Quarterly report pursuant to Section 13 or 15(d)

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

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REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
 9 Months Ended
Sep. 30, 2013
Real Estate Related Loans Residential Mortgage Loans And Subprime Mortgage Loans  
REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS, AND SUBPRIME MORTGAGE LOANS
6. REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

 

The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans at September 30, 2013. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.

 

Loan Type   Outstanding
Face Amount		     Carrying
Value (A)		     Loan
Count		     Weighted
 Average
 Yield		     Weighted Average Coupon     Weighted Average Maturity
(Years) (B)		     Floating Rate Loans as a % of Face Amount     Delinquent Face Amount (C)  
Mezzanine Loans   $ 338,178     $ 268,635       12       10.65 %     8.78 %     1.8       88.4 %   $ 12,000  
Corporate Bank Loans     875,072       402,139       7       13.73 %     5.60 %     1.2       74.4 %     —  
B-Notes     110,461       94,703       4       10.50 %     6.30 %     0.7       79.3 %     —  
Whole Loans     29,820       29,820       2       4.80 %     3.75 %     0.2       97.6 %     —  
Total Real Estate Related and other Loans Held-for-Sale, Net   $ 1,353,531     $ 795,297       25       11.97 %     6.41 %     1.3       78.8 %   $ 12,000  
                                                                 
Non-Securitized Manufactured Housing Loan Portfolio I   $ 561     $ 145       15       81.45 %     7.78 %     0.9       0.0 %   $ 56  
Non-Securitized Manufactured Housing Loan Portfolio II     2,677       2,091       100       15.43 %     10.03 %     5.2       9.6 %     181  
Total Residential Mortgage Loans Held-for-Sale, Net (D)   $ 3,238     $ 2,236       115       19.71 %     9.64 %     4.5       7.9 %   $ 237  
                                                                 
Securitized Manufactured Housing Loan Portfolio I (D)(E)   $ 106,304     $ 91,488       2,903       9.45 %     8.62 %     6.1       0.6 %   $ 1,267  
Securitized Manufactured Housing Loan Portfolio II (D)(E)     134,641       132,728       4,821       7.72 %     9.64 %     4.9       16.4 %     2,036  
Residential Loans (D)(E)     47,114       36,247       175       7.75 %     2.33 %     5.4       100.0 %     6,683  
Total Residential Mortgage Loans Held- for-Investment, Net   $ 288,059     $ 260,463       7,899       8.33 %     8.07 %     5.5       24.2 %   $ 9,986  
                                                                 
Subprime Mortgage Loans Subject to Call Option   $ 406,217     $ 406,217                                                  

 

(A) Carrying value includes interest receivable of $0.1 million for the residential housing loans and principal and interest receivable of $5.0 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, 2013, $142.3 million face amount of real estate related and other 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, 2013:

 

    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 Portfolio I   $ 675     $ 155     $ 473     $ 639     $ 1,942     $ 104,362     $ 106,304  
Securitized Manufactured Housing Loan Portfolio II   $ 929     $ 221     $ 1,199     $ 616     $ 2,965     $ 131,676     $ 134,641  
Residential Loans   $ 86     $ —     $ 6,124     $ 559     $ 6,769     $ 40,345     $ 47,114  

 

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

 

The following is a summary of real estate related and other loans by maturities at September 30, 2013:

 

    Outstanding           Number of  
Year of Maturity (1)   Face Amount     Carrying Value     Loans  
Delinquent (2)   $ 12,000     $ —       1  
Period from October 1, 2013 to December 31, 2013     88,648       41,146       2  
2014     834,131       384,189       9  
2015     58,199       56,340       5  
2016     72,533       70,911       2  
2017     94,981       80,790       4  
2018     —       —       —  
Thereafter     193,039       161,921       2  
Total   $ 1,353,531     $ 795,297       25  

 

(1) Based on the final extended maturity date of each loan investment as of September 30, 2013.

(2) Includes loans that are non-performing, in foreclosure, or under bankruptcy.

 

Activities relating to the carrying value of Newcastle’s real estate related and other loans and residential mortgage loans are as follows:

 

    Held-for-Sale     Held-for-Investment  
      Real Estate Related and Other Loans       Residential Mortgage Loans       Residential Mortgage Loans       Reverse Mortgage Loans  
Balance at December 31, 2012   $ 843,132     $ 2,471     $ 292,461     $ —  
Purchases / additional fundings     171,987       —       —       35,138  
Interest accrued to principal balance     19,495       —       —       —  
Principal paydowns     (247,930 )     (263 )     (36,294 )     —  
Sales     (9,318 )     —       —       —  
Spin-off of New Residential     —       —       —       (35,865 )
Valuation (allowance) reversal on loans     10,529       42       902       —  
Loss on repayment of loans held-for-sale     —       —       —       —  
Accretion of loan discount and other amortization     6,689       —       3,156       727  
Other     713       (14 )     238       —  
Balance at September 30, 2013   $ 795,297       2,236     $ 260,463     $ —  

 

The following is a rollforward of the related loss allowance.

 

    Held-For-Sale     Held-For-Investment  
      Real Estate Related and Other Loans       Residential Mortgage Loans       Residential Mortgage
Loans (A) 		 
Balance at December 31, 2012   $ (182,062 )   $ (1,072 )   $ (22,478 )
Charge-offs     60       144       3,716  
Valuation (allowance) reversal on loans     10,529       42       902  
Balance at September 30, 2013   $ (171,473 )   $ (886 )   $ (17,860 )

 

(A) The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.

 

The table below summarizes the geographic distribution of real estate related and other loans and residential mortgage loans at September 30, 2013:

 

      Real Estate Related
and Other Loans 		    Residential Mortgage Loans  
Geographic Location   Outstanding Face Amount     Percentage     Outstanding Face Amount     Percentage  
Western U.S.   $ 131,422       26.9 %   $ 176,513       60.6 %
Northeastern U.S.     68,404       14.0 %     8,955       3.1 %
Southeastern U.S.     85,011       17.4 %     63,000       21.6 %
Midwestern U.S.     31,633       6.5 %     10,486       3.6 %
Southwestern U.S.     67,768       13.9 %     32,343       11.1 %
Foreign     104,860       21.3 %     —       0.0 %
    $ 489,098       100.0 %   $ 291,297       100.0 %
Other     864,433     (A)                    
    $ 1,353,531                          

 

(A) Includes corporate bank loans which are not directly secured by real estate assets.

 

For the nine months ended September 30, 2013, Newcastle increased its investment in the outstanding debt of GateHouse. Newcastle purchased from third parties an aggregate face amount of $466.0 million for an aggregate purchase price of $172.2 million during this period. As of September 30, 2013, Newcastle held $625.6 million of face amount (or 52.2% of the total outstanding) of this debt with a carrying value of $243.0 million (see Note 2).

 

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, 2013:

 

    Subprime Portfolio          
    I     II     Total  
Total securitized loans (unpaid principal balance) (A)   $ 387,199     $ 521,009     $ 908,208  
Loans subject to call option (carrying value)   $ 299,176     $ 107,041     $ 406,217  
Retained interests (fair value) (B)   $ 1,848     $ —     $ 1,848  

 

(A) Average loan seasoning of 98 months and 80 months for Subprime Portfolios I and II, respectively, at September 30, 2013.

(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 23.04% as of September 30, 2013.

 

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, 2013:

 

    Subprime Portfolio  
    I     II  
Loan unpaid principal balance (UPB)   $ 387,199     $ 521,009  
Weighted average coupon rate of loans     5.89 %     5.20 %
Delinquencies of 60 or more days (UPB) (A)   $ 113,349     $ 205,941  
Net credit losses for the nine months ended September 30, 2013   $ 18,759     $ 32,448  
Cumulative net credit losses   $ 239,176     $ 289,167  
Cumulative net credit losses as a % of original UPB     15.9 %     26.6 %
Percentage of ARM loans (B)     51.2 %     56.9 %
Percentage of loans with original loan-to-value ratio >90%     10.6 %     16.8 %
Percentage of interest-only loans     27.6 %     3.3 %
Face amount of debt (C)   $ 383,199     $ 521,009  
Weighted average funding cost of debt (D)     0.55 %     0.48 %

 

(A) Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or REO.

(B) ARM loans are adjustable-rate mortgage loans. An option ARM is an adjustable-rate mortgage that provides the borrower with an option to choose from several payment amounts each month for a specified period of the loan term. None of the loans in the subprime portfolios are option ARMs.

(C) Excludes face amount of $4.0 million of retained notes for Subprime Portfolio I at September 30, 2013.

(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, 2013 and 2012.

 

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.