Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

v2.4.0.8
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
6 Months Ended
Jun. 30, 2014
Receivables [Abstract]  
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
6.    REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
 
The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans at June 30, 2014. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.
Loan Type
Outstanding
Face Amount
 
Carrying
Value (A)
 
Loan
Count
 
Weighted
 Average Yield
 
Weighted Average Coupon
 
Weighted Average Life
(Years) (B)
 
Floating Rate Loans as a % of Face Amount
 
Delinquent Face Amount (C)
Mezzanine Loans
$
157,046
 
$
124,628
 
8
 
7.42
%
 
7.34
%
 
1.3
 
75.9
%
 
$
12,000
Corporate Bank Loans
164,973
 
97,684
 
5
 
23.06
%
 
13.12
%
 
1.9
 
0.6
%
 
B-Notes
69,912
 
66,420
 
2
 
5.57
%
 
4.40
%
 
1.6
 
68.2
%
 
Whole Loans
380
 
380
 
1
 
3.95
%
 
7.37
%
 
0.5
 
0.0
%
 
Total Real Estate Related and other Loans Held-for-Sale, Net
$
392,311
 
$
289,112
 
16
 
12.27
%
 
9.25
%
 
1.6
 
42.8
%
 
$
12,000
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Loans (D)
43,229
 
32,083
 
165
 
7.22
%
 
2.27
%
 
5.7
 
100.0
%
 
6,311
Total Residential Mortgage Loans Held-for-Sale, Net
$
43,229
 
$
32,083
 
165
 
7.22
%
 
2.27
%
 
5.7
 
100.0
%
 
$
6,311
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime Mortgage Loans Subject to Call Option
$
406,217
 
$
406,217
 
 
 
 
 
 
 
 
 
 
 
 
(A)
Carrying value includes negligible interest receivable for the residential housing loans.
(B)
The weighted average life is based on the timing of expected principal reduction on the assets.
(C)
Includes loans that are 60 or more days past due (including loans that are in foreclosure, or borrower’s in bankruptcy) or considered real estate owned (“REO”). As of June 30, 2014, $87.4 million face amount of real estate related and other loans was on non-accrual status.
(D)
Loans acquired at a discount for credit quality.
 
In May 2014, Newcastle sold its manufactured housing portfolio through a securitization. The portfolio had an outstanding face amount of $222.2 million and was sold at 104% of par, resulting in $231.6 million of total proceeds including accrued interest. Part of the proceeds were used to repay the current debt on the portfolio at par, including $132.4 million of third-party debt and $20.5 million of debt owned by CDO VIII and CDO IX. The securitization of the portfolio was accomplished through a special purpose entity, in which Newcastle holds no interests, and was treated as a sale for accounting purposes. The sale generated a gain of $24.7 million, or $19.4 million net after $1.9 million of deal expenses and the write off of $3.4 million of unamortized discount on third party debt (recorded as a loss on extinguishment of debt).
 
The following is a summary of real estate related and other loans by maturities at June 30, 2014:
 
Outstanding
 
 
 
Number of
Year of Maturity (1)
Face Amount
 
Carrying Value
 
Loans
Delinquent (2)
$
12,000
 
$
 
1
Period from July 1, 2014 to December 31, 2014
111,104
 
47,651
 
5
2015
1,379
 
830
 
2
2016
64,891
 
63,274
 
2
2017
48,938
 
48,938
 
2
2018
22,260
 
18,769
 
1
2019
118,289
 
97,234
 
2
Thereafter
13,450
 
12,416
 
1
Total
$
392,311
 
$
289,112
 
16
(1)
Based on the final extended maturity date of each loan investment as of June 30, 2014.
(2)
Includes loans that are non-performing, in foreclosure, or under bankruptcy.
 
Activities relating to the carrying value of Newcastle’s real estate related and other loans and residential mortgage loans are as follows:
 
Held-for-Sale
 
Held-for-Investment
 
Real Estate Related and Other Loans
 
Residential Mortgage Loans
 
Residential Mortgage Loans
Balance at December 31, 2013
$
437,530
 
$
2,185
 
$
255,450
Purchases / additional fundings
 
 
Interest accrued to principal balance
11,274
 
 
Principal paydowns
(167,171
)
 
(8,226
)
 
(9,436
)
Sales
 
(206,360
)
 
Transfer to held-for-sale
 
246,121
 
(246,121
)
Valuation (allowance) reversal on loans
(1,958
)
 
19
 
(833
)
Accretion of loan discount and other amortization
8,867
 
 
115
Other
570
 
(1,656
)
 
825
Balance at June 30, 2014
$
289,112
 
32,083
 
$
 
In January 2014, Intrawest, a portfolio company of a private equity fund managed by an affiliate of Newcastle’s Manager completed a $37.5 million primary offering and a $150.0 million secondary offering. At December 31, 2013, Newcastle had an outstanding investment balance of $185.6 million in Intrawest's debt. Following Intrawest’s public offerings, Newcastle received total cash of $83.3 million, which reduced the face of the debt balance down to $103.3 million at March 31, 2014.
 
The following is a rollforward of the related loss allowance.
 
Held-For-Sale
 
Held-For-Investment
 
Real Estate Related and
Other Loans
 
Residential Mortgage Loans
 
Residential Mortgage
Loans (A)
Balance at December 31, 2013
$
(94,037
)
 
$
(824
)
 
$
(12,247
)
Charge-offs (B)
504
 
84
 
711
Sales
 
10,525
 
Transfer to held-for-sale
 
(12,369
)
 
12,369
Valuation (allowance) reversal on loans
(1,958
)
 
19
 
(833
)
Balance at June 30, 2014
$
(95,491
)
 
$
(2,565
)
 
$
 
(A)
The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.
(B) The charge-offs for real estate related loans represent one loan which was under restructuring.
 
The table below summarizes the geographic distribution of real estate related and other loans and residential mortgage loans at June 30, 2014:
 
Real Estate Related
and Other Loans
 
Residential Mortgage Loans
Geographic Location
Outstanding Face Amount
 
Percentage
 
Outstanding Face Amount
 
Percentage
Western U.S.
$
43,453
 
18.7
%
 
$
5,291
 
12.2
%
Northeastern U.S.
31,004
 
13.4
%
 
2,067
 
4.8
%
Southeastern U.S.
51,733
 
22.3
%
 
30,884
 
71.4
%
Midwestern U.S.
8,922
 
3.8
%
 
2,201
 
5.1
%
Southwestern U.S.
10,468
 
4.5
%
 
2,786
 
6.5
%
Foreign
86,569
 
37.3
%
 
 
—%
 
$
232,149
 
100.0
%
 
$
43,229
 
100.0
%
Other
160,162
 
(A)
 
 
 
 
 
$
392,311
 
 
 
 
 
 
(A)
Includes corporate bank loans which are not directly secured by real estate assets.
 
Securitization of Subprime Mortgage Loans
  
The following table presents information on the retained interests in Newcastle’s securitizations of subprime mortgage loans at June 30, 2014:
 
Subprime Portfolio
 
 
 
I
 
II
 
Total
Total securitized loans (unpaid principal balance) (A)
$
347,522
 
$
481,933
 
$
829,455
Loans subject to call option (carrying value)
$
299,176
 
$
107,041
 
$
406,217
Retained interests (fair value) (B)
$
2,608
 
$
 
$
2,608
(A)
Average loan seasoning of 107 months and 89 months for Subprime Portfolios I and II, respectively, at June 30, 2014.
(B)
The retained interests include retained bonds of the securitizations. The fair value of which is estimated based on pricing models. Newcastle’s residual interests were written off in 2010. The weighted average yield of the retained bonds was 25.07% as of June 30, 2014.
 
Newcastle has no obligation to repurchase any loans from either of its subprime securitizations. Therefore, it is expected that its exposure to loss is limited to the carrying amount of its retained interests in the securitization entities, as described above.  A subsidiary of Newcastle gave limited representations and warranties with respect to Subprime Portfolio II and is required to pay the difference, if any, between the repurchase price of any loan in such portfolio and the price required to be paid by a third party originator for such loan. Such subsidiary, however, has no assets and does not have recourse to the general credit of Newcastle.
 
The following table summarizes certain characteristics of the underlying subprime mortgage loans, and related financing, in the securitizations as of June 30, 2014:
 
Subprime Portfolio
 
I
 
II
Loan unpaid principal balance (UPB)
$
347,522
 
$
481,933
Weighted average coupon rate of loans
5.69
%
 
4.76
%
Delinquencies of 60 or more days (UPB) (A)
$
90,313
 
$
173,548
Net credit losses for the six months ended June 30, 2014
$
13,973
 
$
17,703
Cumulative net credit losses
$
260,778
 
$
319,277
Cumulative net credit losses as a % of original UPB
17.4
%
 
29.3
%
Percentage of ARM loans (B)
50.1
%
 
64.2
%
Percentage of loans with original loan-to-value ratio >90%
10.7
%
 
16.9
%
Percentage of interest-only loans
10.5
%
 
21.2
%
Face amount of debt (C)
$
343,522
 
$
481,933
Weighted average funding cost of debt (D)
0.50
%
 
0.42
%
(A)
Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or REO.
(B)
ARM loans are adjustable-rate mortgage loans. An option ARM is an adjustable-rate mortgage that provides the borrower with an option to choose from several payment amounts each month for a specified period of the loan term. None of the loans in the subprime portfolios are option ARMs.
(C)
Excludes face amount of $4.0 million of retained notes for Subprime Portfolio I at June 30, 2014.
(D)
Includes the effect of applicable hedges.
 
Newcastle received negligible cash inflows from the retained interests of Subprime Portfolios I and II during the six months ended June 30, 2014 and 2013.
 
The loans subject to call option and the corresponding financing recognize interest income and expense based on the expected weighted average coupons of the loans subject to call option at the call date of 9.24% and 8.68% for Subprime Portfolio’s I and II, respectively.