| 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
Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. Purchased loans that Newcastle has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as held-for-investment. Alternatively, loans acquired with the intent to sell are classified as held-for-sale.
The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans at September 30, 2014. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.
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Loan Type
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Outstanding
Face Amount
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Carrying
Value (A)
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Loan
Count
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Weighted
Average
Yield
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Weighted Average Coupon
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Weighted Average Life
(Years) (B)
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Floating Rate Loans as a % of Face Amount
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Delinquent Face Amount (C)
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Mezzanine Loans
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$
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132,053
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$
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99,666
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7
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7.25
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%
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7.20
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%
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1.2
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71.6
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%
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$
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12,000
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Corporate Bank Loans
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169,659
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106,296
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5
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21.84
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%
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13.19
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%
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1.8
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0.6
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%
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—
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B-Notes
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22,067
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18,761
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1
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12.00
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%
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7.32
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%
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4.3
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0.0
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%
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—
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Whole Loans
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269
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269
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1
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4.00
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%
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7.48
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%
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0.4
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0.0
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%
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—
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Total Real Estate Related and other Loans Held-for-Sale, Net
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$
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324,048
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$
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224,992
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14
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14.53
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%
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10.34
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%
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1.7
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29.5
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%
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$
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12,000
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Residential Loans (D)
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4,686
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4,036
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8
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7.74
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%
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1.84
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%
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1.7
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100.0
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%
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1,105
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Total Residential Mortgage Loans Held-for-Sale, Net
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$
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4,686
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$
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4,036
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8
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7.74
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%
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1.84
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%
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1.7
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100.0
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%
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$
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1,105
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Subprime Mortgage Loans Subject to Call Option
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$
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406,217
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$
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406,217
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(A)
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Carrying value includes negligible interest receivable for the residential housing loans.
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(B)
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The weighted average life is based on the timing of expected principal reduction on the assets.
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(C)
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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 September 30, 2014, $76.5 million face amount of real estate related and other loans was on non-accrual status.
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(D)
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Loans acquired at a discount for credit quality.
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Loans
Held-for-Investment
Loans
held-for-investment are recorded net of any unamortized discount (or gross of any unamortized premiums), including any fees received
and an allowance for loan loss based on inputs determined using management’s best estimates. If the fair value of a loan
declines below its carrying amount, Newcastle records an allowance for loss in accordance with ASC 310-10-35-37 to 40. If such
loan subsequently increases in value, Newcastle records a reversal of such allowance to the extent of the previously recorded
allowance (i.e., any increase in value above the recorded investment in the loan is not recorded). For impaired loans other than
impaired loans acquired at a discount for credit quality, Newcastle accrues for interest on the net carrying amount of the loans
(provided that no interest is accrued to the extent it is deemed uncollectible), and other changes in the carrying amount of the
loans are recorded as an adjustment to the loss allowance (either an increase or a reversal), in accordance with ASC 310-10-35-40a.
Loans
Held-for-Sale
Loans
held-for-sale are recorded net of any unamortized discount (or gross of any unamortized premiums), including any fees received
and are measured at the lower of cost or fair value, with valuation changes recorded in other income. As loans held-for-sale are
recognized at the lower of cost or fair value, Newcastle’s allowance for loss policy does not apply to these loans. Purchase
price discounts or premiums are deferred in a contra loan account until the related loans 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.
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).
In July 2014, Newcastle sold residential whole loans with an outstanding face amount of $37.4 million at a price of 91.5% of par or $34.7 million of proceeds. A part of the proceeds was used to repay $23.0 million in repurchase agreements associated with these loans. Newcastle recognized a gain on settlement of investments of $7.8 million and incurred approximately $1.2 million of transaction expenses.
The following is a summary of real estate related and other loans by maturities at September 30, 2014:
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Outstanding
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Number of
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Year of Maturity (1)
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Face Amount
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Carrying Value
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Loans
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Delinquent (2)
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$
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12,000
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$
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—
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1
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Period from October 1, 2014 to December 31, 2014
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—
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—
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—
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2015
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64,720
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718
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6
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2016
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64,843
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63,227
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2
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2017
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24,370
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24,370
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1
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2018
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22,067
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18,761
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1
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2019
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122,974
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105,846
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2
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Thereafter
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13,074
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12,070
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1
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Total
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$
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324,048
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$
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224,992
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14
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(1)
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Based on the final extended maturity date of each loan investment as of September 30, 2014.
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(2)
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Includes loans that are non-performing, in foreclosure, or under bankruptcy.
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Activities relating to the carrying value of Newcastle’s real estate related and other loans and residential mortgage loans are as follows:
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Held-for-Sale
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Held-for-Investment
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Real Estate Related and Other Loans
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Residential Mortgage Loans
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Residential Mortgage Loans
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Balance at December 31, 2013
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$
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437,530
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$
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2,185
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$
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255,450
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Purchases / additional fundings
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—
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—
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—
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Interest accrued to principal balance
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15,960
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—
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—
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Principal paydowns
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(240,119
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)
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(9,333
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)
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(9,436
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)
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Transfer to held-for-sale
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—
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246,121
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(246,121
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)
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Sales
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—
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(233,349
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)
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—
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Valuation (allowance) reversal on loans
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2,186
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(109
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)
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(833
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)
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Accretion of loan discount and other amortization
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8,867
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—
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115
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Other
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568
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(1,479
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)
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825
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Balance at September 30, 2014
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$
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224,992
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4,036
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$
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—
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The following is a rollforward
of the related loss allowance.
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Held-For-Sale
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Held-For-Investment
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Real Estate Related and Other Loans
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Residential Mortgage Loans
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Residential Mortgage
Loans (A)
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Balance at December 31, 2013
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$
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(94,037
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)
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$
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(824
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)
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$
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(12,247
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)
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Charge-offs (B)
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14,397
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84
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711
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Transfer to held-for-sale
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—
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(12,369
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)
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12,369
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Sales
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—
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13,006
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—
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Valuation (allowance) reversal on loans
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2,186
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(109
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)
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(833
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)
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Balance at September 30, 2014
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$
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(77,454
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)
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$
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(212
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$
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—
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(A)
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The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.
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(B)
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The charge-offs for real estate related loans represent one loan which was under restructuring.
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The table below summarizes the geographic distribution of real estate related and other loans and residential mortgage loans at September 30, 2014:
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Real Estate Related
and Other Loans
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Residential Mortgage Loans
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Geographic Location
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Outstanding Face Amount
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Percentage
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Outstanding Face Amount
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Percentage
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Western U.S.
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$
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28,298
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17.8
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%
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$
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991
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21.1
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%
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Northeastern U.S.
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26,426
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16.6
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%
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531
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11.3
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%
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Southeastern U.S.
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51,494
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32.3
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%
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3,025
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64.6
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%
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Midwestern U.S.
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3,830
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2.4
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%
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139
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3.0
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%
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Southwestern U.S.
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10,446
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6.5
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%
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—
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—
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%
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Foreign
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38,898
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24.4
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%
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—
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—%
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$
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159,392
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100.0
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%
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$
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4,686
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100.0
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%
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Other
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164,656
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(A)
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$
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324,048
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(A)
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Includes corporate bank loans which are not directly secured by real estate assets.
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Securitization
of Subprime Mortgage Loans
The following table presents information on the retained interests in Newcastle’s securitizations of subprime mortgage loans at September 30, 2014:
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Subprime Portfolio
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I
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II
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Total
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Total securitized loans (unpaid principal balance) (A)
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$
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334,758
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$
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468,100
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$
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802,858
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Loans subject to call option (carrying value)
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$
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299,176
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$
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107,041
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$
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406,217
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Retained interests (fair value) (B)
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$
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3,057
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$
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—
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$
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3,057
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(A)
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Average loan seasoning of 110 months and 92 months for Subprime Portfolios I and II, respectively, at September 30, 2014.
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(B)
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The
retained interests include retained bonds of the securitizations with negligible monthly interest cash flow until principal
payment is available. The fair value of which is estimated based on pricing service quotation. Newcastle’s retained interests
were written off in 2010. The weighted average yield of the retained bonds was 22.40% as of September 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 September 30, 2014:
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Subprime Portfolio
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I
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II
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Loan unpaid principal balance (UPB)
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$
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334,758
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$
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468,100
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Weighted average coupon rate of loans
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5.83
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%
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|
4.71
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%
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Delinquencies of 60 or more days (UPB) (A)
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$
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83,602
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$
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164,991
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Net credit losses for the nine months ended September 30, 2014
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$
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20,347
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$
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24,126
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Cumulative net credit losses
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$
|
267,152
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$
|
325,700
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Cumulative net credit losses as a % of original UPB
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17.8
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%
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|
29.9
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%
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Percentage of ARM loans (B)
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51.0
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%
|
|
64.2
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%
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Percentage of loans with original loan-to-value ratio >90%
|
10.8
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%
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|
16.9
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%
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Percentage of interest-only loans
|
8.7
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%
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|
18.7
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%
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Face amount of debt (C)
|
$
|
330,758
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|
|
$
|
468,100
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|
|
Weighted average funding cost of debt (D)
|
0.51
|
%
|
|
0.43
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%
|
|
|
| |
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|
(A)
|
Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or REO.
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(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.
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(C)
|
Excludes face amount of $4.0 million of retained notes for Subprime Portfolio I at September 30, 2014.
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(D)
|
Includes the effect of applicable hedges.
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Newcastle received negligible cash inflows from the retained interests of Subprime Portfolios I and II during the nine months ended September 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.
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