Annual report pursuant to Section 13 and 15(d)

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

v2.4.1.9
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
12 Months Ended
Dec. 31, 2014
Receivables [Abstract]  
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
The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.
 
 
December 31, 2014
 
December 31, 2013
Loan Type
 
Outstanding
Face Amount
 
Carrying
Value (A)
 
Loan
Count
 
Wtd.
Avg
Yield
 
Weighted
Average
Coupon
 
Weighted
Average
Life
(Years) (B)
 
Floating Rate
Loans as a %
of Face
Amount
 
Delinquent
Face Amount
(C)
 
Carrying
Value
 
Wtd. Avg.
Yield
Mezzanine Loans
 
$
131,551

 
$
103,582

 
7

 
7.79
%
 
7.20
%
 
1.2

 
71.9
%
 
$
12,000

 
$
139,720

 
6.63
%
Corporate Bank Loans
 
174,530

 
107,715

 
5

 
22.08
%
 
13.19
%
 
1.7

 
0.6
%
 

 
166,710

 
24.18
%
B-Notes
 
21,865

 
18,748

 
1

 
12.00
%
 
7.32
%
 
4.0

 
0.0
%
 

 
101,385

 
10.12
%
Whole Loans
 
155

 
155

 
1

 
4.00
%
 
7.48
%
 
0.2

 
0.0
%
 

 
29,715

 
3.65
%
Total Real Estate Related and other Loans Held-for-Sale, Net (D)
 
$
328,101

 
$
230,200

 
14

 
14.82
%
 
10.39
%
 
1.6

 
29.1
%
 
$
12,000

 
$
437,530

 
13.92
%
Non-Securitized Manufactured Housing Loan Portfolio I
 
$

 
$

 

 

 

 

 

 
$

 
$
130

 
81.79
%
Non-Securitized Manufactured Housing Loan Portfolio II
 

 

 

 

 

 

 

 

 
2,055

 
15.39
%
Residential Loans
 
4,309

 
3,854

 
6

 
23.48
%
 
1.84
%
 
1.2

 
100.0
%
 
766

 

 

Total Residential Mortgage Loans Held-for-Sale, Net (E)(F)
 
$
4,309

 
$
3,854

 
6

 
23.48
%
 
1.84
%
 
1.2

 
100.0
%
 
$
766

 
$
2,185

 
19.34
%
Securitized Manufactured Housing Loan Portfolio I
 
$

 
$

 

 

 

 

 

 

 
$
91,924

 
9.44
%
Securitized Manufactured Housing Loan Portfolio II
 

 

 

 

 

 

 

 

 
128,117

 
8.11
%
Residential Loans
 

 

 

 

 

 

 

 

 
35,409

 
7.49
%
Total Residential Mortgage Loans Held-for-Investment, Net (F)
 
$

 
$

 

 

 

 

 

 

 
$
255,450

 
8.50
%
Subprime Mortgage Loans Subject to Call Option
 
$
406,217

 
$
406,217

 
 
 
 
 
 
 
 
 
 
 
 
 
$
406,217

 
 

(A)
The aggregate United States federal income tax basis for such assets at December 31, 2014 was approximately $253.5 million (unaudited), excluding the securitized subprime mortgage loans, which are fully consolidated for tax purposes. Carrying value includes negligible interest receivable for the residential 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 days or more past due (including loans that are in foreclosure and borrowers in bankruptcy) or considered real estate owned (“REO”). As of December 31, 2014 and December 31, 2013, $76.5 million and $76.5 million face amount of real estate related and other loans, respectively, was on non-accrual status.
(D)
Loans which are more than 3% of the total current carrying value (or $6.9 million) at December 31, 2014 are as follows:
 
 
December 31, 2014
Loan Type
 
Outstanding
Face Amount
 
Carrying Value
 
Prior Liens
(1)
 
Loan
Count
 
Yield (2)
 
Coupon (2)
 
Weighted Average
Life (Years)
Individual Bank Loan
(3)
$
116,048

 
$
99,976

 
$
627,615

 
1

 
22.50
%
 
15.55
%
 
2.1

Individual Mezzanine Loan
(4)
35,859

 
34,246

 
738,782

 
1

 
7.00
%
 
7.00
%
 
1.2

Individual Mezzanine Loan
(4)
28,939

 
28,939

 
169,933

 
1

 
7.00
%
 
8.00
%
 
0.1

Individual Mezzanine Loan
(4)
24,294

 
24,294

 
299,770

 
1

 
9.00
%
 
9.00
%
 
2.3

Individual B-Note Loan
(4)
21,865

 
18,748

 
124,548

 
1

 
12.00
%
 
7.32
%
 
4.0

Individual Mezzanine Loan
(4)
12,691

 
11,716

 
175,000

 
1

 
5.00
%
 
5.15
%
 
3.6

Individual Bank Loan
(4)
11,798

 
7,291

 

 
1

 
15.00
%
 
15.00
%
 
4.2

Others
(5)
76,607

 
4,990

 


 
7

 
21.64
%
 
6.55
%
 
0.2

 
 
$
328,101

 
$
230,200

 
 
 
14

 
14.82
%
 
10.39
%
 
1.6


(1)
Represents face amount of third party liens that are senior to Newcastle’s position.
(2)
For others, represents weighted average yield and weighted average coupon.
(3)
Interest accrued to principal balance over life to maturity with a discounted payoff option prior to April 2015. Following a public offering by the debt issuer in January 2014, Newcastle received cash of $83.3 million, which reduced the face of the loan to $99.4 million.
(4)
Interest only payments over life to maturity and balloon principal payment upon maturity.
(5)
Various terms of payment. This represents $46.7 million, $29.8 million and $0.1 million of bank loans, mezzanine loans and whole loans, respectively. Each of the seven loans had a carrying value of less than $6.9 million at December 31, 2014.

(E)
The following is an aging analysis of past due residential loans held-for-sale as of December 31, 2014:
 
30-59 Days
Past Due
 
60-90 Days
Past Due
 
Over 90 Days
Past Due
 
REO
 
Total Past
Due
 
Current
 
Total Outstanding
Face Amount
Residential Loans
$

 
$

 
$

 
$
766

 
$
766

 
$
3,543

 
$
4,309


Newcastle’s management monitors the credit qualities of the residential loans primarily by using the aging analysis, current trends in delinquencies and the actual loss incurrence rate.

(F)
Loans acquired at a discount for credit quality.
Newcastle's investments in real estate related and other loans and non-securitized manufactured housing loans were classified as held-for-sale as of December 31, 2014 and December 31, 2013. Loans held-for-sale are marked to the lower of carrying value or fair value.
Newcastle’s investment in the securitized manufactured housing loan portfolios I and II was classified as held-for-investment as of December 31, 2013. In connection with the securitizations of the manufactured housing loan portfolios, Newcastle gave representations and warranties with respect to the manufactured housing loans sold to the securitization trusts. To the extent a breach of any such representations and warranties materially and adversely affects the value or enforceability of the related loans, Newcastle will be required to repurchase such loans from the respective securitization trusts.
 
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 was 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 $1.1 million of transaction expenses. 

The following is a summary of real estate related and other loans by maturity at December 31, 2014:
Year of Maturity (1)
 
Outstanding
Face Amount
 
Carrying Value
 
Number of
Loans
Delinquent (2)
 
$
12,000

 
$

 
1

2015
 
64,607

 
4,990

 
6

2016
 
64,799

 
63,185

 
2

2017
 
24,294

 
24,294

 
1

2018
 
21,865

 
18,748

 
1

2019
 
127,845

 
107,266

 
2

Thereafter
 
12,691

 
11,717

 
1

Total
 
$
328,101

 
$
230,200

 
14


(1)Based on the final extended maturity date of each loan investment as of December 31, 2014.
(2)Includes loans that are non-performing, in foreclosure, or under bankruptcy.


Activities relating to the carrying value of real estate related and other loans and residential mortgage loans are as follows:
 
Held for Sale
 
Held for Investment
 
Real Estate
Related Loans
 
Residential
Mortgage Loans
 
Residential
Mortgage Loans
 
NPL Reverse
Mortgage Loans
December 31, 2011
$
813,580

 
$
2,687

 
$
331,236

 
$

Purchases / additional fundings
109,491

 

 

 

Interest accrued to principal balance
22,835

 

 

 

Principal paydowns
(129,950
)
 
(686
)
 
(38,182
)
 

Sales

 

 

 

Transfer to held for investment

 

 

 

Valuation (allowance) reversal on loans
28,213

 
493

 
(4,119
)
 

Loss on repayment of loans held for sale
(1,614
)
 

 

 

Accretion of loan discount and other amortization

 

 
4,002

 

Other
577

 
(23
)
 
(476
)
 

December 31, 2012
$
843,132

 
$
2,471

 
$
292,461

 
$

Purchases / additional fundings
315,296

 

 

 
35,138

Interest accrued to principal balance
26,588

 

 

 

Principal paydowns
(257,335
)
 
(373
)
 
(45,665
)
 

Sales
(101,338
)
 

 

 

New Residential spin-off

 

 

 
(35,865
)
Conversion to equity-GateHouse
(393,531
)
 

 

 

Elimination after restructure-Golf
(29,412
)
 

 

 

Valuation (allowance) reversal on loans
19,479

 
105

 
5,451

 

Gain on repayment of loans held for sale
7,216

 

 

 

Accretion of loan discount and other amortization
6,689

 

 
3,684

 
727

Other
746

 
(18
)
 
(481
)
 

December 31, 2013
$
437,530

 
$
2,185

 
$
255,450

 
$

Purchases / additional fundings

 

 

 

Interest accrued to principal balance
20,830

 

 

 

Principal paydowns
(240,937
)
 
(9,574
)
 
(9,436
)
 

Transfer to held-for-sale

 
246,121

 
(246,121
)
 

Sales

 
(233,349
)
 

 

Valuation (allowance) reversal on loans
3,303

 
(51
)
 
(833
)
 

Accretion of loan discount and other amortization
8,867

 

 
115

 

Other
607

 
(1,478
)
 
825

 

December 31, 2014
$
230,200

 
$
3,854

 
$

 
$


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, 2011
 
$
(228,017
)
 
$
(2,461
)
 
$
(26,075
)
Charge-offs (B)
 
17,742

 
896

 
7,716

Valuation (allowance) reversal on loans
 
28,213

 
493

 
(4,119
)
Balance at December 31, 2012
 
(182,062
)
 
(1,072
)
 
(22,478
)
Charge-offs (B)
 
68,546

 
143

 
4,780

Valuation (allowance) reversal on loans
 
19,479

 
105

 
5,451

Balance at December 31, 2013
 
$
(94,037
)
 
$
(824
)
 
$
(12,247
)
Charge-offs (B)
 
14,808

 
84

 
711

Transfer to held-for-sale
 

 
(12,369
)
 
12,369

Sales
 

 
13,006

 

Valuation (allowance) reversal on loans
 
3,303

 
(51
)
 
(833
)
Balance at December 31, 2014
 
$
(75,926
)
 
$
(154
)
 
$


(A)
The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.
(B)
The charge-offs for real estate related loans represent three, three and six loans which were written off, sold, restructured, or paid off at a discounted price during 2014, 2013 and 2012, respectively.

The average carrying amount of Newcastle’s real estate related and other loans was approximately $270.1 million, $761.7 million and $843.4 million during 2014, 2013 and 2012, respectively, on which Newcastle earned approximately $49.3 million, $81.5 million and $81.5 million of gross interest revenues, respectively.
The average carrying amount of Newcastle’s residential mortgage loans was approximately $90.5 million, $282.7 million and $312.5 million during 2014, 2013 and 2012, respectively, on which Newcastle earned approximately $8.3 million, $27.3 million and $31.6 million of gross interest revenues, respectively.
The table below summarizes the geographic distribution of real estate related and other loans and residential loans at December 31, 2014:
 
 
Real Estate Related and Other Loans
 
Residential Mortgage Loans
Geographic Location
 
Outstanding Face Amount
 
Percentage
 
Outstanding Face Amount
 
Percentage
Western U.S.
 
$
28,112

 
17.7
%
 
$
980

 
22.8
%
Northeastern U.S.
 
26,302

 
16.6
%
 
523

 
12.1
%
Southeastern U.S.
 
51,247

 
32.3
%
 
2,667

 
61.9
%
Midwestern U.S.
 
3,817

 
2.4
%
 
139

 
3.2
%
Southwestern U.S.
 
10,426

 
6.5
%
 

 

Foreign
 
38,872

 
24.5
%
 

 

 
 
$
158,776

 
100.0
%
 
$
4,309

 
100.0
%
Other
 
169,325

 
(A)
 
 
 
 
 
 
$
328,101

 
 
 
 
 
 

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

Securitization of Subprime Mortgage Loans
Newcastle acquired and securitized two portfolios of subprime residential mortgage loans (“Subprime Portfolio I” and “Subprime Portfolio II”), through subsidiaries, as summarized in the table below. Both portfolios are being serviced by an affiliate of the Manager for a servicing fee equal to 0.50% per annum on their respective unpaid principal balances.
Both portfolios were securitized through special purpose entities (“Securitization Trust 2006”) and (“Securitization Trust 2007”) which are not consolidated by Newcastle. Newcastle retained a portion of the notes issued by, and all of the equity of, both entities.

Newcastle, as holder of the equity (or residual interest), has the option (a call option) to redeem the notes once the aggregate principal balance of Subprime Portfolio I or Subprime Portfolio II is equal to or less than 20% or 10%, respectively, of such balance at the date of the transfer. The transactions between Newcastle and each securitization trust qualified as sales for accounting purposes. However, the loans which are subject to a call option by Newcastle were not treated as being sold and are classified as “held for investment” subsequent to the completion of the securitizations. 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 options at the call date of 9.24% and 8.68% for Subprime Portfolios I and II, respectively. The call options are “out of the money,” meaning that the price Newcastle would have to pay to acquire such loans exceeds their fair value at this time, and there is no requirement to exercise such options.
 
In both transactions, the residual interests and the retained bonds are reported as real estate securities, available for sale. The retained loans subject to call option and corresponding financing are reported as separate line items on Newcastle’s balance sheet.
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.
 
Subprime Portfolio
 
I
 
II
Date of acquisition
March 2006
 
March 2007
Original number of loans (approximate)
11,300
 
7,300
Predominant origination date of loans
2005
 
2006
Original face amount of purchase
$1.5 billion
 
$1.3 billion
 
 
 
 
Pre-securitization loan write-down
($4.1 million)
 
($5.8 million)
Gain on pre-securitization hedge
$5.5 million
 
$5.8 million
Gain on sale
Less than $0.1 million
 
$0.1 million
 
 
 
 
Securitization date
April 2006
 
July 2007
Face amount of loans at securitization
$1.5 billion
 
$1.1 billion
Face amount of notes sold by trust
$1.4 billion
 
$1.0 billion
Stated maturity of notes
March 2036
 
April 2037
Face amount of notes retained by Newcastle
$37.6 million
 
$38.8 million
Fair value of equity retained by Newcastle
$62.4 million (A)
 
$46.7 million (A)
 
 
 
 
Key assumptions in measuring such fair value (A):
 
 
 
Weighted average life (years)
3.1
 
3.8
Expected credit losses
5.3%
 
8.0%
Weighted average constant prepayment rate
28.0%
 
30.1%
Discount rate
18.8%
 
22.5%
(A)As of the date of transfer.


The following table presents information on the retained interests in the securitizations of Subprime Portfolios I and II at December 31, 2014:
 
Subprime Portfolio
 
I
 
II
 
Total
Total securitized loans (unpaid principal balance) (A)
$
322,723

 
$
452,199

 
$
774,922

Loans subject to call option (carrying value)
$
299,176

 
$
107,041

 
$
406,217

Retained interests (fair value) (B)
$
3,024

 
$

 
$
3,024

(A)
Average loan seasoning of 113 months and 95 months for Subprime Portfolios I and II, respectively, at December 31, 2014.
(B)
The retained interests include retained bonds of the securitizations. Their fair value is estimated based on pricing models. Newcastle’s residual interests were written off in 2010. The weighted average yield of the retained note was 22.40% as of December 31, 2014.

The following table summarizes certain characteristics of the underlying subprime mortgage loans, and related financing, in the securitizations as of December 31, 2014 (unaudited, except stated otherwise):
 
Subprime Portfolio
 
I
 
II
Loan unpaid principal balance (UPB) (A)
$
322,723

 
$
452,199

Weighted average coupon rate of loans
5.77
%
 
4.67
%
Delinquencies of 60 or more days (UPB) (B)
$
77,785

 
$
158,124

Net credit losses for year ended
 
 
 
December 31, 2014
$
25,225

 
$
34,102

December 31, 2013
$
26,388

 
$
44,855

Cumulative net credit losses
$
272,030

 
$
335,676

Cumulative net credit losses as a % of original UPB
18.1
%
 
30.9
%
Percentage of ARM loans (C)
50.9
%
 
63.9
%
Percentage of loans with loan-to-value ratio >90%
10.4
%
 
16.9
%
Percentage of interest-only loans
2.9
%
 
17.2
%
Face amount of debt (A) (D)
$
318,723

 
$
452,199

Weighted average funding cost of debt (E)
0.53
%
 
0.44
%

(A)
Audited.
(B)
Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or real estate owned.
(C)
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.
(D)
Excludes face amount of $4.0 million of retained notes for Subprime Portfolio I at December 31, 2014.
(E)
Includes the effect of applicable hedges.

Newcastle received negligible cash flows from the retained interests of Subprime Portfolios I and II during the years ended December 31, 2014, 2013 and 2012.