Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE RELATED LOANS

v2.4.0.6
REAL ESTATE RELATED LOANS
9 Months Ended
Sep. 30, 2012
RealEstateRelatedLoansAbstract  
REAL ESTATE RELATED LOANS

4. REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS, SUBPRIME MORTGAGE LOANS, CDO SERVICING RIGHTS AND INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS

 

The following is a summary of real estate related loans, residential mortgage loans and subprime mortgage loans at September 30, 2012. 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
    Wtd. Avg. Yield     Weighted Average Coupon     Weighted Average Maturity
(Years) (B)
    Floating Rate Loans as a % of Face Amount     Delinquent Face Amount (C)  
Mezzanine Loans   $ 530,343     $ 443,269       17       10.79 %     8.55 %     2.3       67.0 %   $ 12,000  
Corporate Bank Loans     334,855       180,044       7       20.05 %     9.51 %     1.9       40.7 %     —  
B-Notes     207,494       188,748       7       10.79 %     5.51 %     2.4       71.4 %     —  
Whole Loans     30,242       30,242       3       5.20 %     3.84 %     1.3       96.3 %     —  
Total Real Estate Related Loans                                                                
    Held-for-Sale, Net   $ 1,102,934     $ 842,303       34       12.57 %     8.14 %     2.2       60.7 %   $ 12,000  
Non-Securitized Manufactured Housing  Loan Portfolio I   $ 591     $ 151       16       38.88 %     7.83 %     0.7       0.0 %   $ 56  
Non-Securitized Manufactured Housing  Loan Portfolio II     3,144       2,415       117       15.47 %     10.03 %     5.5       9.2 %     370  
Total Residential Mortgage Loans                                                                
    Held-for-Sale, Net (D)   $ 3,735     $ 2,566       133       16.85 %     9.68 %     4.7       7.7 %   $ 426  
                                                                 
Securitized Manufactured Housing Loan  Portfolio I   $ 122,453     $ 102,745       3,268       9.48 %     8.66 %     6.9       0.8 %   $ 990  
Securitized Manufactured Housing Loan  Portfolio II     158,542       155,933       5,534       7.51 %     9.64 %     5.7       16.9 %     2,676  
Residential Loans     57,163       42,692       202       7.56 %     2.57 %     6.4       100.0 %     10,380  
Total Residential Mortgage Loans Held-  for-Investment, Net (D) (E)   $ 338,158     $ 301,370       9,004       8.19 %     8.09 %     6.2       25.1 %   $ 14,046  
Subprime Mortgage Loans Subject to Call Option   $ 406,217     $ 405,525                                                  

 

(A) Carrying value includes interest receivable of $0.1 million for the residential housing loans and principal and interest receivable of $4.9 million for the manufactured housing loans.
(B) The weighted average maturity 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 September 30, 2012, $136.5 million face amount of real estate related loans was on non-accrual status.
(D) Loans acquired at a discount for credit quality.
(E) The following is an aging analysis of past due residential loans held-for-investment as of September 30, 2012:

 

    30-59 Days Past Due     60-89 Days Past Due     Over 90 Days Past Due     REO     Total Past Due     Current     Total Outstanding Face Amount  
Securitized Manufactured Housing Loan Portoflio I   $ 839     $ 263     $ 383     $ 344     $ 1,829     $ 120,624     $ 122,453  
Securitized Manufactured Housing Loan Portoflio II   $ 1,159     $ 313     $ 1,594     $ 769     $ 3,835     $ 154,707     $ 158,542  
Residential Loans   $ 300     $ 1,020     $ 8,784     $ 576     $ 10,680     $ 46,483     $ 57,163  

 

Newcastle’s management monitors the credit qualities of the Manufactured Housing Loan Portfolios I and II primarily by using aging analyses, current trends in delinquencies and actual loss incurrence rates.

 

The following is a summary of real estate related loans by maturities at September 30, 2012:

 

Year of Maturity (1)     Face Amount     Carrying Value     Loans  
Delinquent (2)     $ 12,000     $ —       1  
Period from October 1, 2012 to December 31, 2012       59,644       16,695       1  
2013       35,970       27,501       3  
2014       394,090       243,428       12  
2015       249,537       210,614       7  
2016       240,252       238,457       5  
2017       95,483       91,321       4  
Thereafter       15,958       14,287       1  
  Total     $ 1,102,934     $ 842,303       34  

 

(1) Based on the final extended maturity date of each loan investment as of September 30, 2012.
(2) Includes loans that are non-performing, in foreclosure, or under bankruptcy.

 

Activities relating to the carrying value of our real estate loans and residential mortgage loans are as follows:

 

    Held-for-Sale     Held-for-Investment  
    Real Estate Related Loans     Residential Mortgage Loans     Residential Mortgage Loans  
Balance at December 31, 2011   $ 813,580     $ 2,687     $ 331,236  
Purchases / additional fundings     91,481       —       —  
Interest accrued to principal balance     16,759       —       —  
Principal paydowns     (89,243 )     (622 )     (29,448 )
Sales     —       —       —  
Valuation (allowance) reversal on loans     10,879       482       (3,201 )
Loss on repayment of loans held-for-sale     (1,614 )     —       —  
Accretion of loan discount and other amortization     —       —       3,208  
Other     461       19       (425 )
Balance at September 30, 2012   $ 842,303       2,566     $ 301,370  

 

The following is a rollforward of the related loss allowance.

 

    Held-For-Sale     Held-For-Investment  
    Real Estate
Related Loans
    Residential Mortgage
Loans
    Residential Mortgage
Loans (B)
 
Balance at December 31, 2011   $ (228,017 )   $ (2,461 )   $ (26,075 )
Charge-offs (A)     17,648       870       6,363  
Valuation (allowance) reversal on loans     10,879       482       (3,201 )
Balance at September 30, 2012   $ (199,490 )   $ (1,109 )   $ (22,913 )

 

(A) The charge-offs for real estate related loans represent a loan which was paid off at a discounted price during the period.
(B) The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.

 

Investments in Excess Mortgage Servicing Rights

 

The following is a summary of Newcastle’s Excess MSRs:

 

          September 30, 2012     Nine Months Ended September 30, 2012  
    Unpaid Principal
Balance
    Amortized Cost Basis (A)     Carrying Value (B)     Weighted Average Yield     Average Maturity (Years) (C)     Changes in Fair Value Recorded in Other Income (Loss) (D)  
MSR Pool 1   $ 8,761,705     $ 31,360     $ 36,430       18.0 %     4.7     $ 4,902  
MSR Pool 1 - Recapture Agreement     —       4,999       5,473       18.0 %     10.6       275  
MSR Pool 2     9,734,046       34,729       35,024       17.3 %     4.9       295  
MSR Pool 2 - Recapture Agreement     —       5,820       6,251       17.3 %     11.7       431  
MSR Pool 3     9,413,001       29,195       31,037       17.6 %     4.7       1,842  
MSR Pool 3 - Recapture Agreement     —       5,210       5,091       17.6 %     11.2       (119 )
MSR Pool 4     6,013,872       11,875       12,451       17.9 %     4.6       576  
MSR Pool 4 - Recapture Agreement     —       2,952       3,073       17.9 %     11.0       121  
MSR Pool 5     45,706,396       116,805       114,779       17.5 %     4.8       (2,026 )
MSR Pool 5 - Recapture Agreement     —       8,522       8,738       17.5 %     12.1       216  
    $ 79,629,020     $ 251,467     $ 258,347       17.6 %     5.5     $ 6,513  

 

  (A) 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.
  (B) Carrying value represents the fair value of the pools or Recapture Agreements, as applicable.
  (C) The weighted average maturity represents the weighted average expected timing of the receipt of cash flows of each investment.
  (D) The portion of the change in fair value of the Recapture Agreement relating to loans recaptured to date is reflected in the respective pool.

 

In December 2011, Newcastle entered into an agreement (“MSR Agreement I”) with Nationstar Mortgage LLC (“Nationstar”), a leading residential mortgage servicer majority-owned by funds managed by Newcastle’s manager, to invest in Excess MSRs with Nationstar. Nationstar acquired the mortgage servicing rights on a pool of government-sponsored enterprise (“GSE”) residential mortgage loans with an outstanding principal balance of approximately $9.9 billion (“MSR Pool 1”) on September 30, 2011. Nationstar is entitled to receive an initial weighted average total mortgage servicing amount of 35 basis points (bps) on the performing unpaid principal balance, as well as any ancillary income from MSR Pool 1. Pursuant to MSR Agreement I, Nationstar performs all servicing functions and advancing functions related to MSR Pool 1 for a basic fee (the contractual amount the service is entitled to for performing the servicing duties) of 6 bps. Therefore, the remainder, or “excess mortgage servicing amount” is initially equal to a weighted average of 29 bps. Newcastle acquired the right to receive 65% of the excess mortgage servicing amount on MSR Pool 1 and, subject to certain limitations and pursuant to a loan replacement agreement (the “Recapture Agreement”), 65% of the Excess MSRs on certain future mortgage loans originated by Nationstar, that represent refinancings of loans in MSR Pool 1 (which loans then become part of MSR Pool 1) for $43.7 million. Nationstar has co-invested, pari passu with Newcastle, in 35% of the Excess MSRs. Nationstar, as servicer, also retains the ancillary income, the servicing obligations and liabilities as the servicer. If Nationstar is terminated as the servicer, Newcastle’s right to receive its portion of the excess mortgage servicing amount is also terminated. To the extent that Nationstar is terminated as the servicer and receives a termination payment, Newcastle is entitled to a pro rata share, or 65%, of such termination payment.

 

On June 5, 2012, Newcastle announced the completion of a co-investment with Nationstar related to their acquisition of mortgage servicing rights from Bank of America, National Association. Newcastle has invested approximately $44 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $10.4 billion (“MSR Pool 2”), comprised of conforming loans in GSE pools. Nationstar has co-invested pari passu with Newcastle in 35% of the Excess MSRs and will be the servicer of the loans performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata by Newcastle and Nationstar, subject to certain limitations. As of September 30, 2012, Newcastle funded $39.1 million of the purchase price and expected the remainder of the purchase price payable to Nationstar to be funded in the fourth quarter of 2012 pursuant to the payment terms of the agreement.

 

On June 29, 2012, Newcastle announced the completion of a co-investment in Excess MSRs in connection with Nationstar’s acquisition of mortgage servicing rights from Aurora Bank FSB, a subsidiary of Lehman Brothers Bancorp Inc. Newcastle invested approximately $176.5 million to acquire a 65% interest in the Excess MSRs on a portfolio of residential mortgage loans with an outstanding principal balance of approximately $63.7 billion, comprised of approximately 75% non-conforming loans in private label securitizations and approximately 25% conforming loans in GSE pools. The portfolio is comprised of three pools: a pool of non-conforming loans in private label securitizations with an outstanding principal balance of approximately $47.6 billion (“MSR Pool 5”), and two GSE loan pools with outstanding principal balances of approximately $6.3 billion (“MSR Pool 4”) and $9.8 billion (“MSR Pool 3”), respectively. Nationstar has co-invested pari passu with Newcastle in 35% of the Excess MSRs and will be the servicer of the loans performing all servicing and advancing functions, and retaining the ancillary income, servicing obligations and liabilities as the servicer. Under the terms of this investment, to the extent that any loans in the portfolio are refinanced by Nationstar, the resulting Excess MSRs will be shared pro rata by Newcastle and Nationstar, subject to certain limitations.

 

The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSRs at September 30, 2012:

 

State Concentration   Percentage of Total Outstanding  
California     32.3 %
Florida     10.1 %
Washington     4.3 %
New York     4.2 %
Arizona     4.0 %
Texas     3.6 %
Colorado     3.5 %
Maryland     3.3 %
New Jersey     3.1 %
Virginia     3.0 %
Other U.S.     28.6 %
      100.0 %

 

(A) Based on the information provided by the loan servicer as of the most recent remittance.

 

Geographic concentrations of investments expose Newcastle to the risk of economic downturns within the relevant states. Any such downturn in a state where Newcastle holds significant investments could affect the underlying borrower’s ability to make the mortgage payment and therefore could have a meaningful, negative impact on Newcastle’s Excess MSRs.

 

See note 12 regarding the agreements to acquire an additional portfolio of Excess MSRs.

 

CDO Servicing Rights

 

In February 2011, Newcastle, through one of its subsidiaries, purchased the management rights with respect to certain CBASS Investment Management LLC (“C-BASS”) CDOs pursuant to a bankruptcy proceeding for $2.2 million. Newcastle initially recorded the cost of acquiring the collateral management rights as a servicing asset and subsequently amortizes this asset in proportion to, and over the period of, estimated net servicing income. Servicing assets are assessed for impairment on a quarterly basis, with impairment recognized as a valuation allowance. Key economic assumptions used in measuring any potential impairment of the servicing assets include the prepayment speeds of the underlying loans, default rates, loss severities and discount rates. During the nine months ended September 30, 2012 and 2011, respectively, Newcastle recorded $0.3 million and $0.2 million of servicing rights amortization and no servicing rights impairment. As of September 30, 2012, Newcastle’s servicing asset had a carrying value of $1.8 million recorded in Receivables and Other Assets.

 

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, 2012:

 

    Subprime Portfolio        
    I     II     Total  
Total securitized loans (unpaid principal balance) (A)   $ 434,578     $ 573,735     $ 1,008,313  
Loans subject to call option (carrying value)   $ 299,176     $ 106,349     $ 405,525  
Retained interests (fair value) (B)   $ 381     $ —     $ 381  

 

(A) Average loan seasoning of 86 months and 68 months for Subprime Portfolios I and II, respectively, at September 30, 2012.
(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 8.36% as of September 30, 2012.

 

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, 2012:

 

    Subprime Portfolio  
    I     II  
Loan unpaid principal balance (UPB)   $ 434,578     $ 573,735  
Weighted average coupon rate of loans     5.39 %     4.59 %
Delinquencies of 60 or more days (UPB) (A)   $ 100,159     $ 165,693  
Net credit losses for the nine months ended September 30, 2012   $ 24,034     $ 29,599  
Cumulative net credit losses   $ 216,903     $ 251,452  
Cumulative net credit losses as a % of original UPB     14.4 %     23.1 %
Percentage of ARM loans (B)     51.4 %     64.6 %
Percentage of loans with original loan-to-value ratio >90%     10.6 %     17.2 %
Percentage of interest-only loans     21.0 %     4.2 %
Face amount of debt (C)   $ 430,578     $ 573,735  
Weighted average funding cost of debt (D)     0.58 %     1.16 %

 

(A) Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or real estate owned.
(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 September 30, 2012.
(D) Includes the effect of applicable hedges.

 

Newcastle received negligible cash inflows from the retained interests of Subprime Portfolios I and II during the nine months ended September 30, 2012 and 2011.

 

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.