Quarterly report pursuant to Section 13 or 15(d)

INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AND CDO SERVICING RIGHTS

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INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AND CDO SERVICING RIGHTS
 3 Months Ended
Mar. 31, 2013
Investments In Excess Mortgage Servicing Rights And Cdo Servicing Rights  
INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AND CDO SERVICING RIGHTS
5.   INVESTMENTS IN EXCESS MORTGAGE SERVICING RIGHTS AND CDO SERVICING RIGHTS
 
The following is a summary of Newcastle’s direct investments in Excess MSRs:
         
March 31, 2013
    
Three Months Ended
March 31, 2013
  
   
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
   $ 8,021,789     $ 29,329     $ 35,333       18.0 %     4.8     $ 266  
MSR Pool 1 - Recapture Agreement
     —       3,676       4,355       18.0 %     11.0       174  
MSR Pool 2
     9,038,057       32,345       33,695       17.3 %     5.0       306  
MSR Pool 2 - Recapture Agreement
     —       4,108       4,880       17.3 %     12.0       591  
MSR Pool 3
     8,758,689       26,502       30,126       17.6 %     4.7       768  
MSR Pool 3 - Recapture Agreement
     —       4,598       4,552       17.6 %     11.4       30  
MSR Pool 4
     5,586,851       10,809       11,969       17.9 %     4.6       141  
MSR Pool 4 - Recapture Agreement
     —       2,763       2,705       17.9 %     11.1       (43 )
MSR Pool 5
     41,917,506       102,718       104,507       17.5 %     4.7       (190 )
MSR Pool 5 - Recapture Agreement
     —       8,460       4,433       17.5 %     11.7       (185 )
    $ 73,322,892     $ 225,308     $ 236,555       17.6 %     5.4     $ 1,858  
 
(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.
 
The table below summarizes the geographic distribution of the underlying residential mortgage loans of the Excess MSRs at March 31, 2013:
State Concentration
  
Percentage of Total
Outstanding
  
California
     31.7 %
Florida
     10.1 %
New York
     4.4 %
Washington
     4.3 %
Arizona
     3.8 %
Texas
     3.6 %
Colorado
     3.5 %
Maryland
     3.4 %
New Jersey
     3.2 %
Virginia
     3.0 %
Other U.S.
     29.0 %
      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.

 
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 three months ended March 31, 2013 and 2012, respectively, Newcastle recorded $0.1 million and $0.1 million of servicing rights amortization and no servicing rights impairment. As of March 31, 2013, Newcastle’s servicing asset had a carrying value of $1.6 million recorded in Receivables and Other Assets.