income.

195

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

New Residential’s liabilities measured at fair value on a recurring basis using Level 3 inputs changed as follows:



	Level 3
	Excess Spread Financing			Mortgage-Backed Securities Issued			Contingent Consideration
	Excess Spread Financing			Mortgage-Backed Securities Issued			Contingent Consideration			Total
Balance at December 31, 2017	$	—		$	—		$	—		$	—
Transfers^(A)
Transfers from Level 3	—			—			—			—
Transfers to Level 3	—			—			—			—
Shellpoint Acquisition	48,262			120,702			39,262			208,226
Gains (losses) included in net income
Included in other-than-temporary impairment on securities^(B)	—			—			—			—
Included in change in fair value of investments in excess mortgage servicing rights	—			—			—			—
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(B)	—			—			—			—
Included in servicing revenue, net^(C)	(8,591		)	—			—			(8,591		)
Included in change in fair value of investments in notes receivable - rights to MSRs	—			—			—			—
Included in change in fair value of servicer advance investments	—			—			—			—
Included in gain (loss) on settlement of investments, net	—			—			—			—
Included in other income^(B)	—			684			1,580			2,264
Gains (losses) included in other comprehensive income, net of tax^(D)	—			—			—			—
Interest income	—			—			—			—
Purchases, sales and payments
Purchases	—			—			—			—
Proceeds from sales	—			—			—			—
Payments	—			(4,338		)	—			(4,338		)
Other	(367		)	—			—			(367		)
Balance at December 31, 2018	$	39,304		$	117,048		$	40,842		$	197,194
Transfers^(A)
Transfers from Level 3	—			—			—			—
Transfers to Level 3	—			—			—			—
Acquisitions	—			—			13,893			13,893
Ditech Acquisition^(E)	—			209,459			—			209,459
Gains (losses) included in net income
Included in other-than-temporary impairment on securities^(B)	—			—			—			—
Included in change in fair value of investments in excess mortgage servicing rights	—			—			—			—
Included in change in fair value of investments in excess mortgage servicing rights, equity method investees^(B)	—			—			—			—
Included in servicing revenue, net^(C)	(8,406		)	—			—			(8,406		)
Included in change in fair value of investments in notes receivable - rights to MSRs	—			—			—			—
Included in change in fair value of servicer advance investments	—			—			—			—
Included in change in fair value of investments in residential mortgage loans	—			—			—			—
Included in gain (loss) on settlement of investments, net	—			—			—			—
Included in other income^(B)	—			1,236			10,487			11,723
Gains (losses) included in other comprehensive income, net of tax^(D)	—			—			—			—
Interest income	—			—			—			—
Purchases, sales and payments
Purchases	—			378,569			—			378,569
Proceeds from sales	—			—			—			—
Payments	—			(46,574		)	(10,000		)	(56,574		)
Other	879			—			—			879
Balance at December 31, 2019	$	31,777		$	659,738		$	55,222		$	746,737


(A)	Transfers are assumed to occur at the beginning of the respective period.

196

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(B)	The gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 liabilities still held at the reporting dates and realized gains (losses) recorded during the period.


(C)	The components of Servicing revenue, net are disclosed in Note 6.


(D)	These gains (losses) were included in net unrealized gain (loss) on securities in the Consolidated Statements of Comprehensive Income.


(E)	As a result of the Ditech Acquisition, New Residential acquired MSRs and the servicing on certain residual tranches of Non-Agency RMBS it already owned, and now consolidates the respective securities. See Note 12 for the associated liability.

Investments in Excess MSRs, Excess MSRs Equity Method Investees, MSRs and MSR Financing Receivables Valuation

Fair value estimates of New Residential’s investments in MSRs and Excess MSRs were based on internal pricing models. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included expectations of prepayment rates, delinquency rates, recapture rates, the mortgage servicing amount or excess mortgage servicing amount of the underlying residential mortgage loans, as applicable, and discount rates that market participants would use in determining the fair values of mortgage servicing rights on similar pools of residential mortgage loans. In addition, for investments in MSRs, significant inputs included the market-level estimated cost of servicing.

In order to evaluate the reasonableness of its fair value determinations, New Residential engages an independent valuation firm to separately measure the fair value of its investments in MSRs and Excess MSRs. The independent valuation firm determines an estimated fair value range of each pool based on its own models and issues a “fairness opinion” with this range. New Residential compares the range included in the opinion to the value generated by its internal models. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

Significant increases (decreases) in the discount rates, prepayment or delinquency rates, or costs of servicing, in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recapture rates or mortgage servicing amount or excess mortgage servicing amount, as applicable, in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the prepayment rate.

197

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The following tables summarize certain information regarding the weighted average inputs used:



	December 31, 2019
	Significant Inputs^(A)
	Prepayment Rate^(B)		Delinquency^(C)		Recapture Rate^(D)		Mortgage Servicing Amount or Excess Mortgage Servicing Amount (bps)^(E)	Collateral Weighted Average Maturity Years^(F)
Excess MSRs Directly Held (Note 5)
Agency
Original Pools	8.6	%	1.1	%	20.3	%	21	20
Recaptured Pools	10.7	%	0.5	%	27.8	%	23	23
	9.2	%	0.9	%	22.3	%	22	21
Non-Agency^(G)
Mr. Cooper and SLS Serviced:
Original Pools	9.7	%	N/A		15.5	%	15	24
Recaptured Pools	7.5	%	N/A		17.4	%	24	23
	9.4	%	N/A		15.8	%	16	24
Total/Weighted Average--Excess MSRs Directly Held	9.3	%	0.9	%	19.4	%	19	22

Excess MSRs Held through Equity Method Investees (Note 5)
Agency
Original Pools	9.3	%	1.4	%	23.7	%	19	19
Recaptured Pools	10.3	%	0.8	%	26.7	%	24	22
Total/Weighted Average--Excess MSRs Held through Investees	9.8	%	1.1	%	25.1	%	21	20

Total/Weighted Average--Excess MSRs All Pools	9.5	%	1.0	%	21.4	%	20	21

MSRs (Note 6)
Agency^(H)
Mortgage Servicing Rights^(I)	12.5	%	1.0	%	23.3	%	28	22
MSR Financing Receivables^(I)	15.4	%	0.4	%	15.8	%	27	25
Non-Agency
Mortgage Servicing Rights	11.6	%	1.2	%	22.1	%	31	16
MSR Financing Receivables^(I)	8.3	%	14.4	%	9.3	%	47	25
Ginnie Mae
Mortgage Servicing Rights^(J)	16.2	%	4.4	%	28.1	%	42	27

198

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



	December 31, 2018
	Significant Inputs^(A)
	Prepayment Rate^(B)		Delinquency^(C)		Recapture Rate^(D)		Mortgage Servicing Amount or Excess Mortgage Servicing Amount (bps)^(E)	Collateral Weighted Average Maturity Years^(F)
Excess MSRs Directly Held (Note 5)
Agency
Original Pools	9.8	%	2.5	%	26.3	%	21	21
Recaptured Pools	8.0	%	2.1	%	23.6	%	22	24
Recapture Agreement	7.9	%	2.2	%	24.8	%	22	—
	9.1	%	2.4	%	25.4	%	21	22
Non-Agency^(G)
Mr. Cooper and SLS Serviced:
Original Pools	10.4	%	N/A		15.4	%	15	24
Recaptured Pools	8.0	%	N/A		19.9	%	23	24
Recapture Agreement	7.9	%	N/A		19.8	%	20	—
	9.9	%	N/A		16.3	%	16	24
Total/Weighted Average--Excess MSRs Directly Held	9.4	%	2.4	%	21.5	%	19	23

Excess MSRs Held through Equity Method Investees (Note 5)
Agency
Original Pools	10.9	%	3.9	%	29.6	%	19	20
Recaptured Pools	8.5	%	2.6	%	28.8	%	23	23
Recapture Agreement	8.6	%	2.7	%	30.4	%	23	—
Total/Weighted Average--Excess MSRs Held through Investees	9.6	%	3.2	%	29.4	%	21	21

Total/Weighted Average--Excess MSRs All Pools	9.5	%	2.7	%	24.5	%	20	22

MSRs (Note 6)
Agency^(H)
Mortgage Servicing Rights^(I)	9.4	%	1.0	%	22.2	%	26	22
MSR Financing Receivables^(I)	9.5	%	0.9	%	14.7	%	27	20
Non-Agency
Mortgage Servicing Rights^(I)	13.2	%	0.9	%	10.0	%	25	25
MSR Financing Receivables^(I)	8.2	%	17.2	%	5.0	%	45	26
Ginnie Mae
Mortgage Servicing Rights^(J)	11.2	%	3.9	%	24.2	%	33	27


(A)	Weighted by fair value of the portfolio.


(B)	Projected annualized weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.


(C)	Projected percentage of residential mortgage loans in the pool for which the borrower will miss its mortgage payments.


(D)	Percentage of voluntarily prepaid loans that are expected to be refinanced by the related servicer or subservicer, as applicable.

(E)

Weighted average total mortgage servicing amount, in excess of the basic fee as applicable, measured in bps. As of December 31, 2019 and 2018, weighted average costs of subservicing of $7.18 and $7.30, respectively, per loan per month was used to value the agency MSRs, including MSR Financing Receivables. Weighted average costs of subservicing of $11.28 and $11.45, respectively, per loan per month was used to value the non-agency MSRs, including MSR Financing Receivables. Weighted average cost of subservicing of $9.20 and $10.06, respectively, per loan per month was used to value the Ginnie Mae MSRs.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(F)	Weighted average maturity of the underlying residential mortgage loans in the pool.


(G)	For certain pools, the Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO). For these pools, no delinquency assumption is used.


(H)	Represents Fannie Mae and Freddie Mac MSRs.


(I)	For certain pools, recapture rate represents the expected recapture rate with the successor subservicer appointed by NRM.


(J)	Includes valuation of the related Excess spread financing (Note 6).

With respect to valuing the Ocwen-serviced MSR financing receivables, which include a significant servicer advances receivable component, the cost of financing servicer advances receivable is assumed to be LIBOR plus 1.8%.

As of December 31, 2019 and 2018, weighted average discount rates of 7.8% and 8.8%, respectively, were used to value New Residential’s investments in Excess MSRs (directly and through equity method investees). As of December 31, 2019 and 2018, weighted average discount rates of 7.8% and 8.7% were used to value New Residential’s investments in MSRs, respectively. As of December 31, 2019 and 2018, weighted average discount rates of 8.9% and 10.3%, respectively, were used to value New Residential’s investments in MSR financing receivables.

All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. New Residential uses assumptions that generate its best estimate of future cash flows for each investment in MSRs and Excess MSRs.

When valuing investments in MSRs and Excess MSRs, New Residential uses the following criteria to determine the significant inputs:

•

Prepayment Rate: Prepayment rate projections are in the form of a “vector” that varies over the expected life of the pool. The prepayment vector specifies the percentage of the collateral balance that is expected to prepay voluntarily (i.e., pay off) and involuntarily (i.e., default) at each point in the future. The prepayment vector is based on assumptions that reflect macroeconomic conditions like home price appreciation, current level of interest rates as well as loan level factors such as the borrower’s interest rate, FICO score, loan-to-value ratio, debt-to-income ratio, vintage on a loan level basis. New Residential considers historical prepayment experience associated with the collateral when determining this vector and also reviews industry research on the prepayment experience of similar loan pools. This data is obtained from remittance reports, market data services and other market sources.

•

Delinquency Rates: For existing mortgage pools, delinquency rates are based on the recent pool-specific experience of loans that missed their latest mortgage payments. Delinquency rate projections are in the form of a “vector” that varies over the expected life of the pool. The delinquency vector specifies the percentage of the unpaid principal balance that is expected to be delinquent each month. The delinquency vector is based on assumptions that reflect macroeconomic conditions, the historical delinquency rates for the pools and the underlying borrower characteristics such as the FICO score and loan-to-value ratio. For the recapture agreements and recaptured loans, delinquency rates are based on the experience of similar loan pools originated by New Residential’s servicers and subservicers, and delinquency experience over the past year. New Residential believes this time period provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions. Additional consideration is given to loans that are expected to become 30 or more days delinquent.

•

Recapture Rates: Recapture rates are based on actual average recapture rates experienced by New Residential’s servicers and subservicers on similar residential mortgage loan pools. Generally, New Residential looks to three to six months’ worth of actual recapture rates, which it believes provides a reasonable sample for projecting future recapture rates while taking into account current market conditions. Recapture rate projections are in the form of a “vector” that varies over the expected life of the pool. The recapture vector specifies the percentage of the refinanced loans that have been recaptured within the pool by the servicer or subservicer. The recapture vector takes into account the nature and timeline of the relationship between the borrowers in the pool and the servicer or subservicer, the customer retention programs offered by the servicer or subservicer and the historical recapture rates.

•

Mortgage Servicing Amount or Excess Mortgage Servicing Amount: For existing mortgage pools, mortgage servicing amount and excess mortgage servicing amount projections are based on the actual total mortgage servicing amount, in excess of a base fee as applicable. For loans expected to be refinanced by the related servicer or subservicer and subject to a recapture agreement, New Residential considers the mortgage servicing amount or excess mortgage servicing amount on loans recently originated by the related servicer over the past three months and other general market considerations. New

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Residential believes this time period provides a reasonable sample for projecting future mortgage servicing amounts and excess mortgage servicing amounts while taking into account current market conditions.


•	Discount Rate: The discount rates used by New Residential are derived from market data on pricing of mortgage servicing rights backed by similar collateral.


•	Cost of subservicing: The costs of subservicing used by New Residential are based on available market data for various loan types and delinquency statuses.

New Residential uses different prepayment and delinquency assumptions in valuing the MSRs and Excess MSRs relating to the original loan pools, the recapture agreements and the MSRs and Excess MSRs relating to recaptured loans. The prepayment rate and delinquency rate assumptions differ because of differences in the collateral characteristics, refinance potential and expected borrower behavior for original loans and loans which have been refinanced. The assumptions for recapture and discount rates when valuing investments in MSRs and Excess MSRs and recapture agreements are based on historical recapture experience and market pricing.

Servicer Advance Investments Valuation

New Residential uses internal pricing models to estimate the future cash flows related to the Servicer Advance Investments that incorporate significant unobservable inputs and include assumptions that are inherently subjective and imprecise. New Residential’s estimations of future cash flows include the combined cash flows of all of the components that comprise the Servicer Advance Investments: existing advances, the requirement to purchase future advances, the recovery of advances and the right to the basic fee component of the related MSR. The factors that most significantly impact the fair value include (i) the rate at which the servicer advance balance changes over the term of the investment, (ii) the UPB of the underlying loans with respect to which New Residential has the obligation to make advances and owns the basic fee component of the related MSR which, in turn, is driven by prepayment rates and (iii) the percentage of delinquent loans with respect to which New Residential owns the basic fee component of the related MSR. The valuation technique is based on discounted cash flows. Significant inputs used in the valuations included the assumptions used to establish the aforementioned cash flows and discount rates that market participants would use in determining the fair values of Servicer Advance Investments.

In order to evaluate the reasonableness of its fair value determinations, New Residential engages an independent valuation firm to separately measure the fair value of its Servicer Advance Investments. The independent valuation firm determines an estimated fair value range based on its own models and issues a “fairness opinion” with this range. New Residential compares the range included in the opinion to the value generated by its internal models. To date, New Residential has not made any significant valuation adjustments as a result of these fairness opinions.

Significant increases (decreases) in the advance balance-to-UPB ratio, prepayment rate, delinquency rate, or discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by a directionally similar change in the assumption used for the advance balance-to-UPB ratio.

The following table summarizes certain information regarding the inputs used in valuing the Servicer Advance Investments, including the basic fee component of the related MSRs:



	Significant Inputs
	Weighted Average
	Outstanding Servicer Advances to UPB of Underlying Residential Mortgage Loans		Prepayment Rate^(A)		Delinquency		Mortgage Servicing Amount^(B)		Discount Rate		Collateral Weighted Average Maturity (Years)^(C)
December 31, 2019	1.4	%	10.6	%	15.7	%	19.6	bps	5.3	%	22.9
December 31, 2018	1.4	%	10.9	%	17.7	%	19.6	bps	5.9	%	23.4


(A)	Projected annual weighted average lifetime voluntary and involuntary prepayment rate using a prepayment vector.


(B)	Mortgage servicing amount is net of 10.1 bps and 9.6 bps which represent the amounts New Residential paid its servicers as a monthly servicing fee as of December 31, 2019 and 2018, respectively.


(C)	Weighted average maturity of the underlying residential mortgage loans in the pool.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The valuation of the Servicer Advance Investments also takes into account the performance fee paid to the servicer, which in the case of the Buyer is based on its equity returns and therefore is impacted by relevant financing assumptions such as loan-to-value ratio and interest rate as well as advance-to-UPB ratio. All of the assumptions listed have some degree of market observability, based on New Residential’s knowledge of the market, relationships with market participants, and use of common market data sources. The prepayment rate, the delinquency rate and the advance-to-UPB ratio projections are in the form of “curves” or “vectors” that vary over the expected life of the underlying mortgages and related servicer advances. New Residential uses assumptions that generate its best estimate of future cash flows for each Servicer Advance Investment, including the basic fee component of the related MSR.

When valuing Servicer Advance Investments, New Residential uses the following criteria to determine the significant inputs:

•

Servicer advance balance: Servicer advance balance projections are in the form of a “vector” that varies over the expected life of the residential mortgage loan pool. The servicer advance balance projection is based on assumptions that reflect factors such as the borrower’s expected delinquency status, the rate at which delinquent borrowers re-perform or become current again, servicer modification offer and acceptance rates, liquidation timelines and the servicers’ stop advance and clawback policies.

•

Delinquency Rates: For existing mortgage pools, delinquency rates are based on the recent pool-specific experience of loans that missed recent mortgage payment(s) as well as loan- and borrower-specific characteristics such as the borrower’s FICO score, the loan-to-value ratio, debt-to-income ratio, occupancy status, loan documentation, payment history and previous loan modifications. New Residential believes the time period utilized provides a reasonable sample for projecting future delinquency rates while taking into account current market conditions.


•	Mortgage Servicing Amount: Mortgage servicing amounts are contractually determined on a pool-by-pool basis. New Residential projects the weighted average mortgage servicing amount based on its projections for prepayment rates.


•	LIBOR: The performance-based incentive fees on Mr. Cooper-serviced Servicer Advance Investments portfolios are driven by LIBOR-based factors. The LIBOR curves used are widely used by market participants as reference rates for many financial instruments.


•	Discount Rate: The discount rates used by New Residential are derived from market data on pricing of mortgage servicing rights backed by similar collateral and the advances made thereon.

Real Estate and Other Securities Valuation

New Residential’s securities valuation methodology and results are further detailed as follows:



					Fair Value
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Multiple Quotes^(A)		Single Quote^(B)		Total		Level
December 31, 2019
Agency RMBS	$	11,301,603	$	11,474,338	$	11,519,943	$	—	$	11,519,943	2
Non-Agency RMBS^(C)	24,857,988		7,307,837		7,953,573		4,212		7,957,785		3
Total	$	36,159,591	$	18,782,175	$	19,473,516	$	4,212	$	19,477,728
December 31, 2018
Agency RMBS	$	2,613,395	$	2,657,917	$	2,665,618	$	—	$	2,665,618	2
Non-Agency RMBS^(C)	19,539,450		8,554,511		8,959,845		11,118		8,970,963		3
Total	$	22,152,845	$	11,212,428	$	11,625,463	$	11,118	$	11,636,581

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

(A)

New Residential generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold New Residential the security) for Non-Agency RMBS. New Residential evaluates quotes received and determines one as being most representative of fair value, and does not use an average of the quotes. Even if New Residential receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because it believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases, for non-agency RMBS, there is a wide disparity between the quotes New Residential receives. New Residential believes using an average of the quotes in these cases would not represent the fair value of the asset. Based on New Residential’s own fair value analysis, it selects one of the quotes which is believed to more accurately reflect fair value. New Residential has not adjusted any of the quotes received in the periods presented. These quotations are generally received via email and contain disclaimers which state that they are “indicative” and not “actionable” meaning that the party giving the quotation is not bound to actually purchase the security at the quoted price. New Residential’s investments in Agency RMBS are classified within Level 2 of the fair value hierarchy because the market for these securities is very active and market prices are readily observable.

The third-party pricing services and brokers engaged by New Residential (collectively, “valuation providers”) use either the income approach or the market approach, or a combination of the two, in arriving at their estimated valuations of RMBS. Valuation providers using the market approach generally look at prices and other relevant information generated by market transactions involving identical or comparable assets. Valuation providers using the income approach create pricing models that generally incorporate such assumptions as discount rates, expected prepayment rates, expected default rates and expected loss severities. New Residential has reviewed the methodologies utilized by its valuation providers and has found them to be consistent with GAAP requirements. In addition to obtaining multiple quotations, when available, and reviewing the valuation methodologies of its valuation providers, New Residential creates its own internal pricing models for Level 3 securities and uses the outputs of these models as part of its process of evaluating the fair value estimates it receives from its valuation providers. These models incorporate the same types of assumptions as the models used by the valuation providers, but the assumptions are developed independently. These assumptions are regularly refined and updated at least quarterly by New Residential, and reviewed by its valuation group, which is separate from its investment acquisition and management group, to reflect market developments and actual performance.

For 67.7% of New Residential’s Non-Agency RMBS, the ranges of assumptions used by New Residential’s valuation providers are summarized in the table below. The assumptions used by New Residential’s valuation providers with respect to the remainder of New Residential’s Non-Agency RMBS were not readily available.

Fair Value

Discount Rate

Prepayment Rate^(a)

CDR^(b)

Loss Severity^(c)

Non-Agency RMBS

5,389,502

1.82% to 17.84%

0.5% to 23.0%

0.2% to 7.00%

15.0% to 100%


(a)	Represents the annualized rate of the prepayments as a percentage of the total principal balance of the pool.


(b)	Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance of the pool.


(c)	Represents the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding balance.


(B)	New Residential was unable to obtain quotations from more than one source on these securities. For approximately $0.7 million in 2019 and $11.1 million in 2018, the one source was the party that sold New Residential the security.


(C)	Includes New Residential’s investments in interest-only notes for which the fair value option for financial instruments was elected.

Residential Mortgage Loans Valuation

New Residential, through its wholly owned subsidiary, NewRez, originates mortgage loans that it intends to sell into Fannie Mae, Freddie Mac, and Ginnie Mae mortgage backed securitizations. Residential mortgage loans held-for-sale, at fair value are typically pooled together and sold into certain exit markets, depending upon underlying attributes of the loan, such as agency eligibility, product type, interest rate, and credit quality. Residential mortgage loans held-for-sale, at fair value are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, (ii) current commitments to purchase loans or (iii) recent observable market

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

trades for similar loans, adjusted for credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, New Residential classifies these valuations as Level 2 in the fair value hierarchy.

Residential mortgage loans held-for-sale, at fair value also includes certain nonconforming mortgage loans originated for sale to private investors which are valued using internal pricing models to forecast loan level cash flows using inputs such as default rates, prepayments speeds and discount rates. As the internal pricing model is based on certain unobservable inputs, New Residential classifies these valuations as Level 3 in the fair value hierarchy.

The following table summarizes certain information regarding the inputs used in valuing residential mortgage loans held-for-sale, at fair value classified as Level 3:



	Fair Value		Discount Rate	Prepayment Rate	CDR	Loss Severity
Acquired Loans	$	3,024,288	4.0%	7.5%	2.7%	27.6%
Originated Loans	490,094		3.0-4.5%	6.0-17.0%	0.0-2.5%	0.0% - 60.0%
Residential Mortgage Loans Held-for-Sale, at Fair Value	$	3,514,382

Residential mortgage loans held-for-investment, at fair value includes mortgage loans underlying the SAFT 2013-1 securitization, which are valued using internal pricing models using inputs such as default rates, prepayment speeds and discount rates. As the internal pricing model is based on certain unobservable inputs, New Residential classifies these valuations as Level 3 in the fair value hierarchy.

The following table summarizes certain information regarding the inputs used in valuing residential mortgage loans held-for-investment, at fair value classified as Level 3:



	Fair Value		Discount Rate	Prepayment Rate	CDR	Loss Severity
Residential Mortgage Loans Held-for-Investment, at Fair Value	$	484,443	5.5%	6.2%	4.0%	35.5%

Derivative Valuation

New Residential enters into economic hedges including interest rate swaps, caps and TBAs, which are categorized as Level 2 in the valuation hierarchy. New Residential generally values such derivatives using quotations, similarly to the method of valuation used for New Residential’s other assets that are classified as Level 2 in the fair value hierarchy.

As a part of the mortgage loan origination business, New Residential enters into forward loan sale and securities delivery commitments, which are valued based on observed market pricing for similar instruments and therefore, are classified as Level 2. In addition, New Residential enters into IRLCs, which are valued using internal pricing models (i) incorporating market pricing for instruments with similar characteristics, (ii) estimating the fair value of the servicing rights expected to be recorded at sale of the loan and (iii) adjusting for anticipated loan funding probability. Both the fair value of servicing rights expected to be recorded at the date of sale of the loan and anticipated loan funding probability are significant unobservable inputs and therefore, IRLCs are classified as Level 3 in the fair value hierarchy.

The following table summarizes certain information regarding the inputs used in valuing IRLCs:



	Fair Value		Loan Funding Probability	Fair Value of initial servicing rights (bps)
IRLCs (net)	$	39,891	43% to 100%	6.25 to 327

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Mortgage-Backed Securities Issued

New Residential and NewRez, a wholly owned subsidiary of New Residential, were deemed to be the primary beneficiaries of the MDST Trusts, RPL Borrowers and SAFT 2013-1 securitization entity and therefore, New Residential’s Consolidated Balance Sheets include the mortgage-backed securities issued by the MDST Trusts, RPL Borrowers and SAFT 2013-1, respectively. New Residential elected the fair value option for these financial instruments and the mortgage-backed securities issued were valued consistently with New Residential’s Non-Agency RMBS described above.

The following table summarizes certain information regards the inputs used in valuing Mortgage-Backed Securities Issued:

Fair Value

Discount Rate

Prepayment Rate

CDR

Loss Severity

Mortgage-Backed Securities Issued

659,738

2.58% to 7.5%

4.5% to 15%

0% to 4%

30% to 95%

Contingent Consideration Valuation

New Residential, as additional consideration for the Shellpoint Acquisition, may make up to three cash earnout payments, which will be calculated following each of the first three anniversaries of the Shellpoint Closing as a percentage of the amount by which the pre-tax income of certain of Shellpoint’s businesses exceeds certain specified thresholds, up to an aggregate maximum amount of $60.0 million (the “Shellpoint Earnout Payments”). On September 5, 2019, New Residential paid $10.0 million as the first of three potential earnout payments. In accordance with ASC 805, New Residential measures its contingent consideration at fair value on a recurring basis using a scenario-based method to weigh the probability of multiple outcomes to arrive at an expected payment cash flow and then discounts the expected cash flow. The inputs utilized in valuing the contingent consideration include a discount rate of 11% and the application of probability weighting of income scenarios, which are significant unobservable inputs and therefore, contingent consideration is classified as Level 3 in the fair value hierarchy.

In addition, as additional consideration for the Guardian Acquisition, New Residential may make up to four cash earnout payments, calculated as the amount of cumulative Guardian earnings on specified contracts in excess of certain thresholds up to an aggregate maximum amount of $17.5 million (the “Guardian Earnout Payments”), which will be calculated following the end of each calendar year with the final payment being calculated as of the fourth anniversary date of the Guardian closing. As described above, in accordance with ASC 805, New Residential measures its contingent consideration at fair value on a recurring basis using a scenario-based method to weigh the probability of multiple outcomes to arrive at an expected payment cash flow and then discounts the expected cash flow. The inputs utilized in valuing the contingent consideration include a discount rate of 11% and the application of probability weighting of income scenarios, which are significant unobservable inputs and therefore, contingent consideration is classified as Level 3 in the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis; that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances such as when there is evidence of impairment. For residential mortgage loans held-for-sale and foreclosed real estate accounted for as REO, New Residential applies the lower of cost or fair value accounting and may be required, from time to time, to record a nonrecurring fair value adjustment.

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DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

At December 31, 2019 and 2018, assets measured at fair value on a nonrecurring basis were $1,242.2 million and $764.1 million, respectively. The $1,242.2 million of assets at December 31, 2019 include approximately $1,189.5 million of residential mortgage loans held-for-sale and $52.7 million of REO. The $764.1 million of assets at December 31, 2018 include approximately $689.1 million of residential mortgage loans held-for-sale and $75.0 million of REO. The fair value of New Residential’s residential mortgage loans, held-for-sale is estimated based on a discounted cash flow model analysis using internal pricing models and is categorized within Level 3 of the fair value hierarchy. The following table summarizes the inputs used in valuing these residential mortgage loans:



	Fair Value and Carrying Value		Discount Rate		Weighted Average Life (Years)^(A)	Prepayment Rate		CDR^(B)		Loss Severity^(C)
December 31, 2019
Performing Loans	$	707,106	4.2	%	4.1	11.7	%	2.6	%	27.3	%
Non-Performing Loans	482,401		5.5	%	3.1	3.0	%	2.9	%	30.0	%
Total/Weighted Average	$	1,189,507	4.7	%	3.7	8.2	%			28.4	%
December 31, 2018
Performing Loans	$	307,135	4.4	%	4.0	10.5	%	3.0	%	33.2	%
Non-Performing Loans	381,940		5.5	%	3.1	2.9	%	2.8	%	30.0	%
Total/Weighted Average	$	689,075	5.0	%	3.5	6.3	%			31.4	%


(A)	The weighted average life is based on the expected timing of the receipt of cash flows.


(B)	Represents the annualized rate of the involuntary prepayments (defaults) as a percentage of the total principal balance.


(C)	Loss severity is the expected amount of future realized losses resulting from the ultimate liquidation of a particular loan, expressed as the net amount of loss relative to the outstanding loan balance.

The fair value of REO is estimated using a broker’s price opinion discounted based upon New Residential’s experience with actual liquidation values and, therefore, is categorized within Level 3 of the fair value hierarchy. These discounts to the broker price opinion generally range from 10% to 25%, depending on the information available to the broker.

The total change in the recorded value of assets for which a fair value adjustment has been included in the Consolidated Statements of Income for the year ended December 31, 2019 consisted of a reversal of prior valuation allowance of $20.0 million for residential mortgage loans and a reversal of prior valuation allowance of $0.6 million for REO.

The total change in the recorded value of assets for which a fair value adjustment has been included in the Consolidated Statements of Income for the year ended December 31, 2018 was an increase in the net valuation allowance of approximately $14.4 million consisting of an approximately $11.3 million increase for residential mortgage loans and $3.1 million increased allowance for REO.

14. Consolidated Variable Interest Entities

VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. A VIE is required to be consolidated only by its primary beneficiary, which is defined as the party who has the power to direct the activities of a VIE that most significantly impact its economic performance and who has the obligation to absorb losses or the right to receive benefits from the VIE that could be potentially significant to the VIE.

To assess whether New Residential has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, New Residential considers all the facts and circumstances, including its role in establishing the VIE and its ongoing rights and responsibilities. This assessment includes, first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. To assess whether New Residential has the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, New Residential considers all of its economic interests and applies judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Servicer Advance Investment

New Residential, through a taxable wholly owned subsidiary, is the managing member of the Buyer and owned approximately 73.2% of the Buyer as of December 31, 2019. In 2013, New Residential created the Buyer to acquire the then outstanding servicing advance receivables related to a portfolio of residential mortgage loans from a third party. The Buyer is required to purchase all future servicer advances made with respect to this portfolio of mortgage loans and is entitled to receive cash flows from advance recoveries and a basic fee component of the related MSRs, net of subservicing compensation paid.

The Buyer may call capital up to the commitment amount on unfunded commitments and recall capital to the extent the Buyer makes a distribution to the co-investors, including New Residential. As of December 31, 2019, the noncontrolling third-party co-investors and New Residential had previously funded their commitments, however the Buyer may recall $327.8 million and $305.2 million of capital distributed to the third-party co-investors and New Residential, respectively. Neither the third-party co-investors nor New Residential is obligated to fund amounts in excess of their respective capital commitments, regardless of the capital requirements of the Buyer.

Shelter Joint Ventures

A wholly owned subsidiary of NewRez, Shelter Mortgage Company LLC (“Shelter”) is a mortgage originator specializing in retail originations. Shelter operates its business through a series of joint ventures and is deemed to be the primary beneficiary of the joint ventures as a result of its ability to direct activities that most significantly impact the economic performance of the entities and its ownership of a significant equity investment.

Residential Mortgage Loans

During the first quarter of 2019, New Residential formed entities (the “RPL Borrowers”) that issued securitized debt collateralized by reperforming residential mortgage loans. New Residential determined that the RPL Borrowers should be evaluated for consolidation under the VIE model rather than the voting interest entity model as the equity holders as a group lack the characteristics of a controlling financial interest. Under the VIE model, New Residential’s consolidated subsidiaries had both 1) the power to direct the most significant activities of the RPL Borrowers and 2) significant variable interests in each of the RPL Borrowers, through their control of the related optional redemption feature and their ownership of certain notes issued by the RPL Borrowers and, therefore, met the primary beneficiary criterion and consolidated the RPL Borrowers.

On October 1, 2019, as a result of New Residential’s acquisition of servicing assets from Ditech and its pre existing ownership of the equity, New Residential consolidated the MDST Trusts. New Residential’s determination to consolidate the MDST Trusts is a result of its ownership of the equity in these trusts in conjunction with the ability to direct activities that most significantly impact the economic performance of the entities with the acquisition of the servicing by NewRez.

NewRez was deemed to be the primary beneficiary of the SAFT 2013-1 securitization entity as a result of its ability to direct activities that most significantly impact the economic performance of the entity in its role as servicer and its ownership of subordinated retained interests. The following table summarizes certain characteristics of the underlying residential mortgage loans, and related financing, in these securitizations as of December 31, 2019:



	December 31,
	2019			2018
Residential mortgage loan UPB	$	19,590,978		$	7,818,221
Weighted average delinquency^(A)	1.25		%	1.97		%
Net credit losses	$	9,354		$	9,101
Face amount of debt held by third parties^(B)	$	17,946,939		$	6,783,187

Carrying value of bonds retained by New Residential^{(C) (D)}	$	1,656,712		$	1,206,402
Cash flows received by New Residential on these bonds	$	270,739		$	178,301


(A)	Represents the percentage of the UPB that is 60+ days delinquent.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)


(B)	Excludes bonds retained by New Residential.


(C)	Includes bonds retained pursuant to required risk retention regulations.


(D)	Classified within Level 3 of the fair value hierarchy as the valuation is based on certain unobservable inputs including discount rate, prepayment rates and loss severity. See Note 13 for details on unobservable inputs.

Consumer Loan Companies

New Residential has a co-investment in a portfolio of consumer loans held through the Consumer Loan Companies. As of December 31, 2019, New Residential owns 53.5% of the limited liability company interests in, and consolidates, the Consumer Loan Companies.

The Consumer Loan Companies consolidate certain entities that issued securitization debt collateralized by the consumer loans (the “Consumer Loan SPVs”). The Consumer Loan SPVs are VIEs of which the Consumer Loan Companies are the primary beneficiaries.

The table below presents the carrying value and classification of the assets and liabilities of consolidated VIEs on New Residential’s consolidated balance sheets:



	The Buyer		Shelter Joint Ventures		Residential Mortgage Loans		Consumer Loan SPVs		Total
December 31, 2019
Assets
Servicer advance investments, at fair value	$	565,271	$	—	$	—	$	—	$	565,271
Residential mortgage loans, held-for-investment, at fair value	—		—		913,030		—		913,030
Consumer loans, held-for-investment	—		—		—		818,943		818,943
Cash and cash equivalents	30,065		23,802		—		—		53,867
Restricted cash	5,350		—		—		9,073		14,423
Other assets	2,414		3,556		4,534		12,409		22,913
Total Assets	$	603,100	$	27,358	$	917,564	$	840,425	$	2,388,447
Liabilities
Notes and bonds payable^(A)	$	433,300	$	—	$	659,738	$	820,658	$	1,913,696
Accrued expenses and other liabilities	1,593		4,187		10,132		4,126		20,038
Total Liabilities	$	434,893	$	4,187	$	669,870	$	824,784	$	1,933,734
December 31, 2018
Assets
Servicer advance investments, at fair value	$	713,239	$	—	$	—	$	—	$	713,239
Residential mortgage loans, held-for-investment	—		—		121,319		—		121,319
Consumer loans, held-for-investments	—		—		—		1,039,480		1,039,480
Cash and cash equivalents	29,833		17,346		—		—		47,179
Restricted cash	7,809		—		—		10,186		17,995
Servicer advances receivable	—		—		—		—		—
Other assets	2,414		618		—		15,627		18,659
Total Assets	$	753,295	$	17,964	$	121,319	$	1,065,293	$	1,957,871
Liabilities
Notes and bonds payable^(A)	$	556,340	$	—	$	117,048	$	1,030,096	$	1,703,484
Accrued expenses and other liabilities	2,442		2,282		—		3,814		8,538
Total Liabilities	$	558,782	$	2,282	$	117,048	$	1,033,910	$	1,712,022


(A)	The creditors of the VIEs do not have recourse to the general credit of New Residential, and the assets of the VIEs are not directly available to satisfy New Residential’s obligations.

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Noncontrolling Interests

Noncontrolling interests represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than New Residential. These interests are related to noncontrolling interests in consolidated entities that hold New Residential’s Servicer Advance Investments (Note 7), the Shelter JVs, (Note 9), Residential Mortgage Loan trusts (Note 9), and Consumer Loans (Note 10).

Others’ interests in the equity of New Residential’s consolidated subsidiaries is computed as follows:



	December 31, 2019									December 31, 2018
	The Buyer^(A)			Shelter Joint Ventures			Consumer Loan Companies			The Buyer^(A)			Shelter Joint Ventures			Consumer Loan Companies
Total consolidated equity	$	168,207		$	23,171		$	46,510		$	194,513		$	15,682		$	66,105
Others’ ownership interest	26.8		%	49.0		%	46.5		%	26.8		%	51.0		%	46.5		%
Others’ interest in equity of consolidated subsidiary	$	45,025		$	11,354		$	22,171		$	52,066		$	7,998		$	30,561

Others’ interests in the New Residential’s net income (loss) is computed as follows:



	Year Ended December 31, 2019									Year Ended December 31, 2018									Year Ended December 31, 2017
	The Buyer^(A)			Shelter Joint Ventures			Consumer Loan Companies			The Buyer^(A)			Shelter Joint Ventures			Consumer Loan Companies			The Buyer^(A)			Shelter Joint Ventures			Consumer Loan Companies
Net income	$	15,892		$	12,717		$	69,143		$	7,209		$	3,135		$	79,539		$	23,604		$	—		$	98,692
Others’ ownership interest as a percent of total	26.8		%	49.0		%	46.5		%	27.4		%	51.0		%	46.5		%	47.6		%	—		%	46.5		%
Others’ interest in net income of consolidated subsidiaries	$	4,255		$	6,231		$	32,151		$	1,978		$	1,599		$	36,987		$	11,227		$	—		$	45,892


(A)	As a result, New Residential owned 73.2%, 72.6% and 52.4% of the Buyer, on average during the years ended December 31, 2019, 2018 and 2017, respectively. See Note 12 regarding the financing of Servicer Advance Investments.

15. EQUITY AND EARNINGS PER SHARE

Equity and Dividends

New Residential’s certificate of incorporation authorizes 2,000,000,000 shares of common stock, par value $0.01 per share, and 100,000,000 shares of preferred stock, par value $0.01 per share.

In February 2017, New Residential issued 56.5 million shares of its common stock in a public offering at a price to the public of $15.00 per share for net proceeds of approximately $834.5 million. One of New Residential’s executive officers participated in this offering and purchased 18,600 shares at the public offering price. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 5.7 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $8.1 million as of the grant date. The assumptions used in valuing the options were: a 2.38% risk-free rate, a 10.82% dividend yield, 28.64% volatility and a 10-year term.

In January 2018, New Residential issued 28.8 million shares of its common stock in a public offering at a price to the public of $17.10 per share for net proceeds of approximately $482.3 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 2.9 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.58% risk-free rate, a 9.86% dividend yield, 23.16% volatility and a 10-year term.

On July 30, 2018, New Residential entered into a Distribution Agreement to sell shares of its common stock, par value $0.01 per share (the “ATM Shares”), having an aggregate offering price of up to $500.0 million, from time to time, through an “at-the-market” equity offering program (the “ATM Program”). During the year ended December 31, 2018, New Residential sold 0.5

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NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

million ATM Shares for aggregate proceeds of $9.1 million. In connection with the shares sold under the ATM program, New Residential granted options to the Manager relating to 0.05 million shares of New Residential’s common stock at the offering prices, which had fair value of approximately $0.1 million as of the grant dates. On August 1, 2019, the Distribution Agreement was amended to, among other things, (i) add additional sales agents under the ATM Program, and (ii) restore the aggregate offering price under the ATM Program to the original amount of $500.0 million. During the year ended December 31, 2019, New Residential did not sell any ATM Shares.

In November 2018, New Residential issued 28.8 million shares of its common stock in a public offering at a price to the public of $17.32 per share for net proceeds of approximately $489.2 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 2.9 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 3.25% risk-free rate, a 8.61% dividend yield, 17.50% volatility and a 10-year term.

In February 2019, New Residential issued 46.0 million shares of its common stock in a public offering at a price to the public of $16.50 per share for net proceeds of approximately $751.7 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 4.6 million shares of New Residential’s common stock at the public offering price, which had a fair value of approximately $3.8 million as of the grant date. The assumptions used in valuing the options were: a 2.40% risk-free rate, a 9.30% dividend yield, 19.26% volatility and a 10-year term.

On July 2, 2019, in a public offering, New Residential issued 6.2 million shares of its 7.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Preferred Series A”), par value $0.01 per share, with a liquidation preference of $25.00 per share for net proceeds of approximately $150.0 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 0.6 million shares of New Residential’s common stock at the closing price per share of common stock on the pricing date, which had a fair value of approximately $0.5 million as of the grant date. The assumptions used in valuing the options were: a 1.91% risk-free rate, a 9.73% dividend yield, 17.95% volatility and a 10-year term.

On August 15, 2019, in a public offering, New Residential issued 11.3 million shares of its 7.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Preferred Series B”), par value $0.01 per share, with a liquidation preference of $25.00 per share for net proceeds of approximately $273.4 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 1.1 million shares of New Residential’s common stock at the closing price per share of common stock on the pricing date, which had a fair value of approximately $0.7 million as of the grant date. The assumptions used in valuing the options were: a 1.56% risk-free rate, a 11.20% dividend yield, 18.23% volatility and a 10-year term.

On September 23, 2019, New Residential’s board of directors declared third quarter 2019 preferred dividends of $0.69 per share of Preferred Series A and $0.45 per share of Preferred Series B, or $4.3 million and $5.0 million, respectively.

On December 16, 2019, New Residential’s board of directors declared fourth quarter 2019 preferred dividends of $0.47 per share of Preferred Series A and $0.45 per share of Preferred Series B, or $2.9 million and $5.0 million, respectively.

210

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Common dividends have been declared as follows:



		Per Share
Declaration Date	Payment Date	Quarterly Dividend	Total Amounts Distributed (millions)
January 26, 2017	April 2017	0.48	147.5
June 21, 2017	July 2017	0.50	153.7
September 22, 2017	October 2017	0.50	153.7
December 18, 2017	January 2018	0.50	153.7
March 22, 2018	April 2018	0.50	168.1
June 21, 2018	July 2018	0.50	169.9
September 20, 2018	October 2018	0.50	170.2
December 20, 2018	January 2019	0.50	184.6
March 25, 2019	April 2019	0.50	207.7
June 18, 2019	July 2019	0.50	207.8
September 23, 2019	October 2019	0.50	207.8
December 16, 2019	January 2020	0.50	207.8

Approximately 2.4 million shares of New Residential’s common stock were held by Fortress, through its affiliates, and its principals at December 31, 2019.

On August 20, 2019, New Residential announced that its board of directors had authorized the repurchase of up to $200.0 million of its common stock through December 31, 2020. Repurchases may be made from time to time through open market purchases or privately negotiated transactions, pursuant to one or more plans established pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 or by means of one or more tender offers, in each case, as permitted by securities laws and other legal requirements. The amount and timing of the purchases will depend on a number of factors including the price and availability of New Residential’s shares, trading volume, capital availability, New Residential’s 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 date of issuance of these Consolidated Financial Statements.

Option Plan

New Residential has a Nonqualified Stock Option and Incentive Award Plan, as amended (the “Plan”) which provides for the grant of equity-based awards, including restricted stock, options, stock appreciation rights, performance awards, tandem awards and other equity-based and non-equity based awards, in each case to the Manager, and to the directors, officers, employees, service providers, consultants and advisor of the Manager who perform services for New Residential, and to New Residential’s directors, officers, service providers, consultants and advisors. New Residential initially reserved 15,000,000 shares of its common stock for issuance under the Plan; on the first day of each fiscal year beginning during the 10-year term of the Plan in and after calendar year 2014, that number will be increased by a number of shares of New Residential’s common stock equal to 10% of the number of shares of common stock newly issued by New Residential during the immediately preceding fiscal year (and, in the case of fiscal year 2013, after the effective date of the Plan). No adjustment was made on January 1, 2014. Increases of 4,600,000, 5,799,166, 5,654,578 and 2,000,000 were made on January 1, 2020, 2019, 2018 and 2017, respectively. New Residential’s board of directors may also determine to issue options to the Manager that are not subject to the Plan, provided that the number of shares underlying any options granted to the Manager in connection with capital raising efforts would not exceed 10% of the shares sold in such offering and would be subject to NYSE rules. Upon exercise, all options will be settled in an amount of cash equal to the excess of the fair market value of a share of common stock on the date of exercise over the exercise price per share unless advance approval is made to settle options in shares of common stock.

Upon joining the board, non-employee directors were, in accordance with the Plan, granted options relating to an aggregate of 7,000 shares of common stock. The fair value of such options was not material at the date of grant.

211

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

New Residential’s outstanding options were summarized as follows:



	December 31,
	2019	2018
Held by the Manager	10,511,167	6,961,222
Issued to the Manager and subsequently assigned to certain of the Manager’s employees	2,290,749	1,530,916
Issued to the independent directors	7,000	6,000
Total	12,808,916	8,498,138

The following table summarizes New Residential’s outstanding options as of December 31, 2019. The last sales price on the New York Stock Exchange for New Residential’s common stock in the year ended December 31, 2019 was $16.11per share.



Recipient	Date of Grant/ Exercise^(A)	Number of Unexercised Options	Options Exercisable as of December 31, 2019	Weighted Average Exercise Price^(B)		Intrinsic Value of Exercisable Options as of December 31, 2019 (millions)
Directors	Various	7,000	7,000	$	13.61	$	—
Manager^(C)	2017	1,130,916	—	14.09		2.3
Manager^(C)	2018	5,320,000	2,996,715	16.79		—
Manager^(C)	2019	6,351,000	1,787,500	16.35		—
Outstanding		12,808,916	4,791,215


(A)	Options expire on the tenth anniversary from date of grant.


(B)	The exercise prices are subject to adjustment in connection with return of capital dividends. A portion of New Residential’s 2018 dividends was deemed to be a return of capital and the exercise prices were adjusted accordingly.


(C)	The Manager assigned certain of its options to its employees as follows:



Date of Grant to Manager	Range of Exercise Prices	Total Unexercised Inception to Date
2017	$14.09	1,130,916
2018	$16.68 to $18.15	1,159,833
Total		2,290,749

The following table summarizes activity in New Residential’s outstanding options:



	Amount		Weighted Average Exercise Price
December 31, 2017 outstanding options	18,502,188
Options granted	5,799,166		$	17.23
Options exercised	(15,803,216	)	$	14.30
Options expired unexercised	—
December 31, 2018 outstanding options	8,498,138
Options granted	6,352,000		$	16.20
Options exercised	(2,041,222	)	$	13.88
Options expired unexercised	—
December 31, 2019 outstanding options	12,808,916		See table above

212

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Income and Earnings Per Share

New Residential is required to present both basic and diluted earnings per share (“EPS”). Basic EPS is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding plus the additional dilutive effect, if any, of common stock equivalents during each period. New Residential’s common stock equivalents are its outstanding options. During the years ended December 31, 2019, 2018 and 2017, based on the treasury stock method, New Residential had 200,465, 1,868,438 and 2,143,323 dilutive common stock equivalents, respectively, outstanding.

Noncontrolling Interests

Noncontrolling interests is comprised of the interests held by third parties in consolidated entities that hold New Residential’s Servicer Advance Investments (Note 7), Shelter JVs (Note 9) and Consumer Loans (Note 10).

16. COMMITMENTS AND CONTINGENCIES

Litigation – New Residential is or may become, from time to time, involved in various disputes, litigation and regulatory inquiry and investigation matters that arise in the ordinary course of business. Given the inherent unpredictability of these types of proceedings, it is possible that future adverse outcomes could have a material adverse effect on its business, financial position or results of operations. New Residential is not aware of any unasserted claims that it believes are material and probable of assertion where the risk of loss is expected to be reasonably possible.

Indemnifications – In the normal course of business, New Residential and its subsidiaries enter into contracts that contain a variety of representations and warranties and that provide general indemnifications. New Residential’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against New Residential that have not yet occurred. However, based on its experience, New Residential expects the risk of material loss to be remote.

Capital Commitments — As of December 31, 2019, New Residential had outstanding capital commitments related to investments in the following investment types (also refer to Note 6 for MSR investment commitments and to Note 20 for additional capital commitments entered into subsequent to December 31, 2019, if any):

MSRs and Servicer Advance Investments — New Residential and, in some cases, third-party co-investors agreed to purchase future servicer advances related to certain Non-Agency mortgage loans. In addition, New Residential’s subsidiaries, NRM and NewRez, are generally obligated to fund future servicer advances related to the loans it is obligated to service. The actual amount of future advances purchased will be based on: (a) the credit and prepayment performance of the underlying loans, (b) the amount of advances recoverable prior to liquidation of the related collateral and (c) the percentage of the loans with respect to which no additional advance obligations are made. The actual amount of future advances is subject to significant uncertainty. See Notes 5 and 6 for information on New Residential’s Investments in MSRs and Servicer Advance Investments, respectively.

Mortgage Origination Reserves — NewRez, a wholly owned subsidiary of New Residential, originates conventional, government-insured and nonconforming residential mortgage loans for sale and securitization. The GSEs or Ginnie Mae guarantee conventional and government-insured mortgage securitizations and mortgage investors issue nonconforming private label mortgage securitizations while NewRez generally retains the right to service the underlying residential mortgage loans. In connection with the transfer of loans to the GSEs or mortgage investors, NewRez makes representations and warranties regarding certain attributes of the loans and, subsequent to the sale, if it is determined that a sold loan is in breach of these representations and warranties, NewRez generally has an obligation to cure the breach. If NewRez is unable to cure the breach, the purchaser may require NewRez to repurchase the loan.

In addition, for Ginnie Mae guaranteed securitizations, NewRez holds the Ginnie Mae Buy-Back Option to repurchase delinquent loans from the securitization at its discretion. While NewRez is not obligated to repurchase the delinquent loans, NewRez generally executes its option to repurchase that will result in an economic benefit. As of December 31, 2019, New Residential’s estimated liability associated with representations and warranties and Ginnie Mae repurchases was $12.5 million and $172.3 million,

213

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

respectively. See Notes 6 and 9 for information on New Residential’s Ginnie Mae Buy-Back Option and mortgage origination, respectively.

Mortgage Origination Unfunded Commitments — As of December 31, 2019, NewRez was committed to fund approximately $4,043.9 million of mortgage loans and had forward loan sale commitments of $43.7 million. The forward sales are expected to close during the first quarter of 2020.

Residential Mortgage Loans — As part of its investment in residential mortgage loans, New Residential may be required to outlay capital. These capital outflows primarily consist of advance escrow and tax payments, residential maintenance and property disposition fees. The actual amount of these outflows is subject to significant uncertainty. See Note 9 for information on New Residential’s investments in residential mortgage loans.

Consumer Loans — The Consumer Loan Companies have invested in loans with an aggregate of $272.1 million of unfunded and available revolving credit privileges as of December 31, 2019. However, under the terms of these loans, requests for draws may be denied and unfunded availability may be terminated at New Residential’s discretion.

Leases — New Residential, through its wholly owned subsidiary, Shellpoint, has leases on office space expiring through 2025 with future commitments under non-cancelable leases of approximately $46.2 million, held on the balance sheet discounted between 4 - 5%. Included in its future commitments is $20.4 million of leases at market expiring through 2023 acquired as part of the Ditech acquisition. The future commitments under non-cancelable leases have not been reduced by the sublease rentals of approximately $1.9 million due in the future periods. The terms of the leases do not impose any financial restrictions or covenants.

Environmental Costs — As a residential real estate owner, New Residential is subject to potential environmental costs. At December 31, 2019, New Residential is not aware of any environmental concerns that would have a material adverse effect on its consolidated financial position or results of operations.

Debt Covenants — New Residential’s debt obligations contain various customary loan covenants (Note 12).

Certain Tax-Related Covenants — If New Residential is treated as a successor to Drive Shack Inc. (“Drive Shack”) under applicable U.S. federal income tax rules, and if Drive Shack failed to qualify as a REIT for a taxable year ending on or before December 31, 2014, New Residential could be prohibited from electing to be a REIT. Accordingly, in the separation and distribution agreement executed in connection with New Residential’s spin-off from Drive Shack, Drive Shack (i) represented that it had no knowledge of any fact or circumstance that would cause New Residential to fail to qualify as a REIT, (ii) covenanted to use commercially reasonable efforts to cooperate with New Residential as necessary to enable New Residential to qualify for taxation as a REIT and receive customary legal opinions concerning REIT status, including providing information and representations to New Residential and its tax counsel with respect to the composition of Drive Shack’s income and assets, the composition of its stockholders, and its operation as a REIT; and (iii) covenanted to use its reasonable best efforts to maintain its REIT status for each of Drive Shack’s taxable years ending on or before December 31, 2014 (unless Drive Shack obtains an opinion from a nationally recognized tax counsel or a private letter ruling from the U.S. Internal Revenue Service (“IRS”) to the effect that Drive Shack’s failure to maintain its REIT status will not cause New Residential to fail to qualify as a REIT under the successor REIT rule referred to above). Additionally, New Residential covenanted to use its reasonable best efforts to qualify for taxation as a REIT for its taxable year ended December 31, 2013.

17. TRANSACTIONS WITH AFFILIATES AND AFFILIATED ENTITIES

New Residential is party to a Management Agreement with its Manager which provides for automatically renewing one-year terms subject to certain termination rights. The Manager’s performance is reviewed annually and the Management Agreement may be terminated by New Residential by payment of a termination fee, as defined in the Management Agreement, equal to the amount of management fees earned by the Manager during the 12 consecutive calendar months immediately preceding the termination, upon the affirmative vote of at least two-thirds of the independent directors, or by a majority vote of the holders of common stock. If the Management Agreement is terminated, the Manager may require New Residential to purchase from the Manager the right of the Manager to receive the Incentive Compensation. In exchange therefor, New Residential would be obligated to pay the Manager a cash purchase price equal to the amount of the Incentive Compensation that would be paid to the Manager if all of New Residential’s assets were sold for cash at their then current fair market value (taking into account, among other things, expected future performance of the underlying investments). Pursuant to the Management Agreement, the Manager, under the supervision of New Residential’s board of directors, formulates investment strategies, arranges for the acquisition of assets and associated financing, monitors the performance of New Residential’s assets and provides certain advisory, administrative and managerial services in connection with the operations of New Residential.

The Manager is entitled to receive a management fee in an amount equal to 1.5% per annum of New Residential’s gross equity calculated and payable monthly in arrears in cash. Gross equity is generally (i) the equity transferred by Drive Shack, formerly Newcastle Investment Corp., which was the sole stockholder of New Residential until the spin-off of New Residential completed on May 15, 2013, on the date of the spin-off (ii) plus total net proceeds from preferred and common stock offerings, plus certain capital contributions to subsidiaries, less capital distributions and repurchases of common stock.

In addition, the Manager is entitled to receive annual incentive compensation in an amount equal to the product of (A) 25% of the dollar amount by which (1) (a) New Residential’s funds from operations before the incentive compensation, excluding funds from operations from investments in the Consumer Loan Companies and any unrealized gains or losses from mark-to-market valuation changes on investments and debt (and any deferred tax impact thereof), per share of common stock, plus (b) earnings (or losses) from the Consumer Loan Companies computed on a level-yield basis (such that the loans are treated as if they qualified as loans acquired with a discount for credit quality as set forth in ASC No. 310-30, as such codification was in effect on June 30, 2013) as if the Consumer Loan Companies had been acquired at their GAAP basis on May 15, 2013, plus earnings (or losses) from equity method investees invested in Excess MSRs as if such equity method investees had not made a fair value election, plus gains (or losses) from debt restructuring and gains (or losses) from sales of property, and plus non-routine items, minus amortization of non-routine items, in each case per share of common stock, exceed (2) an amount equal to (a) the weighted average of the book value per share of the equity transferred by Drive Shack on the date of the spin-off and the prices per share of New Residential’s common stock in any offerings (adjusted for prior capital dividends or capital distributions) multiplied by (b) a simple interest rate of 10% per annum, multiplied by (B) the weighted average number of shares of common stock outstanding. “Funds from operations” means net income (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and gains (or losses) from sales of property, plus depreciation on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds from operations will be computed on an unconsolidated basis. The computation of funds from operations may be adjusted at the direction of New Residential’s independent directors based on changes in, or certain applications of, GAAP. Funds from operations is determined from the date of the spin-off and without regard to Drive Shack’s prior performance.

In addition to the management fee and incentive compensation, New Residential is responsible for reimbursing the Manager for certain expenses paid by the Manager on behalf of New Residential.

Due to affiliates is comprised of the following amounts:



	December 31,
	2019		2018
Management fees	$	7,076	$	5,779
Incentive compensation	91,892		94,900
Expense reimbursements and other	4,914		792
Total	$	103,882	$	101,471

Affiliate expenses and fees were comprised of:



	Year Ended December 31,
	2019		2018		2017
Management fees	$	79,472	$	62,594	$	55,634
Incentive compensation	91,892		94,900		81,373
Expense reimbursements^(A)	500		500		500
Total	$	171,864	$	157,994	$	137,507

(A) Included in General and Administrative Expenses in the Consolidated Statements of Income.

See Note 5 regarding co-investments with Fortress-managed funds.

See Note 15 regarding options granted to the Manager.

18. RECLASSIFICATION FROM ACCUMULATED OTHER COMPREHENSIVE INCOME INTO NET INCOME

The following table summarizes the amounts reclassified out of accumulated other comprehensive income into net income:



Accumulated Other Comprehensive Income Components	Statement of Income Location	Year Ended December 31,
Accumulated Other Comprehensive Income Components	Statement of Income Location	2019			2018		2017
Reclassification of net realized (gain) loss on securities into earnings	Gain (loss) on settlement of investments, net	$	(205,989	)	$	29,936	$	(20,642	)
Reclassification of net realized (gain) loss on securities into earnings	Other-than-temporary impairment on securities	25,174			30,017		10,334
Total reclassifications		$	(180,815	)	$	59,953	$	(10,308	)

New Residential allocated $4.2 million of income tax expense to other comprehensive income for the year ended December 31, 2019.

214

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

19. INCOME TAXES

Income tax (benefit) expense consists of the following:



	Year Ended December 31,
	2019		2018			2017
Current:
Federal	$	148	$	6,146		$	(1,250	)
State and Local	3,411		477			360
Total Current Income Tax Expense (Benefit)	3,559		6,623			(890		)
Deferred:
Federal	28,939		(68,907		)	148,997
State and Local	9,268		(11,147		)	19,521
Total Deferred Income Tax Expense (Benefit)	38,207		(80,054		)	168,518
Total Income Tax (Benefit) Expense	$	41,766	$	(73,431	)	$	167,628

New Residential intends to qualify as a REIT for each of its tax years through December 31, 2019. A REIT is generally not subject to U.S. federal corporate income tax on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by prescribed dates and complies with various other requirements.

New Residential operates various securitization vehicles and has made certain investments, particularly its investments in MSRs (Note 6), Servicer Advance Investments (Note 7) and REO (Note 9), through taxable REIT subsidiaries (“TRSs”) that are subject to regular corporate income taxes which have been provided for in the provision for income taxes, as applicable.

The increase in the expense for income taxes for the year ended December 31, 2019 is primarily due to deferred tax expense generated by MSR income and loan origination income attributable to New Residential TRSs.

The increase in the benefit for income taxes for the year ended December 31, 2018 is primarily due to the release of valuation allowances on deferred tax assets and increase in other deferred tax benefits attributable to New Residential’s TRSs.

The difference between New Residential’s reported provision for income taxes and the U.S. federal statutory rate of 21% is as follows:



	December 31,
	2019		2018		2017
Provision at the statutory rate	21.00	%	21.00	%	35.00	%
Non-taxable REIT income	(16.26	)%	(25.44	)%	(21.72	)%
State and local taxes	2.36	%	(1.19	)%	1.76	%
Change in valuation allowance	—	%	(2.31	)%	0.85	%
Change in federal tax rate	—	%	—	%	(0.92	)%
Other	0.66	%	(0.30	)%	(0.17	)%
Total provision	7.76	%	(8.24	)%	14.80	%

215

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liability are presented below:



	December 31,
	2019			2018
Deferred tax assets:
Net operating losses and tax credit carryforwards^(A)	$	79,897		$	41,713
Basis differences for REO and other assets	16,279			8,453
Unrealized mark to market	10,084			36,758
Other	1,194			3,087
Total deferred tax assets	107,454			90,011
Less valuation allowance	—			—
Net deferred tax assets	$	107,454		$	90,011

Deferred tax liabilities:
Mortgage servicing rights	$	(65,582	)	$	—
Basis difference for partnership and other investments	(29,022		)	(24,179		)
Fixed asset depreciation	(4,181		)	—
Total deferred tax (liability)	$	(98,785	)	$	(24,179	)

Net deferred tax assets (liability)	$	8,669		$	65,832

(A)

As of December 31, 2019, New Residential’s TRSs had approximately $328.0 million of net operating loss carryforwards for federal and state income tax purposes which may be available to offset future taxable income, if and when it arises. Approximately, $9.1 million of these federal and state net operating loss carryforwards will begin to expire in 2034. The utilization of the net operating loss carryforwards to reduce future income taxes will depend on the TRSs ability to generate sufficient taxable income prior to the expiration of the carryforward period.

In assessing the realizability of deferred tax assets, New Residential considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible. As of December 31, 2019, we believe it is more likely than not that we will fully realize our deferred tax assets.

New Residential and its TRSs file income tax returns with the U.S. federal government and various state and local jurisdictions. Generally, New Residential is no longer subject to tax examinations by tax authorities for tax years ended prior to December 31, 2016. New Residential recognizes tax benefits for uncertain tax positions only if it is more likely than not that the position is sustainable based on its technical merits. Interest and penalties on uncertain tax positions are included as a component of the provision for income taxes on the consolidated statements of operations. As of December 31, 2019, New Residential has no material uncertainties to be recognized. New Residential does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will significantly change within 12 months of the reporting date.

216

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

Common stock distributions were taxable as follows:



Year	Dividends per Share		Ordinary Income		Long-term Capital Gain		Return of Capital
2019^(A)	$	1.87	77.53	%	15.82	%	6.65	%
2018^(B)	1.60		78.03	%	1.03	%	20.94	%
2017^(C)	1.94		66.64	%	7.83	%	25.53	%


(A)	The entire $0.50 per share dividend declared in December 2019 and paid in January 2020 is treated as received by stockholders in 2020.


(B)	The entire $0.50 per share dividend declared in December 2018 and paid in January 2019 is treated as received by stockholders in 2019.


(C)	The entire $0.50 per share dividend declared in December 2017 and paid in January 2018 is treated as received by stockholders in 2018.

Series A Preferred stock distributions were as follows:



Year	Dividends per Share		Ordinary Income		Long-term Capital Gain		Return of Capital
2019	$	0.69	84.18	%	15.82	%	—	%

Series B Preferred stock distributions were as follows:



Year	Dividends per Share		Ordinary Income		Long-term Capital Gain		Return of Capital
2019	$	0.45	84.18	%	15.82	%	—	%

20. SUBSEQUENT EVENTS

These financial statements include a discussion of material events that have occurred subsequent to December 31, 2019 (referred to as “subsequent events”) through the issuance of these consolidated financial statements. Events subsequent to that date have not been considered in these financial statements.

Corporate Activities

On December 16, 2019, New Residential’s board of directors declared a fourth quarter 2019 dividend of $0.50 per common share or $207.8 million, which was paid on January 31, 2020 to stockholders of record as of December 31, 2019.

On February 14, 2020, in a public offering, New Residential issued 14.0 million shares of its 6.375% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock (“Preferred Series C”), par value $0.01 per share, with a liquidation preference of $25.00 per share for net proceeds of approximately $338.7 million. To compensate the Manager for its successful efforts in raising capital for New Residential, in connection with this offering, New Residential granted options to the Manager relating to 1.4 million shares of New Residential’s common stock at the closing price per share of common stock on the pricing date, which had a fair value of approximately $1.0 million as of the grant date. The assumptions used in valuing the options were: a 1.55% risk-free rate, a 9.00% dividend yield, 17.39% volatility and a 10-year term.

217

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)

21. SUMMARY QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)

The following is an unaudited summary information on New Residential’s quarterly operations.



2019	Quarter Ended												Year Ended December 31
	March 31			June 30			September 30			December 31			Year Ended December 31
Interest income	$	438,867		$	416,047		$	448,127		$	463,089		$	1,766,130
Interest expense	212,832			228,004			245,902			247,013			933,751
Net interest income	226,035			188,043			202,225			216,076			832,379
Impairment
Other-than-temporary impairment (OTTI) on securities	7,516			8,859			5,567			3,232			25,174
Valuation and loss provision (reversal) on loans and real estate owned	5,280			13,452			(10,690		)	2,361			10,403
	12,796			22,311			(5,123		)	5,593			35,577
Net interest income after impairment	213,239			165,732			207,348			210,483			796,802
Servicing revenue, net	165,853			(85,537		)	53,050			251,793			385,159
Gain on originated mortgage loans, held-for-sale, net	67,170			101,018			126,747			180,520			475,455
Other income (loss)^(A)	(63,966		)	(25,947		)	102,640			(53,826		)	(41,099		)
Operating Expenses	180,387			201,863			250,565			335,803			968,618
Income (Loss) Before Income Taxes	201,909			(46,597		)	239,220			253,167			647,699
Income tax (benefit) expense	45,997			(21,577		)	(5,440		)	22,786			41,766
Net Income (Loss)	$	155,912		$	(25,020	)	$	244,660		$	230,381		$	605,933
Noncontrolling Interests in Income of Consolidated Subsidiaries	$	10,318		$	6,923		$	14,738		$	10,658		$	42,637
Dividends on Preferred Stock	$	—		$	—		$	5,338		$	7,943		$	13,281
Net Income (Loss) Attributable to Common Stockholders	$	145,594		$	(31,943	)	$	224,584		$	211,780		$	550,015
Net Income (Loss) Per Share of Common Stock
Basic	$	0.37		$	(0.08	)	$	0.54		$	0.51		$	1.35
Diluted	$	0.37		$	(0.08	)	$	0.54		$	0.51		$	1.34
Weighted Average Number of Shares of Common Stock Outstanding
Basic	388,279,931			415,463,757			415,520,780			415,520,780			408,789,642
Diluted	388,601,075			415,665,460			415,588,238			415,673,185			408,990,107
Dividends Declared per Share of Common Stock	$	0.50		$	0.50		$	0.50		$	0.50		$	2.00

218

NEW RESIDENTIAL INVESTMENT CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019, 2018 and 2017

(dollars in tables in thousands, except share data)



2018	Quarter Ended												Year Ended December 31
	March 31			June 30			September 30			December 31			Year Ended December 31
Interest income	$	383,573		$	403,805		$	425,524		$	451,321		$	1,664,223
Interest expense	124,387			133,916			162,806			185,324			606,433
Net interest income	259,186			269,889			262,718			265,997			1,057,790
Impairment
Other-than-temporary impairment (OTTI) on securities	6,670			12,631			3,889			6,827			30,017
Valuation and loss provision (reversal) on loans and real estate owned	19,007			3,658			5,471			32,488			60,624
	25,677			16,289			9,360			39,315			90,641
Net interest income after impairment	233,509			253,600			253,358			226,682			967,149
Servicing revenue, net	217,236			146,193			175,355			(10,189		)	528,595
Gain on originated mortgage loans, held-for-sale, net	—			—			47,054			49,091			96,145
Other income (loss)^(A)	264,524			(96,812		)	(84,620		)	(134,477		)	(51,385		)
Operating Expenses	107,817			119,753			192,107			189,727			609,404
Income (Loss) Before Income Taxes	607,452			183,228			199,040			(58,620		)	931,100
Income tax (benefit) expense	(6,912		)	(2,608		)	3,563			(67,474		)	(73,431		)
Net Income	$	614,364		$	185,836		$	195,477		$	8,854		$	1,004,531
Noncontrolling Interests in Income of Consolidated Subsidiaries	$	10,111		$	11,078		$	10,869		$	8,506		$	40,564
Net Income Attributable to Common Stockholders	$	604,253		$	174,758		$	184,608		$	348		$	963,967
Net Income Per Share of Common Stock
Basic	$	1.83		$	0.52		$	0.54		$	—		$	2.82
Diluted	$	1.81		$	0.51		$	0.54		$	—		$	2.81
Weighted Average Number of Shares of Common Stock Outstanding
Basic	330,384,856			336,311,253			340,044,440			358,044,646			341,268,923
Diluted	333,380,436			339,538,503			340,868,403			358,509,094			343,137,361
Dividends Declared per Share of Common Stock	$	0.50		$	0.50		$	0.50		$	0.50		$	2.00


(A)	Earnings from investments in equity method investees is included in other income.

219

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. The Company’s disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective.

Management’s Report on Internal Control Over Financing Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


•	pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;


•	provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and


•	provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the 2013 Internal Control-Integrated Framework.

Based on our assessment, management concluded that, as of December 31, 2019, the Company’s internal control over financial reporting was effective.

The Company’s independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting. This report appears at the beginning of “Financial Statements and Supplementary Data.”

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information.

None.

220

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Any information required by this Item 10 is incorporated by reference to our definitive proxy statement for the 2020 annual meeting of stockholders to be filed with the SEC pursuant to Regulation 14A within 120 days after the fiscal year ended December 31, 2019 (our “Definitive Proxy Statement”) under the headings “Proposal No. 1 Election of Directors,” “Executive Officers” and “Security Ownership of Management and Certain Beneficial Owners — Delinquent Section 16(a) Reports.”

Item 11. Executive Compensation.

The information required by this Item 11 is incorporated by reference to our Definitive Proxy Statement under the headings “Executive and Manager Compensation” and “Compensation Committee Report.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this Item 12 is incorporated by reference to our Definitive Proxy Statement under the heading “Security Ownership of Management and Certain Beneficial Owners.”

See also “Nonqualified Stock Option and Incentive Award Plan” in Part II, Item 5, “Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities” which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, Director Independence.

The information required by this Item 13 is incorporated by reference to our Definitive Proxy Statement under the headings “Proposal No. 1 Election of Directors—Determination of Director Independence” and “Certain Relationships and Related Transactions.”

Item 14. Principal Accounting Fees and Services.

The information required by this Item 14 is incorporated by reference to our Definitive Proxy Statement under the heading “Proposal No. 2 Approval of Appointment of Ernst & Young LLP as Independent Registered Public Accounting Firm—Principal Accountant Fees and Services.”

221

PART IV

Item 15. Exhibits; Financial Statement Schedules.

(a) and (c) Financial statements and schedules:

See “Financial Statements and Supplementary Data.”

(b) Exhibits filed with this Form 10-K:



Exhibit Number			Exhibit Description

2.1†			Separation and Distribution Agreement, dated as of April 26, 2013, by and between New Residential Investment Corp. and Newcastle Investment Corp. (incorporated by reference to Exhibit 2.1 to Amendment No. 6 of New Residential Investment Corp.’s Registration Statement on Form 10, filed April 29, 2013)

2.2†			Purchase Agreement, dated as of March 5, 2013, by and among the Sellers listed therein, HSBC Finance Corporation and SpringCastle Acquisition LLC (incorporated by reference to Exhibit 99.1 to Drive Shack Inc.’s Current Report on Form 8-K, filed March 11, 2013)

2.3†			Master Servicing Rights Purchase Agreement, dated as of December 17, 2013, by and between Nationstar Mortgage LLC and Advance Purchaser LLC (incorporated by reference to Exhibit 2.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 23, 2013)

2.4†			Sale Supplement (Shuttle 1), dated as of December 17, 2013, by and between Nationstar Mortgage LLC and Advance Purchaser LLC (incorporated by reference to Exhibit 2.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 23, 2013)

2.5†			Sale Supplement (Shuttle 2), dated as of December 17, 2013, by and between Nationstar Mortgage LLC and Advance Purchaser LLC (incorporated by reference to Exhibit 2.3 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 23, 2013)

2.6†			Sale Supplement (First Tennessee), dated as of December 17, 2013, by and between Nationstar Mortgage LLC and Advance Purchaser LLC (incorporated by reference to Exhibit 2.4 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 23, 2013)

2.7†			Purchase Agreement, dated as of March 31, 2016, by and among SpringCastle Holdings, LLC, Springleaf Acquisition Corporation, Springleaf Finance, Inc., NRZ Consumer LLC, NRZ SC America LLC, NRZ SC Credit Limited, NRZ SC Finance I LLC, NRZ SC Finance II LLC, NRZ SC Finance III LLC, NRZ SC Finance IV LLC, NRZ SC Finance V LLC, BTO Willow Holdings II, L.P. and Blackstone Family Tactical Opportunities Investment Partnership - NQ - ESC L.P., and solely with respect to Section 11(a) and Section 11(g), NRZ SC America Trust 2015-1, NRZ SC Credit Trust 2015-1, NRZ SC Finance Trust 2015-1, and BTO Willow Holdings, L.P. (incorporated by reference to Exhibit 2.10 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016, filed on May 4, 2016)

2.8†			Securities Purchase Agreement, dated as of November 29, 2017, by and among NRM Acquisition LLC, Shellpoint Partners LLC, the Sellers party thereto and Shellpoint Services LLC, as original representative of the Seller (incorporated by reference to Exhibit 2.8 to New Residential Investment Corp.’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 15, 2018)

2.9†			Amendment No. 1 to the Securities Purchase Agreement, dated as of July 3, 2018, by and among NRM Acquisition LLC, Shellpoint Partners LLC, the Sellers party thereto and Shellpoint Representative LLC, as replacement representative of the Sellers (incorporated by reference to Exhibit 2.9 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018)

2.10			Asset Purchase Agreement among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company, dated June 17, 2019 (incorporated by reference to Exhibit 2.10 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019)

2.11			Amendment No. 1 to the Asset Purchase Agreement, dated as of July 9, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.11 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.12			Amendment No. 2 to the Asset Purchase Agreement, dated as of August 30, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.12 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

222



2.13			Amendment No. 3 to the Asset Purchase Agreement, dated as of September 4, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.13 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.14			Amendment No. 4 to the Asset Purchase Agreement, dated as of September 5, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.14 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.15			Amendment No. 5 to the Asset Purchase Agreement, dated as of September 6, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.15 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.16			Amendment No. 6 to the Asset Purchase Agreement, dated as of September 9, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.16 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.17			Amendment No. 7 to the Asset Purchase Agreement, dated as of September 17, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.17 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.18			Amendment No. 8 to the Asset Purchase Agreement, dated as of September 30, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company (incorporated by reference to Exhibit 2.18 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019)

2.19			Amendment No. 9 to the Asset Purchase Agreement, dated as of November 27, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company

2.20			Amendment No. 10 to the Asset Purchase Agreement, dated as of December 12, 2019, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company

2.21			Amendment No. 11 to the Asset Purchase Agreement, dated as of January 17, 2020, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company

2.22			Amendment No. 12 to the Asset Purchase Agreement, dated as of January 24, 2020, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company

2.23			Settlement and Release Agreement, dated as of January 27, 2020, among New Residential Investment Corp., Ditech Holding Corporation, a Maryland corporation, and Ditech Financial LLC, a Delaware limited liability company

3.1			Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated by reference to Exhibit 3.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)

3.2			Amended and Restated Bylaws of New Residential Investment Corp. (incorporated by reference to Exhibit 3.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)

3.3			Certificate of Amendment to the Amended and Restated Certificate of Incorporation of New Residential Investment Corp. (incorporated by reference to Exhibit 3.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed October 17, 2014)

3.4			Certificate of Designations of New Residential Investment Corp., designating the Company’s 7.50% Series A Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (incorporated by reference to Exhibit 3.4 to New Residential Investment Corp.’s Form 8-A, filed July 2, 2019)

3.5			Certificate of Designations of New Residential Investment Corp., designating the Company’s 7.125% Series B Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, par value $0.01 per share (incorporated by reference to Exhibit 3.5 to New Residential Investment Corp.’s Form 8-A, filed August 15, 2019)

4.1			Specimen Series A Preferred Stock Certificate (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-A filed July 2, 2019)

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4.2			Specimen Series B Preferred Stock Certificate of New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-A, filed August 15, 2019)

4.3			Second Amended and Restated Indenture, dated as of September 7, 2018, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, New Penn Financial, LLC, d/b/a Shellpoint Mortgage Servicing and Credit Suisse AG, New York Branch (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed September 7, 2018)

4.4			Omnibus Amendment to Term Note Indenture Supplements, dated as of August 17, 2017, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed August 22, 2017)

4.5			Series 2016-T2 Indenture Supplement, dated as of October 25, 2016, to the Indenture, dated as of August 28, 2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed October 31, 2016)

4.6			Series 2016-T3 Indenture Supplement, dated as of October 25, 2016, to the Indenture, dated as of August 28, 2015, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed October 31, 2016)

4.7			Series 2016-T4 Indenture Supplement, dated as of December 15, 2016, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 16, 2016)

4.8			Series 2016-T5 Indenture Supplement, dated as of December 15, 2016, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed December 16, 2016)

4.9			Series 2017-T1 Indenture Supplement, dated as of February 7, 2017, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K filed February 7, 2017)

4.10			Series 2018-VF1 Indenture Supplement, dated as of March 22, 2018, to the Amended and Restated Indenture, dated as of August 17, 2017, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, JPMorgan Chase Bank, N.A. and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.'s Current Report on Form 8-K, filed March 28, 2018)

4.11			Omnibus Amendment to Certain Agreements Relating to the NRZ Advance Receivables Trust 2015-ON1, dated as of September 7, 2018, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, Credit Suisse AG, New York Branch, New Penn Financial, LLC, d/b/a Shellpoint Mortgage Servicing and New Residential Investment Corp. (incorporated by reference to Exhibit 4.2 to New Residential Investment Corp.’s Current Report on Form 8-K, filed September 7, 2018)

4.12			Amendment No. 1 to Series 2018-VF1 Indenture Supplement, dated as of September 7, 2018, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, New Penn Financial, LLC, d/b/a Shellpoint Mortgage Servicing, JPMorgan Chase Bank, N.A. and New Residential Investment Corp. (incorporated by reference to Exhibit 4.3 to New Residential Investment Corp.’s Current Report on Form 8-K, filed September 7, 2018)

4.13			Amendment No. 2 to Series 2018-VF1 Indenture Supplement, dated as of September 28, 2018, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, New Penn Financial, LLC, d/b/a Shellpoint Mortgage Servicing, JPMorgan Chase Bank, N.A. and New Residential Investment Corp. (incorporated by reference to Exhibit 4.11 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q, filed May 2, 2019)

224



4.14			Amendment No. 3 to Series 2018-VF1 Indenture Supplement, dated as of March 11, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC d/b/a Shellpoint Mortgage Servicing, JPMorgan Chase Bank, N.A. and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed March 15, 2019)

4.15			Third Amended and Restated Indenture, dated as of July 25, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, PHH Mortgage Corporation, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC, d/b/a Shellpoint Mortgage Servicing and Credit Suisse AG, New York Branch (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-K, filed July 26, 2019)

4.16			Series 2019-T1 Indenture Supplement, dated as of July 25, 2019, to the Third Amended and Restated Indenture, dated as of July 25, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, PHH Mortgage Corporation, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC d/b/a Shellpoint Mortgage Servicing, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.2 to New Residential Investment Corp.’s Form 8-K, filed July 26, 2019)

4.17			Series 2019-T2 Indenture Supplement, dated as of August 15, 2019, to the Third Amended and Restated Indenture, dated as of July 25, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, PHH Mortgage Corporation, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC d/b/a Shellpoint Mortgage Servicing, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-K, filed August 16, 2019)

4.18			Series 2019-T3 Indenture Supplement, dated as of September 20, 2019, to the Third Amended and Restated Indenture, dated as of July 25, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, PHH Mortgage Corporation, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC d/b/a Shellpoint Mortgage Servicing, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-K, filed September 20, 2019)

4.19			Series 2019-T4 Indenture Supplement, dated as of October 15, 2019, to the Third Amended and Restated Indenture, dated as of July 25, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, PHH Mortgage Corporation, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC d/b/a Shellpoint Mortgage Servicing, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-K, filed October 18, 2019)

4.20			Series 2019-T5 Indenture Supplement, dated as of October 31, 2019, to the Third Amended and Restated Indenture, dated as of July 25, 2019, by and among NRZ Advance Receivables Trust 2015-ON1, Deutsche Bank National Trust Company, PHH Mortgage Corporation, HLSS Holdings, LLC, New Residential Mortgage LLC, NewRez LLC d/b/a Shellpoint Mortgage Servicing, Credit Suisse AG, New York Branch and New Residential Investment Corp. (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Form 8-K, filed November 6, 2019)

4.21			Form of Debt Securities Indenture (including Form of Debt Security) (incorporated by reference to Exhibit 4.1 to New Residential Investment Corp.’s Registration Statement on Form S-3, filed May 16, 2014)

4.22			Description of Securities Registered under Section 12 of the Exchange Act

10.1			Third Amended and Restated Management and Advisory Agreement, dated as of May 7, 2015, by and between New Residential Investment Corp. and FIG LLC (incorporated by reference to Exhibit 10.4 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2015)

10.2			Form of Indemnification Agreement by and between New Residential Investment Corp. and its directors and officers (incorporated by reference to Exhibit 10.2 to Amendment No. 3 to New Residential Investment Corp.’s Registration Statement on Form 10, filed March 27, 2013)

10.3			New Residential Investment Corp. Nonqualified Stock Option and Incentive Award Plan, adopted as of April 29, 2013 (incorporated by reference to Exhibit 10.1 to New Residential Investment Corp.’s Current Report on Form 8-K, filed May 3, 2013)

10.4			Amended and Restated New Residential Investment Corp. Nonqualified Stock Option and Incentive Plan, adopted as of November 4, 2014 (incorporated by reference to Exhibit 10.6 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2014)

10.5			Investment Guidelines (incorporated by reference to Exhibit 10.4 to Amendment No. 4 to New Residential Investment Corp.’s Registration Statement on Form 10, filed April 9, 2013)

10.6			Excess Servicing Spread Sale and Assignment Agreement, dated as of December 8, 2011, by and between Nationstar Mortgage LLC and NIC MSR I LLC (incorporated by reference to Exhibit 10.5 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011)

225




10.7			Excess Spread Refinanced Loan Replacement Agreement, dated as of December 8, 2011, by and between Nationstar Mortgage LLC and NIC MSR I LLC (incorporated by reference to Exhibit 10.6 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011)

10.8			Future Spread Agreement for FHLMC Mortgage Loans, dated as of May 13, 2012, by and between Nationstar Mortgage LLC and NIC MSR IV LLC (incorporated by reference to Exhibit 10.4 to Drive Shack Inc.’s Current Report on Form 8-K, filed May 15, 2012)

10.9			Future Spread Agreement for FNMA Mortgage Loans, dated as of May 13, 2012, by and between Nationstar Mortgage LLC and NIC MSR V LLC (incorporated by reference to Exhibit 10.2 to Drive Shack Inc.’s Current Report on Form 8-K, filed May 15, 2012)

10.10			Future Spread Agreement for Non-Agency Mortgage Loans, dated as of May 13, 2012, by and between Nationstar Mortgage LLC and NIC MSR VI LLC (incorporated by reference to Exhibit 10.6 to Drive Shack Inc.’s Current Report on Form 8-K, filed May 15, 2012)

10.11			Future Spread Agreement for GNMA Mortgage Loans, dated as of May 13, 2012, by and between Nationstar Mortgage LLC and NIC MSR VII, LLC (incorporated by reference to Exhibit 10.8 to Drive Shack Inc.’s Current Report on Form 8-K, filed May 15, 2012)

10.12			Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of May 31, 2012, by and between Nationstar Mortgage LLC and NIC MSR III LLC (incorporated by reference to Exhibit 10.1 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 6, 2012)

10.13			Future Spread Agreement for FHLMC Mortgage Loans, dated as of May 31, 2012, by and between Nationstar Mortgage LLC and NIC MSR III LLC (incorporated by reference to Exhibit 10.2 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 6, 2012)

10.14			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.1 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)

10.15			Amended and Restated Future Spread Agreement for FNMA Mortgage Loans, dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.2 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)

10.16			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.3 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)

10.17			Amended and Restated Future Spread Agreement for FHLMC Mortgage Loans, dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.4 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)

10.18			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.5 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)

10.19			Amended and Restated Future Spread Agreement for Non-Agency Mortgage Loans, dated as of June 7, 2012, by and between Nationstar Mortgage LLC and NIC MSR II LLC (incorporated by reference to Exhibit 10.6 to Drive Shack Inc.’s Current Report on Form 8-K, filed June 7, 2012)

10.20			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR V LLC (incorporated by reference to Exhibit 10.1 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)

10.21			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR IV LLC (incorporated by reference to Exhibit 10.2 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)

10.22			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR VI LLC (incorporated by reference to Exhibit 10.3 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)

10.23			Amended and Restated Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of June 28, 2012, by and between Nationstar Mortgage LLC and NIC MSR VII LLC (incorporated by reference to Exhibit 10.4 to Drive Shack Inc.’s Current Report on Form 8-K, filed July 5, 2012)

10.24			Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of December 31, 2012, by and between Nationstar Mortgage LLC and MSR VIII LLC (incorporated by reference to Exhibit 10.35 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

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10.25			Future Spread Agreement for GNMA Mortgage Loans, dated as of December 31, 2012, by and between Nationstar Mortgage LLC and MSR VIII LLC (incorporated by reference to Exhibit 10.36 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.26			Current Excess Servicing Spread Acquisition Agreement for FHLMC Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR IX LLC (incorporated by reference to Exhibit 10.37 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.27			Future Spread Agreement for FHLMC Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR IX LLC (incorporated by reference to Exhibit 10.38 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.28			Current Excess Servicing Spread Acquisition Agreement for FNMA Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR X LLC (incorporated by reference to Exhibit 10.39 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.29			Future Spread Agreement for FNMA Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR X LLC (incorporated by reference to Exhibit 10.40 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.30			Current Excess Servicing Spread Acquisition Agreement for GNMA Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR XI LLC (incorporated by reference to Exhibit 10.41 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.31			Future Spread Agreement for GNMA Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR XI LLC (incorporated by reference to Exhibit 10.42 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.32			Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR XII LLC (incorporated by reference to Exhibit 10.43 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.33			Future Spread Agreement for Non-Agency Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR XII LLC (incorporated by reference to Exhibit 10.44 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.34			Current Excess Servicing Spread Acquisition Agreement for Non-Agency Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR XIII LLC (incorporated by reference to Exhibit 10.45 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.35			Future Spread Agreement for Non-Agency Mortgage Loans, dated as of January 6, 2013, by and between Nationstar Mortgage LLC and MSR XIII LLC (incorporated by reference to Exhibit 10.46 to Drive Shack Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012)

10.36			Interim Servicing Agreement, dated as of April 1, 2013, by and among the Interim Servicers listed therein, HSBC Finance Corporation, as Interim Servicer Representative, HSBC Bank USA, National Association, SpringCastle America, LLC, SpringCastle Credit, LLC, SpringCastle Finance, LLC, Wilmington Trust, National Association, as Loan Trustee, and SpringCastle Finance LLC, as Owner Representative (incorporated by reference to Exhibit 10.35 to Amendment No. 4 to New Residential Investment Corp.’s Registration Statement on Form 10, filed April 9, 2013)

10.37			Second Amended and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC, dated as of March 31, 2016 (incorporated by reference to Exhibit 10.37 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016)

10.38			Services Agreement, dated as of April 6, 2015, by and between HLSS Advances Acquisition Corp. and Home Loan Servicing Solutions, Ltd. (incorporated by reference to Exhibit 2.4 to New Residential Investment Corp.’s Current Report on Form 8-K, filed April 10, 2015)

10.39			Receivables Sale Agreement, dated as of August 28, 2015, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC and NRZ Advance Facility Transferor 2015-ON1 LLC (incorporated by reference to Exhibit 10.47 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)

10.40			Receivables Pooling Agreement, dated as of August 28, 2015, by and between NRZ Advance Facility Transferor 2015-ON1 LLC and NRZ Advance Receivables Trust 2015-ON1 (incorporated by reference to Exhibit 10.48 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015)

10.41#			Master Agreement, dated as July 23, 2017, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC and New Residential Mortgage LLC (incorporated by reference to Exhibit 10.41 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)

227




10.42			Amendment No. 1 to Master Agreement, dated as of October 12, 2017, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC and New Residential Mortgage LLC (incorporated by reference to Exhibit 10.42 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)

10.43#			Transfer Agreement, dated as of July 23, 2017, by and among Ocwen Loan Servicing, LLC, New Residential Mortgage LLC, Ocwen Financial Corporation and New Residential Investment Corp. (incorporated by reference to Exhibit 10.43 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)

10.44#			Amendment No. 1 to the Transfer Agreement, dated January 18, 2018, by and among Ocwen Loan Servicing, LLC, New Residential Mortgage LLC, Ocwen Financial Corporation and New Residential Investment Corp. (incorporated by reference to Exhibit 10.44 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018)

10.45#			Subservicing Agreement, dated as of July 23, 2017, by and between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (incorporated by reference to Exhibit 10.44 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)

10.46#			Amendment No. 1 to Subservicing Agreement, dated as of August 17, 2018, by and between New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (incorporated by reference to Exhibit 10.46 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018)

10.47#			Cooperative Brokerage Agreement, dated as of August 28, 2017, by and among REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp. (incorporated by reference to Exhibit 10.45 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)

10.48#			First Amendment to Cooperative Brokerage Agreement, dated as of November 16, 2017, by and among REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp. (incorporated by reference to Exhibit 10.46 to New Residential Investment Corp.’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 14, 2018)

10.49#			Second Amendment to Cooperative Brokerage Agreement, dated as of January 18, 2018, by and among REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp. (incorporated by reference to Exhibit 10.47 to New Residential Investment Corp.’s Annual Report on Form 10-K for the year ended December 31, 2017, filed on February 14, 2018)

10.50			Third Amendment to Cooperative Brokerage Agreement, dated as of March 23, 2018, by and among REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp. (incorporated by reference to Exhibit 10.49 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018)

10.51			Fourth Amendment to Cooperative Brokerage Agreement, dated as of September 11, 2018, by and among REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and New Residential Sales Corp. (incorporated by reference to Exhibit 10.51 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018)

10.52#			Letter Agreement, dated as of August 28, 2017, by and among New Residential Investment Corp., New Residential Mortgage LLC, REALHome Services and Solutions, Inc., REALHome Services and Solutions - CT, Inc. and Altisource Solutions S.a.r.l. (incorporated by reference to Exhibit 10.46 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017)

10.53#			New RMSR Agreement, dated as of January 18, 2018, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (incorporated by reference to Exhibit 10.51 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018)

10.54#			Amendment No. 1 to New RMSR Agreement, dated as of August 17, 2018, by and among Ocwen Loan Servicing, LLC, HLSS Holdings, LLC, HLSS MSR - EBO Acquisition LLC, and New Residential Mortgage LLC (incorporated by reference to Exhibit 10.54 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018)

10.55#			Subservicing Agreement, dated as of August 17, 2018, by and between New Penn Financial, LLC, d/b/a Shellpoint Mortgage Servicing New Residential Mortgage LLC and Ocwen Loan Servicing, LLC (incorporated by reference to Exhibit 10.55 to New Residential Investment Corp.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018)

21.1			List of Subsidiaries of New Residential Investment Corp.

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23.1			Consent of Ernst & Young LLP, independent registered public accounting firm.

31.1			Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2			Certification of Chief Financial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1			Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2			Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101			The following financial information from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in iXBRL (Inline Extensible Business Reporting Language): (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Comprehensive Income; (iii) Consolidated Statements of Changes in Stockholders’ Equity; (iv) Consolidated Statements of Cash Flows; and (v) Notes to Consolidated Financial Statements

104			Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)




†	Schedules and exhibits may have been omitted.
#	Portions of this exhibit have been omitted pursuant to a request for confidential treatment.

The following second amended and restated limited liability company agreements of the Consumer Loan Companies are substantially identical in all material respects, except as to the parties thereto and the initial capital contributions required under each agreement, to the Second Amended and Restated Limited Liability Company Agreement of SpringCastle Acquisition LLC that is filed as Exhibit 10.37 hereto and are being omitted in reliance on Instruction 2 to Item 601 of Regulation S-K:


•	Second Amended and Restated Limited Liability Company Agreement of SpringCastle America, LLC, dated as of March 31, 2016.


•	Second Amended and Restated Limited Liability Company Agreement of SpringCastle Credit, LLC, dated as of March 31, 2016.


•	Second Amended and Restated Limited Liability Company Agreement of SpringCastle Finance, LLC, dated as of March 31, 2016.

229

SPECIAL NOTE REGARDING EXHIBITS

In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:


•	should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements proved to be inaccurate;


•	have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;


•	may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and


•	were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Item 16. Form 10-K Summary.

None.

230

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:



	NEW RESIDENTIAL INVESTMENT CORP.

	By:	/s/ Michael Nierenberg
		Michael Nierenberg
		Chairman of the Board

		February 19, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following person on behalf of the Registrant and in the capacities and on the dates indicated.



By:	/s/ Michael Nierenberg	By:	/s/ Nicola Santoro, Jr.
Michael Nierenberg		Nicola Santoro, Jr.
Chairman of the Board, Chief Executive Officer and President		Chief Financial Officer, Chief Accounting Officer and Treasurer
(Principal Executive Officer)		(Principal Financial Officer)
February 19, 2020		February 19, 2020


By:	/s/ Kevin J. Finnerty	By:	/s/ David Saltzman
Kevin J. Finnerty		David Saltzman
Director		Director
February 19, 2020		February 19, 2020

By:	/s/ Douglas L. Jacobs	By:	/s/ Andrew Sloves
Douglas L. Jacobs		Andrew Sloves
Director		Director
February 19, 2020		February 19, 2020

By:	/s/ Pamela F. Lenehan	By:	/s/ Alan L. Tyson
Pamela F. Lenehan		Alan L. Tyson
Director		Director
February 19, 2020		February 19, 2020

By:	/s/ Robert J. McGinnis
Robert J. McGinnis
Director
February 19, 2020

231


1.	Review Periods. The reference in Section 2.11(b) of the Purchase Agreement to “thirty (30) day period” is hereby deleted and replaced with “forty five (45) day period”.


4.	Counterparts. This Amendment may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which shall be deemed to constitute the same Amendment. This Amendment may be executed by facsimile or .pdf signature and a facsimile or .pdf signature shall constitute an original for all purposes.


5.	Miscellaneous. Section 1.2 (Interpretation), Section 10.4 (Amendments and Waivers), Section 10.7 (Governing Law), Section 10.8 (Submission to Jurisdiction; Service of Process) and 10.9 (Waiver of Jury Trial) of the Purchase Agreement are hereby incorporated into this Amendment mutatis mutandis.


1.	Review Periods. The introductory clause “During the forty five (45) day period immediately following Buyer’s receipt of the Advances Initial Statement” of Section 2.11(b) of the Purchase Agreement is hereby deleted in its entirety and replaced with “Beginning immediately upon Buyer’s receipt of the Advances Initial Statement and ending on January 17, 2020”.


1.	Review Periods. The reference to “January 17, 2020” in the introductory clause “Beginning immediately upon Buyer’s receipt of the Advances Initial Statement and ending on January 17, 2020” of Section 2.11(b) of the Purchase Agreement is hereby replaced with “January 24, 2020”.


(b)	the Remaining Assets Final Amount is negative $6,331,477.69 (which excludes the Existing Agreements Settlement Amount (as defined below)).


(a)	any servicing or document holdback obligations pursuant to any Existing Agreements;


(c)	the amounts due and owing between the Debtors and/or their controlled Affiliates, on the one hand, and the Buyer, New Residential Mortgage LLC, NewRez LLC, and/or their respective Affiliates, on the other hand, under the Existing Agreements for all periods prior to the Closing Date,


ii.	the release of the portion of the MSR Escrow Amount that has not, as of the date of this Agreement, been released from the MSR Escrow Account, which amounts shall be released in accordance with the terms of the Purchase Agreement (including, without limitation, Section 6.8 of the Purchase Agreement);


•	2,000,000,000 shares of common stock, par value $0.01 per share; and


•	100,000,000 shares of preferred stock, par value $0.01 per share, 6,210,000 of which are shares of Series A Preferred Stock and 11,500,000 of which are shares of Series B Preferred Stock.


i.	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 Series A Preferred Stock with respect to rights to the payment of dividends and the distribution of assets upon our liquidation, dissolution or winding up;


ii.	on a parity with all equity securities issued by us other than the equity securities referred to in clauses (i) and (iii);


iv.	effectively junior to all of our existing and future indebtedness (including indebtedness convertible to our common stock or preferred stock) and other liabilities and to all liabilities and preferred equity and to the indebtedness of our existing subsidiaries and any future subsidiaries.


•	LIBOR will be the rate (expressed as a percentage per year) for deposits in U.S. dollars having an index maturity of three months, in amounts of at least $1,000,000, as such rate appears on “Reuters Page LIBOR01” at approximately 11:00 a.m. (London time) on the relevant Dividend Determination Date; or


•	Redemption Procedures. In the event we elect to redeem any shares of the Series A Preferred Stock, the notice of redemption will be mailed to each holder of record of the Series A Preferred Stock called for redemption at such holder’s address as it appears on our stock transfer records and will state the following:


•	the number of shares of the Series A Preferred Stock to be redeemed;


•	the place or places where certificates (if any) for the Series A Preferred Stock are to be surrendered for payment of the redemption price;


•	that dividends on the shares to be redeemed will cease to accumulate on the redemption date;


•	whether such redemption is being made pursuant to the provisions described above under “—Optional Redemption” or “—Special Optional Redemption”;


•	if applicable, that such redemption is being made in connection with a Change of Control and, in that case, a brief description of the transaction or transactions constituting such Change of Control; and


•	3.12305 (the “Series A Share Cap”), subject to certain adjustments to this Series A Share Cap as described below.


•	the last date on which the holders of the Series A Preferred Stock may exercise their Change of Control Conversion Right;


•	the method and period for calculating the Common Stock Price;


•	if applicable, the type and amount of Alternative Conversion Consideration entitled to be received per share of the Series A Preferred Stock;


•	the name and address of the paying agent and transfer agent for the Series A Preferred Stock;


•	the procedures that the holders of the Series A Preferred Stock must follow to exercise the Change of Control Conversion Right (including procedures for surrendering shares for conversion through the facilities of a Share Depositary (as defined herein)), including the form of conversion notice to be delivered by such holders as described below; and


•	the last date on which holders of the Series A Preferred Stock may withdraw shares surrendered for conversion and the procedures that such holders must follow to effect such a withdrawal.


•	that the Series A Preferred Stock is to be converted pursuant to the applicable provisions of the Series A Preferred Stock.


•	the number of withdrawn shares of the Series A Preferred Stock;