FAIR VALUE OF FINANCIAL INSTRUMENTS

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FAIR VALUE OF FINANCIAL INSTRUMENTS	12 Months Ended
	Dec. 31, 2012
Fair Value Of Financial Instruments
FAIR VALUE OF FINANCIAL INSTRUMENTS	9.   FAIR VALUE OF FINANCIAL INSTRUMENTS   Fair value may be based upon broker quotations, counterparty quotations or pricing services quotations, which provide valuation estimates based upon reasonable market order indications or a good faith estimate thereof and are subject to significant variability based on market conditions, such as interest rates, credit spreads and market liquidity. A significant portion of Newcastle’s loans, securities and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, Newcastle has estimated the fair value of these illiquid instruments based on internal pricing models rather than quotations. The determination of estimated cash flows used in pricing models is inherently subjective and imprecise. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant change to estimated fair values. It should be noted that minor changes in assumptions or estimation methodologies can have a material effect on these derived or estimated fair values, and that the fair values reflected below are indicative of the interest rate and credit spread environments as of December 31, 2012 and do not take into consideration the effects of subsequent changes in market or other factors.   Newcastle 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, Newcastle’s quarterly procedures include a comparison to the outputs generated from its internal pricing models and transactions Newcastle has completed with respect to these or similar securities, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on Newcastle’s internal pricing models, Newcastle’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third party market parameters and models for reasonableness. Newcastle believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.   For Excess MSRs acquired prior to the current quarter, Newcastle obtains a fairness opinion related to the valuation of our Excess MSRs on the existing mortgage pools from an independent valuation firm at the current quarter end date. For Excess MSRs acquired during the current quarter, Newcastle obtain a fairness opinion related to the valuation of our Excess MSRs on the existing mortgage pools at the time of acquisition. To date, Newcastle has not made any significant valuation adjustments as a result of these third party opinions.   Fair Value Summary Table   The carrying values and estimated fair values of Newcastle's assets and liabilities at December 31, 2012 and 2011 were as follows:       December 31, 2012     December 31, 2011       Principal                   Weighted     Weighted                   Balance or                   Average     Average                   Notional     Carrying     Estimated       Yield/Funding     Maturity     Carrying     Estimated       Amount     Value     Fair Value   Fair Value Method (A)   Cost     (Years)     Value     Fair Value   Assets                                                Financial instruments:                                             Real estate securities, available-for-sale*   $ 2,078,101     $ 1,691,575     $ 1,691,575   Broker quotations, counterparty quotations, pricing services,  pricing models     4.69 %     4.0     $ 1,731,744     $ 1,731,744   Real estate related loans, held-for-sale, net     1,121,085       843,132       853,102   Broker quotations, counterparty quotations, pricing services,  pricing models     12.15 %     2.6       813,580       819,249   Residential mortgage loans, held-for-investment, net     328,070       292,461       297,030   Pricing models     8.19 %     6.1       331,236       330,277   Residential mortgage loans, held-for-sale, net     3,645       2,471       2,471   Pricing models     17.00 %     4.7       2,687       2,687   Investments in excess mortgage servicing rights at fair value* (H)     76,560,751       245,036       245,036   Pricing models     17.59 %     5.4       43,971       43,971   Subprime mortgage loans subject to call option (B)     406,217       405,814       405,814   (B)     9.09 %   (B)       404,723       404,723   Restricted cash*     2,064       2,064       2,064                         105,040       105,040   Cash and cash equivalents*     231,898       231,898       231,898                         157,356       157,356   Derivative assets, treated as hedges (C)(E)*     -       -       -   Counterparty quotations     N/A     (C)       1,092       1,092   Non-hedge derivative assets (D)(E)*     23,400       165       165   Counterparty quotations     N/A     (D)       862       862   Investments in real estate and intangibles, net             188,559       194,878   Broker quotations, recent purchase price               -       -   Operating real estate, held-for-sale             -       -                         7,741       7,741   Other investments             24,907       13,165   Pricing models                     24,907       24,907   Receivables and other assets             17,230       17,230                         26,860       26,860               $ 3,945,312     $ 3,954,428                       $ 3,651,799     $ 3,656,509                                                               Liabilities                                                           Financial instruments:                                                           CDO bonds payable   $ 1,090,915     $ 1,091,354     $ 781,856   Pricing models     2.08 %     2.5     $ 2,403,605     $ 1,500,307   Other bonds and notes payable     187,963       183,390       190,302   Broker quotations, pricing models     5.07 %     4.0       200,377       203,136   Repurchase agreements     929,435       929,435       929,435   Market comparables     0.81 %     0.1       239,740       239,740   Mortgage notes payable     120,525       120,525       120,525   Pricing models     3.79 %     5.8       -       -   Financing of subprime mortgage loans subject to call option (B)     406,217       405,814       405,814   (B)     9.09 %   (B)       404,723       404,723   Junior subordinated notes payable     51,004       51,243       31,545   Pricing models     7.40 %     22.3       51,248       30,145   Interest rate swaps, treated as hedges (C)(E)*     154,450       12,175       12,175   Counterparty quotations     N/A     (C)       90,025       90,025   Non-hedge derivatives (D)(E)*     294,203       19,401       19,401   Counterparty quotations     N/A     (D)       29,295       29,295   Due to affiliates             3,620       3,620                         1,659       1,659   Dividends payable, accrued expenses and other liabilities             55,295       55,295                         39,038       39,038               $ 2,872,252     $ 2,549,968                       $ 3,459,710     $ 2,538,068     *Measured at fair value on a recurring basis.   (A) Methods are listed in order of priority. In the case of real estate securities and real estate related loans, broker quotations are obtained if available and practicable, otherwise counterparty quotations or pricing service valuations are obtained or, finally, internal pricing models are used. Internal pricing models are only used for (i) securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) loans or debt obligations which are private and untraded. (B) These two items results from an option, not an obligation, to repurchase loans from Newcastle’s subprime mortgage loan securitizations (Note 5), are noneconomic until such option is exercised, and are equal and offsetting. (C)  Represents derivative agreements as follows:   Year of Maturity    Weighted Average Month of Maturity   Aggregate Notional Amount     Weighted Average Fixed Pay Rate / Cap Rate     Aggregate Fair Value  Asset / (Liability)                           Interest rate swap agreements which receive 1-Month LIBOR:               2016   Apr   $ 154,450       5.04 %   $ (12,175 )   (D) This represents two interest rate swap agreements with a total notional balance of $294.2 million, maturing in March 2014 and March 2015, respectively, and an interest rate cap agreement with a notional balance of $23.4 million, maturing in August 2019. Newcastle entered into these agreements to reduce its exposure to interest rate changes on the floating rate financings of CDO IV, CDO VI and the senior living assets. These derivative agreements were not designated as hedges for accounting purposes as of December 31, 2012. (E) Newcastle’s derivatives fall into two categories. As of December 31, 2012, all derivatives were held within Newcastle’s nonrecourse CDO structures. An aggregate notional balance of $448.7 million, which were liabilities at period end, is only subject to the credit risks of the respective CDO structures. As they are senior to all the debt obligations of the respective CDOs and the fair value of each of the CDOs’ total investments exceeded the fair value of each of the CDOs’ derivative liabilities, no credit valuation adjustments were recorded. A notional balance of $23.4 million was an asset at period end and therefore are subject to the counterparty’s credit risk. No adjustments have been made to the fair value quotations received related to credit risk as a result of the counterparty’s “AA” credit rating. Newcastle’s significant derivative counterparties include Bank of America, Credit Suisse, and Wells Fargo. (F) Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, creditors or beneficial interest holders of these structures have no recourse to the general credit of Newcastle. Therefore, Newcastle’s exposure to the economic losses from such structures is limited to its invested equity in them and economically their book value cannot be less than zero. As a result, the fair value of Newcastle’s net investments in these non-recourse financing structures is equal to the present value of their expected future net cash flows. (G) Newcastle notes that the unrealized gain on the liabilities within such structures cannot be fully realized. (H) The notional amount represents the total unpaid principal balance of the mortgage loans on which Newcastle is entitled to receive 65% of the Excess MSRs on performing loans.   Valuation Hierarchy   The methodologies used for valuing such instruments have been categorized into three broad levels, which form a hierarchy.   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 speeds, 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.   ·     Level 3A - Valuations based on third party indications (broker quotes, counterparty quotes or pricing services) which were, in turn, based significantly on unobservable inputs or were otherwise not supportable as Level 2 valuations. ·     Level 3B - Valuations based on internal models with significant unobservable inputs.     Newcastle follows this hierarchy for its financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement. 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. For Newcastle’s investments in real estate securities, real estate related loans and residential mortgage loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities. Significant increases (decreases) in any of the discount rates, default rates or loss severities in isolation would result in a significantly lower (higher) fair value measurement. The impact of changes in prepayment speeds would have differing impacts on fair value, depending on the seniority of the investment. Generally, a change in the default assumption is generally accompanied by directionally similar changes in the assumptions used for the loss severity and the prepayment speed. For Newcastle’s investments in Excess MSRs, significant unobservable inputs include the discount rate, assumptions relating to prepayments, delinquency rates, recapture rates and excess mortgage servicing amount. Significant increases (decreases) in the discount rates, prepayments or delinquency rates in isolation would result in a significantly lower (higher) fair value measurement, whereas significant increases (decreases) in the recapture rates or excess mortgage servicing amount in isolation would result in a significantly higher (lower) fair value measurement. Generally, a change in the delinquency rate assumption is accompanied by directionally similar changes in the assumptions used for the prepayment speed.   The following table summarizes financial assets and liabilities measured at fair value on a recurring basis at December 31, 2012:                   Fair Value       Principal Balance or Notional Amount     Carrying Value     Level 2     Level 3A     Level 3B     Total   Assets:                                     Real estate securities, available for sale:                                     CMBS   $ 474,992     $ 376,391     $ -     $ 330,026     $ 46,365     $ 376,391   REIT debt     62,700       66,174       66,174       -       -       66,174   ABS - subprime     558,215       355,975       -       330,021       25,954       355,975   ABS - other real estate     10,098       1,475       -       798       677       1,475   FNMA / FHLMC     768,619       820,535       820,535       -       -       820,535   CDO     203,477       71,025       -       65,027       5,998       71,025   Real estate securities total   $ 2,078,101       1,691,575       886,709       725,872       78,994       1,691,575                                                     Investments in Excess MSRs (1)   $ 76,560,751     $ 245,036     $ -     $ -     $ 245,036     $ 245,036                                                     Derivative assets:                                                 Interest rate caps, not treated as hedges   $ 23,400     $ 165     $ 165     $ -     $ -     $ 165   Derivative assets total   $ 23,400     $ 165     $ 165     $ -     $ -     $ 165                                                     Liabilities:                                                 Derivative Liabilities:                                                 Interest rate swaps, treated as hedges   $ 154,450     $ 12,175     $ 12,175     $ -     $ -     $ 12,175   Interest rate swaps, not treated as hedges     294,203       19,401       19,401       -       -       19,401   Derivative liabilities total   $ 448,653     $ 31,576     $ 31,576     $ -     $ -     $ 31,576     (1) The notional amount represents the total unpaid principal balance of the mortgage loans. Generally, Newcastle does not receive an excess mortgage servicing amount on nonperforming loans.   Newcastle’s investments in instruments (excluding the Excess MSRs, see below) measured at fair value on a recurring basis using Level 3 inputs changed as follows:       Level 3A Assets     CMBS     ABS     Equity/Other             Conduit     Other     Subprime     Other     Securities     Total   Balance at December 31, 2010   $ 840,227     $ 331,904     $ 83,582     $ 36,193     $ -     $ 1,291,906   Transfers (A)                                                 Transfers from Level 3B     41,158       25,000       19,950       718       2,641       89,467   Transfers into Level 3B     (88,464 )     (24,826 )     (15,031 )     (7,548 )     (2,475 )     (138,344 ) CDO V Deconsolidation     (59,970 )     (55,838 )     (5,107 )     -       -       (120,915 ) Total gains (losses) (B)                                                 Included in net income (loss) (C)     42,597       579       (23 )     (113 )     -       43,040   Included in other comprehensive income (loss)     (106,500 )     38,583       (9,158 )     (716 )     (11,461 )     (89,252 ) Amortization included in interest income     23,878       5,883       5,210       338       3,376       38,685   Purchases, sales and settlements                                                 Purchases     313,857       27,262       29,359       7,548       69,308       447,334   Proceeds from sales     (139,387 )     (54,885 )     (6,573 )     -       -       (200,845 ) Proceeds from repayments     (51,113 )     (161,227 )     (36,068 )     (5,232 )     (9,342 )     (262,982 ) Balance at December 31, 2011   $ 816,283     $ 132,435     $ 66,141     $ 31,188     $ 52,047     $ 1,098,094         Level 3B Assets       CMBS     ABS     Equity/Other             Conduit     Other     Subprime     Other     Securities     Total                                         Balance at December 31, 2010   $ 107,457     $ 21,146     $ 94,424     $ 8,985     $ 4,282     $ 236,294   Transfers (A)                                                 Transfers from Level 3A     88,464       24,826       15,031       7,548       2,475       138,344   Transfers into Level 3A     (41,158 )     (25,000 )     (19,950 )     (718 )     (2,641 )     (89,467 ) CDO V Deconsolidation     (32,289 )     (1,908 )     (14,568 )     (3,833 )     -       (52,598 ) Total gains (losses) (B)                                                 Included in net income (loss) (C)     7,972       722       (1,332 )     (287 )     2,273       9,348   Included in other comprehensive income (loss)     32,374       1,743       3,766       (3,200 )     (3,346 )     31,337   Amortization included in interest income     17,055       163       8,796       911       617       27,542   Purchases, sales and settlements                                                 Purchases     13,634       25,000       25       -       10,192       48,851   Proceeds from sales     (27,400 )     (721 )     (8,624 )     (348 )     (3,884 )     (40,977 ) Proceeds from repayments     (25,487 )     (6,493 )     (15,087 )     (2,139 )     (6,029 )     (55,235 ) Balance at December 31, 2011   $ 140,622     $ 39,478     $ 62,481     $ 6,919     $ 3,939     $ 253,439         Level 3A Assets       CMBS     ABS     Equity/Other             Conduit     Other     Subprime     Other     Securities     Total   Balance at December 31, 2011   $ 816,283     $ 132,435     $ 66,141     $ 31,188     $ 52,047     $ 1,098,094   Transfers (A)                                                 Transfers from Level 3B     6,056       21,823       28,048       -       -       55,927   Transfers into Level 3B     (28,467 )     (14,105 )     (11,057 )     (5 )     -       (53,634 ) CDO X Deconsolidation     (634,036 )     (40,172 )     (70,607 )     (25,883 )     -       (770,698 ) Total gains (losses) (B)                                                 Included in net income (loss) (C)     1,190       -       (8 )     -       -       1,182   Included in other comprehensive income (loss)     32,373       11,490       26,159       (629 )     12,823       82,216   Amortization included in interest income     24,845       1,410       10,805       (11 )     5,211       42,260   Purchases, sales and settlements                                                 Purchases     71,968       -       315,475       -       -       387,443   Proceeds from sales     (24,551 )     -       -       -       -       (24,551 ) Proceeds from repayments     (40,086 )     (8,430 )     (34,935 )     (3,862 )     (5,054 )     (92,367 ) Balance at December 31, 2012   $ 225,575     $ 104,451     $ 330,021     $ 798     $ 65,027     $ 725,872         Level 3B Assets       CMBS     ABS     Equity/Other             Conduit     Other     Subprime     Other     Securities     Total                                         Balance at December 31, 2011   $ 140,622     $ 39,478     $ 62,481     $ 6,919     $ 3,939     $ 253,439   Transfers (A)                                                 Transfers from Level 3A     28,467       14,105       11,057       5       -       53,634   Transfers into Level 3A     (6,056 )     (21,823 )     (28,048 )     -       -       (55,927 ) CDO X Deconsolidation     (133,624 )     -       (16,097 )     (291 )     -       (150,012 ) Total gains (losses) (B)                                                 Included in net income (loss) (C)     (6,137 )     (396 )     836       (4,092 )     -       (9,789 ) Included in other comprehensive income (loss)     (9,836 )     1,025       2,414       2,368       2,302       (1,727 ) Amortization included in interest income     8,693       367       6,886       299       446       16,691   Purchases, sales and settlements                                                 Purchases     44,119       -       -       -       -       44,119   Proceeds from sales     (18,708 )     -       (3,295 )     (3,743 )     -       (25,746 ) Proceeds from repayments     (18,346 )     (15,585 )     (10,280 )     (788 )     (689 )     (45,688 ) Balance at December 31, 2012   $ 29,194     $ 17,171     $ 25,954     $ 677     $ 5,998     $ 78,994     (A) Transfers are assumed to occur at the beginning of the quarter. CDO V was deconsolidated on June 17, 2011 and CDO X was deconsolidated on September 12, 2012. (B) None of the gains (losses) recorded in earnings during the periods is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. (C) These gains (losses) are recorded in the following line items in the consolidated statements of income:       Year Ended December 31,       2012     2011       Level 3A     Level 3B     Level 3A     Level 3B   Gain (loss) on settlement of investments, net   $ 1,196     $ 9,000     $ 44,560     $ 22,895   Other income (loss), net     -       -       -       -   OTTI     (14 )     (18,789 )     (1,520 )     (13,547 ) Total   $ 1,182     $ (9,789 )   $ 43,040     $ 9,348   Gain (loss) on sale of investments, net, from investments transferred into Level 3 during the period   $ -     $ -     $ -     $ -     Securities Valuation   As of December 31, 2012, Newcastle’s securities valuation methodology and results are further detailed as follows:                   Fair Value             Outstanding     Amortized                 Internal             Face     Cost     Multiple     Single     Pricing         Asset Type   Amount (A)     Basis (B)     Quotes (C)     Quote (D)     Models (E)     Total                                         CMBS   $ 474,992     $ 336,966     $ 255,784     $ 74,242     $ 46,365     $ 376,391   REIT debt     62,700       62,069       34,809       31,365       -       66,174   ABS - subprime     558,215       321,801       290,731       39,290       25,954       355,975   ABS - other real estate     10,098       1,547       -       798       677       1,475   FNMA / FHLMC     768,619       818,866       395,131       425,404       -       820,535   CDO     203,477       67,538       -       65,027       5,998       71,025   Total   $ 2,078,101     $ 1,608,787     $ 976,455     $ 636,126     $ 78,994     $ 1,691,575     (A) Net of incurred losses. (B) Net of discounts (or gross premiums) and after OTTI, including impairment taken during the period ended December 31, 2012. (C) Management generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold us the security). Management selected one of the quotes received as being most representative of fair value and did not use an average of the quotes. Even if Newcastle 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 management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes Newcastle receives. Management believes using an average of the quotes in these cases would generally not represent the fair value of the asset. Based on Newcastle’s own fair value analysis using internal models, management selects one of the quotes which is believed to more accurately reflect fair value. Newcastle never adjusts quotes received. 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. (D) Management was unable to obtain quotations from more than one source on these securities. The one source was generally the seller (the party that sold us the security) or a pricing service. (E) Securities whose fair value was estimated based on internal pricing models are further detailed as follows:                         Unrealized                               Amortized           Impairment     Gains (Losses)     Weighted Average Significant Input       Cost     Fair     Recorded in     in Accumulated     Discount     Prepayment     Cumulative     Loss   Asset Type   Basis (B)     Value     Current Year     OCI     Rate     Speed (F)     Default Rate     Severity                                                     CMBS - conduit   $ 23,648     $ 29,193     $ 4,418     $ 5,545       10 %     N/A       21 %     39 % CMBS - Large loan                                                                    / single borrower     18,326       17,172       -       (1,154 )     6 %     N/A       18 %     40 % ABS - subprime     13,741       25,954       719       12,213       8 %     2 %     60 %     75 % ABS - other real estate     455       677       64       222       8 %     0 %     44 %     100 % CDO     3,979       5,998       -       2,019       18 %     4 %     69 %     93 % Total   $ 60,149     $ 78,994     $ 5,201     $ 18,845                                     All of the significant inputs listed have some degree of market observability, based on Newcastle’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class (e.g., CMBS projections are developed differently than Home Equity ABS projections) but conform to industry conventions.  Newcastle uses assumptions that generate its best estimate of future cash flows of each respective security.   The prepayment vector specifies the percentage of the collateral balance that is expected to voluntarily pay off at each point in the future. The prepayment vector is based on projections from a widely published investment bank model, which considers factors such as collateral FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis. This vector is scaled up or down to match recent collateral-specific prepayment experience, as obtained from remittance reports and market data services.   Loss severities are based on recent collateral-specific experience with additional consideration given to collateral characteristics. Collateral age is taken into consideration because severities tend to initially increase with collateral age before eventually stabilizing. Newcastle typically uses projected severities that are higher than the historic experience for collateral that is relatively new to account for this effect. Collateral characteristics such as loan size, lien position, and location (state) also effect loss severity. Newcastle considers whether a collateral pool has experienced a significant change in its composition with respect to these factors when assigning severity projections.   Default vectors are determined from the current “pipeline” of loans that are more than 90 days delinquent, in foreclosure, or are real estate owned (REO). These significantly delinquent loans determine the first 24 months of the default vector. Beyond month 24, the default vector transitions to a steady-state value that is generally equal to or greater than that given by the widely published investment bank model.   The discount rates Newcastle uses are derived from a range of observable pricing on securities backed by similar collateral and offered in a live market. As the markets in which Newcastle transacts have become less liquid, Newcastle has had to rely on fewer data points in this analysis.   (F) Projected annualized average prepayment rate.   Loan Valuation   Loans which Newcastle does not have the ability or intent to hold into the foreseeable future are classified as held-for-sale. As a result, these held-for-sale loans are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on broker quotations, pricing service quotations or internal pricing models. All the loans were within Level 3 of the fair value hierarchy. For real estate related loans, the most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments.  For residential mortgage loans, significant inputs include management’s expectations of prepayment speeds, default rates, loss severities and discount rates that market participants would use in determining the fair values of similar pools of residential mortgage loans.   The following tables summarize certain information for real estate related loans and residential mortgage loans held-for-sale as of December 31, 2012:                         Valuation     Significant Input       Outstanding                 Allowance/     Range           Weighted Average       Face     Carrying     Fair     (Reversal) In     Discount     Loss     Discount     Loss   Loan Type   Amount     Value     Value     Current Year     Rate     Severity     Rate     Severity   Mezzanine   $ 527,793     $ 442,529     $ 451,812     $ 4,049       6.5% - 25.0 %     0.0% - 100.0 %     10.1 %     10.6 % Bank Loan     391,904       208,863       208,863       (19,123 )     6.3% - 36.3 %     0.0% - 100.0 %     18.9 %     37.6 % B-Note     171,258       161,610       162,285       (13,139 )     8.0% - 15.0 %     0.0 %     10.4 %     0.0 % Whole Loan     30,130       30,130       30,142       -       5.1% - 7.1 %     0.0% - 15.0 %     5.2 %     14.5 % Total Real Estate Related Loans Held for Sale, Net   $ 1,121,085     $ 843,132     $ 853,102     $ (28,213 )                                                         Valuation                               Outstanding                 Allowance/     Significant Input (Weighted Average)       Face     Carrying     Fair     (Reversal) In     Discount     Prepayment     Cumulative     Loss   Loan Type   Amount     Value     Value     Current Year     Rate     Speed     Default Rate     Severity   Non-securitized Manufactured Housing Loans I   $ 573     $ 163     $ 163     $ 3       38.8 %     0.0 %     52.9 %     75.0 % Non-securitized Manufactured Housing Loans II     3,072       2,308       2,308       (496 )     15.5 %     5.0 %     3.5 %     80.0 % Total Residential Mortgage Loans Held for Sale, Net   $ 3,645     $ 2,471     $ 2,471     $ (493 )                                   Loans which Newcastle has the intent and ability to hold into the foreseeable future are classified as held-for-investment. Loans held-for-investment are carried 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-downs for impaired loans.   The following table summarizes certain information for residential mortgage loans held-for-investment as of December 31, 2012:                               Significant Input (Weighted Average)   Loan Type   Outstanding Face Amount     Carrying Value     Fair Value     Valuation Allowance/ (Reversal) In Current Year     Discount Rate     Prepayment Speed     Constant Default Rate     Loss Severity   Securitized Manufactured Housing Loans I   $ 118,746     $ 100,124     $ 99,964     $ (49 )     9.5 %     4.0 %     4.0 %     75.0 % Securitized Manufactured Housing Loans II     153,193       150,123       148,441       3,926       7.5 %     5.0 %     3.5 %     80.0 % Residential Loans     56,131       42,214       48,625       242       7.4 %     4.7 %     2.8 %     46.6 % Total Residential Mortgage Loans, Held-for-Investment, Net   $ 328,070     $ 292,461     $ 297,030     $ 4,119                                     Excess MSRs Valuation   Fair value estimates of Newcastle’s Excess MSRs investments 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 speeds, delinquency rates, recapture rates, the excess mortgage servicing amount of the underlying mortgage loans, and discount rates that market participants would use in determining the fair values of servicing assets on similar pools of residential mortgage loans.  In addition, in valuing the Excess MSRs investments, management considered the likelihood of Nationstar being removed as servicer, which likelihood is considered to be remote.   The following table summarizes certain information regarding the inputs used in valuing the Excess MSRs investments as of December 31, 2012:       Significant Input Ranges       Prepayment Speed (A)     Delinquency (B)     Recapture Rate (C)   Excess Mortgage Servicing Amount (D)   Discount Rate   MSR Pool 1     17.1 %     10.0 %     35.0 % 29 bps     18.0 % MSR Pool 1 - Recapture Agreement     8.0 %     10.0 %     35.0 % 21 bps     18.0 % MSR Pool 2     16.7 %     11.0 %     35.0 % 23 bps     17.3 % MSR Pool 2 - Recapture Agreement     8.0 %     10.0 %     35.0 % 21 bps     17.3 % MSR Pool 3     16.9 %     12.1 %     35.0 % 23 bps     17.6 % MSR Pool 3 - Recapture Agreement     8.0 %     10.0 %     35.0 % 21 bps     17.6 % MSR Pool 4     18.6 %     15.9 %     35.0 % 17 bps     17.9 % MSR Pool 4 - Recapture Agreement     8.0 %     10.0 %     35.0 % 21 bps     17.9 % MSR Pool 5     15.0 %     N/A (E)     20.0 % 13 bps     17.5 % MSR Pool 5 - Recapture Agreement     8.0 %     N/A (E)     20.0 % 21 bps     17.5 %   (A)  Projected annualized weighted average voluntary and involuntary prepayment rate using a prepayment vector. (B)  Projected percentage of mortgage loans in the pool that are expected to miss their mortgage payments. (C)  Percentage of voluntarily prepaid loans that are expected to be refinanced by Nationstar. (D)  Weighted average total mortgage servicing amount in excess of the basic fee. (E)  The Excess MSR will be paid on the total UPB of the mortgage portfolio (including both performing and delinquent loans until REO)   All of the assumptions listed have some degree of market observability, based on Newcastle’s knowledge of the market, relationships with market participants, and use of common market data sources.   Prepayment speed 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 factors such as the borrower’s FICO score, loan-to-value ratio, debt-to-income ratio, vintage on a loan level basis, as well as the projected effect on loans eligible for the Home Affordable Refinance Program 2.0 (“HARP 2.0”). Management considers collateral-specific prepayment experience when determining this vector.  For the Recapture Agreements and recaptured loans, Newcastle also considers industry research on the prepayment experience of similar loan pools (i.e., loan pools composed of refinanced loans).  This data is obtained from remittance reports, market data services and other market sources.   Delinquency rates are based on the recent pool-specific experience of loans that missed their most recent mortgage payments.  For the Recapture Agreements and recaptured loans, delinquency rates are based on the experience of similar loan pools recently originated by Nationstar and recent delinquency experience.  Additional consideration is given to loans that are expected to become 30 or more days delinquent.   Recapture rates are based on actual average recapture rates experienced by Nationstar on similar mortgage loan pools.  Generally, Newcastle looks to one year worth of actual recapture rates, which management believes provides a reasonable sample for projecting future recapture rates while taking into account current market conditions.   For existing mortgage pools, excess mortgage servicing amount projections are based on the actual total mortgage servicing amount in excess of a basic fee.  For loans expected to be refinanced by Nationstar and subject to a Recapture Agreement, Newcastle considers the excess mortgage servicing amount on loans recently originated by Nationstar and other general market considerations.   The discount rates Newcastle uses are derived from market data on pricing of mortgage servicing rights backed by similar collateral.   Newcastle uses different prepayment and delinquency assumptions in valuing the Excess MSRs relating to the original loan pools, the Recapture Agreements and the Excess MSRs relating to recaptured loans.  The prepayment speed and delinquency rate assumptions differ because of differences in the collateral characteristics, eligibility for the Home Affordable Refinance Program 2.0 (“HARP 2.0”)  and expected borrower behavior for original loans and loans which have been refinanced.  Newcastle uses the same assumptions for recapture and discount rates when valuing Excess MSRs and Recapture Agreement.  These assumptions are based on historical recapture experience and market pricing.   Newcastle’s MSRs investments measured at fair value on a recurring basis using Level 3B inputs changed as follows:       Level 3B (A)       MSR Pool 1     MSR Pool 2     MSR Pool 3     MSR Pool 4     MSR Pool 5     Total   Balance at December 30, 2010                                     Transfers (B)                                     Transfers from Level 3A     -       -       -       -       -       -   Transfers into Level 3A     -       -       -       -       -       -   Gains (losses) included in net income (C)     -       -       -       -       -       -   Interest income     367       -       -       -       -       367   Purchases, sales and repayments                                                 Purchases     43,742       -       -       -       -       43,742   Purchase adjustments     1,260       -       -       -       -       1,260   Proceeds from sales     -       -       -       -       -       -   Proceeds from repayments     (1,398 )     -       -       -       -       (1,398 ) Balance at December 30, 2011   $ 43,971     $ -     $ -     $ -     $ -     $ 43,971   Transfers (B)                                                 Transfers from Level 3A     -       -       -       -       -       -   Transfers into Level 3A     -       -       -       -       -       -   Gains (losses) included in net income (C)     5,877       1,226       2,780       1,004       (1,864 )     9,023   Interest income     7,955       3,450       3,409       1,381       11,293       27,488   Purchases, sales and repayments                                                 Purchases     -       43,872       36,218       15,439       124,813       220,342   Purchase adjustments     (178 )     (1,522 )     -       -       -       (1,700 ) Proceeds from sales     -       -       -       -       -       -   Proceeds from repayments     (16,715 )     (7,704 )     (6,973 )     (2,788 )     (19,908 )     (54,088 ) Balance at December 31, 2012   $ 40,910     $ 39,322     $ 35,434     $ 15,036     $ 114,334     $ 245,036     (A) Includes the recapture agreement for each respective pool. (B) Transfers are assumed to occur at the beginning of the quarter. (C) 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. These gains (losses) are recorded in “Change in fair value of investments in excess mortgage servicing rights” in the consolidated statement of income.   Derivatives   Newcastle’s derivative instruments are valued using counterparty quotations. These quotations are generally based on valuation models with model inputs that can generally be verified and which do not involve significant judgment. The significant observable inputs used in determining the fair value of our Level 2 derivative contracts are contractual cash flows and market based interest rate curves.   Newcastle’s derivatives are recorded on its balance sheet as follows:         Fair Value         December 31,     Balance sheet location   2012     2011                   Derivative Assets               Interest rate caps, designated as hedges Derivative Assets   $ -     $ 1,092   Interest rate caps, not designated as hedges Derivative Assets     165       862         $ 165     $ 1,954   Derivative Liabilities                   Interest rate swaps, designated as hedges Derivative Liabilities   $ 12,175     $ 90,025   Interest rate swaps, not designated as hedges Derivative Liabilities     19,401       29,295         $ 31,576     $ 119,320     The following table summarizes information related to derivatives:       December 31,       2012     2011   Cash flow hedges             Notional amount of interest rate swap agreements   $ 154,450     $ 848,434   Notional amount of interest rate cap agreements     -       104,205   Amount of (loss) recognized in OCI on effective portion     (12,050 )     (69,908 ) Deferred hedge gain (loss) related to anticipated financings, which have subsequently occurred, net of amortization     237       299   Deferred hedge gain (loss) related to dedesignation, net of amortization     (210 )     (893 ) Expected reclassification of deferred hedges from AOCI into earnings over the next 12 months     4       1,688   Expected reclassification of current hedges from AOCI into earnings over the next 12 months     (6,259 )     (35,348 )                   Non-hedge Derivatives                 Notional amount of interest rate swap agreements     294,203       316,600   Notional amount of interest rate cap agreements     23,400       36,428     The following table summarizes gains (losses) recorded in relation to derivatives:     Income Statement   Year Ended December 31,     Location   2012     2011     2010   Cash flow hedges                     Gain (loss) on the ineffective portion  Other Income (Loss)   $ 483     $ (917 )   $ 580   Gain (loss) immediately recognized at dedesignation  Gain (Loss) on Sale of Investments, Other Income (Loss)     (7,036 )     (13,939 )     (39,184 ) Amount of gain (loss) reclassified from AOCI into income, related to effective portion  Interest Expense     (30,631 )     (63,350 )     (83,869 ) Deferred hedge gain reclassified from AOCI into income, related to anticipated financings Interest Expense     61       58       475   Deferred hedge gain (loss) reclassified from AOCI into income, related to effective portion of dedesignated hedges  Interest Expense     1,189       2,259       (5,471 ) Non-hedge derivatives gain (loss)  Other Income (Loss)     9,101       3,284       (1,240 )     Liabilities for Which Fair Value is Only Disclosed The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed: Type of Liabilities Not Measured At Fair Value for Which Fair Value Is Disclosed Fair Value Hierarchy Valuation Techniques and Significant Inputs  CDO bonds payable Level 3  Valuation technique is based on discounted cash flow.    Significant inputs include:  · Underlying security and loan prepayment, default and cumulative loss expectations  · Amount and timing of expected future cash flows  · Market yields and credit spreads implied by comparisons to transactions of similar  tranches of CDO debt by the varying levels of subordination  Other bonds and notes payable   Level 3  Valuation technique is based on discounted cash flow.    Significant inputs include:  · Amount and timing of expected future cash flows  · Interest rates  · Broker quotations  · Market yields and credit spreads implied by comparisons to transactions of similar  tranches of securitized debt by the varying levels of subordination  Repurchase agreements Level 2  Valuation technique is based on market comparables.    Significant variables include:  · Amount and timing of expected future cash flows  · Interest rates  · Collateral funding spreads  Mortgage notes payable     Level 3  Valuation technique is based on discounted cash flows.    Significant inputs include:  · Amount and timing of expected future cash flows  · Interest rates  · Collateral funding spreads  Junior subordinated notes payable Level 3  Valuation technique is based on discounted cash flow.    Significant inputs include:  · Amount and timing of expected future cash flows  · Interest rates  · Market yields and the credit spread of Newcastle