| REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS |
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.
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December 31, 2015 |
|
December 31, 2014 |
Loan Type |
|
Outstanding
Face Amount |
|
Carrying
Value (A) |
|
Valuation Allowance (Reversal) |
|
Loan
Count |
|
Wtd.
Avg
Yield |
|
Wtd
Avg
Coupon |
|
Wtd
Avg
Life
(Years) (B) |
|
Floating Rate
Loans as a %
of Face
Amount |
|
Delinquent
Face Amount
(C) |
|
Carrying
Value |
|
Wtd. Avg.
Yield |
Mezzanine Loans |
|
$ |
37,200 |
|
|
$ |
19,433 |
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$ |
4,386 |
|
|
3 |
|
|
8.00 |
% |
|
8.27 |
% |
|
0.3 |
|
100.0 |
% |
|
$ |
17,767 |
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$ |
103,582 |
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|
7.79 |
% |
Corporate Bank Loans |
|
201,249 |
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129,765 |
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5,218 |
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4 |
|
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22.42 |
% |
|
18.47 |
% |
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1.0 |
|
0.0 |
% |
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45,687 |
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107,715 |
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22.08 |
% |
B-Notes |
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— |
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— |
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— |
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— |
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— |
% |
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— |
% |
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0 |
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— |
% |
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— |
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18,748 |
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|
12.00 |
% |
Whole Loans |
|
— |
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— |
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— |
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— |
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— |
% |
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— |
% |
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0 |
|
— |
% |
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— |
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|
155 |
|
|
4.00 |
% |
Total Real Estate Related and other Loans Held-for-Sale, Net (D) |
|
$ |
238,449 |
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$ |
149,198 |
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$ |
9,604 |
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7 |
|
|
20.54 |
% |
|
16.88 |
% |
|
0.9 |
|
15.6 |
% |
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$ |
63,454 |
|
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$ |
230,200 |
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|
14.82 |
% |
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Residential Mortgage Loans Held-for-Sale, Net (E)(F) |
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$ |
922 |
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$ |
532 |
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$ |
96 |
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4 |
|
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62.02 |
% |
|
2.84 |
% |
|
1.6 |
|
100.0 |
% |
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$ |
766 |
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$ |
3,854 |
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23.48 |
% |
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Subprime Mortgage Loans Subject to Call Option |
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$ |
380,806 |
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$ |
380,806 |
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$ |
406,217 |
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(A) |
The aggregate United States federal income tax basis for such assets at December 31, 2015 was approximately $175.9 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.
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(B) |
The weighted average maturity is based on the timing of expected principal reduction on the assets. |
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(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, 2015 and December 31, 2014, $63.5 million and $76.5 million face amount of real estate related and other loans, respectively, was on non-accrual status.
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(D) |
Loans which are more than 3% of the total current carrying value (or $4.5 million) at December 31, 2015 are as follows:
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December 31, 2015 |
Loan Type |
|
Outstanding
Face Amount |
|
Carrying Value |
|
Prior Liens |
|
Loan
Count |
|
Yield (1) |
|
Coupon (1) |
|
Weighted Average
Life (Years) |
Individual Corporate Bank Loan (2) |
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$ |
141,865 |
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$ |
125,793 |
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$ |
621,088 |
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1 |
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22.50 |
% |
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22.50 |
% |
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1.0 |
Individual Mezzanine Loan (3) |
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19,433 |
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19,433 |
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114,111 |
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1 |
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8.00 |
% |
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8.00 |
% |
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0.5 |
Others (4) |
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77,151 |
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3,972 |
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22,500 |
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5 |
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20.00 |
% |
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8.78 |
% |
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0.6 |
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$ |
238,449 |
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$ |
149,198 |
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7 |
|
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20.54 |
% |
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16.88 |
% |
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0.9 |
|
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(1) |
For Others, represents weighted average yield and weighted average coupon. |
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(2) |
Interest accrued to principal balance over life to maturity. Prior Liens reflect indebtedness and other claims on the assets of the related companies which support the Individual Corporate Bank Loan. |
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(3) |
Interest only payments over life to maturity and balloon principal payment upon maturity. Prior Liens reflect loans in this capital structure which are ranked pari passu to the Individual Mezzanine Loan. |
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(4) |
Various terms of payment. This represents $59.4 million and $17.8 million of bank loans and mezzanine loans, respectively. Each of the five loans had a carrying value of less than $4.5 million at December 31, 2015. Prior Liens reflect face amounts of third party liens that are senior to Newcastle’s position for Others.
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(E) |
The following is an aging analysis of past due residential loans held-for-sale as of December 31, 2015:
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30-59 Days
Past Due |
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60-90 Days
Past Due |
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Over 90 Days
Past Due |
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REO |
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Total Past
Due |
|
Current |
|
Total Outstanding
Face Amount |
Residential Loans |
$ |
— |
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$ |
— |
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$ |
— |
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$ |
766 |
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$ |
766 |
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$ |
156 |
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$ |
922 |
|
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.
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(F) |
Loans acquired at a discount for credit quality. |
Newcastle's investments in real estate related and other loans were classified as held-for-sale as of December 31, 2015 and December 31, 2014. Loans held-for-sale are marked to the lower of carrying value or fair value.
In June 2015, Newcastle sold $12.0 million face amount of commercial real estate related loans from CDO VIII at a price of 100.01% of par for total proceeds of $12.0 million, and recognized a gain of $0.9 million. Newcastle also sold $45.7 million face amount of commercial real estate related loans from CDO IX at an average price of 95.35% for total proceeds of $43.5 million, and recognized a gain of $0.6 million. These proceeds were used to repay the outstanding notes in CDO VIII and CDO IX, respectively.
In August 2015, Newcastle closed on the sale of two residential mortgage loans with face amount of $3.3 million, for total proceeds of $2.9 million net of transaction expenses.
The following is a summary of real estate related and other loans by maturity at December 31, 2015:
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Year of Maturity (1)
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Outstanding
Face Amount |
|
Carrying Value |
|
Number of
Loans |
Delinquent (2)
|
|
$ |
63,454 |
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$ |
— |
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|
4 |
|
2016 |
|
19,433 |
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|
19,433 |
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|
1 |
|
2017 |
|
— |
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— |
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— |
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2018 |
|
— |
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|
— |
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|
— |
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2019 |
|
155,562 |
|
|
129,765 |
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2 |
|
2020 |
|
— |
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— |
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|
— |
|
Thereafter |
|
— |
|
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— |
|
|
— |
|
Total |
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$ |
238,449 |
|
|
$ |
149,198 |
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|
7 |
|
(1)Based on the final extended maturity date of each loan investment as of December 31, 2015.
(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:
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Held for Sale |
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Held for Investment |
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Real Estate
Related Loans |
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Residential
Mortgage Loans |
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Residential
Mortgage Loans |
|
NPL Reverse
Mortgage Loans |
Balance at December 31, 2012 |
$ |
843,132 |
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|
$ |
2,471 |
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$ |
292,461 |
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$ |
— |
|
Purchases / additional fundings |
315,296 |
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— |
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— |
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|
35,138 |
|
Interest accrued to principal balance |
26,588 |
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|
— |
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— |
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|
— |
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Principal paydowns |
(257,335 |
) |
|
(373 |
) |
|
(45,665 |
) |
|
— |
|
Sales |
(101,338 |
) |
|
— |
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|
— |
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|
— |
|
New Residential spin-off |
— |
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— |
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— |
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(35,865 |
) |
Conversion to equity-GateHouse |
(393,531 |
) |
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— |
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— |
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— |
|
Elimination after restructure-Golf |
(29,412 |
) |
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— |
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— |
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— |
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Valuation (allowance) reversal on loans |
19,479 |
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|
105 |
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5,451 |
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— |
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Gain on repayment of loans held for sale |
7,216 |
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— |
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— |
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— |
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Accretion of loan discount and other amortization |
6,689 |
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— |
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|
3,684 |
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|
727 |
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Other |
746 |
|
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(18 |
) |
|
(481 |
) |
|
— |
|
Balance at December 31, 2013 |
$ |
437,530 |
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|
$ |
2,185 |
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$ |
255,450 |
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$ |
— |
|
Purchases / additional fundings |
— |
|
|
— |
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|
— |
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|
— |
|
Interest accrued to principal balance |
20,830 |
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|
— |
|
|
— |
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|
— |
|
Principal paydowns |
(240,937 |
) |
|
(9,574 |
) |
|
(9,436 |
) |
|
— |
|
Sales |
— |
|
|
(233,349 |
) |
|
— |
|
|
— |
|
Transfer to held-for-sale |
— |
|
|
246,121 |
|
|
(246,121 |
) |
|
— |
|
Valuation (allowance) reversal on loans |
3,303 |
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(51 |
) |
|
(833 |
) |
|
— |
|
Accretion of loan discount and other amortization |
8,867 |
|
|
— |
|
|
115 |
|
|
— |
|
Other |
607 |
|
|
(1,478 |
) |
|
825 |
|
|
— |
|
Balance at December 31, 2014 |
$ |
230,200 |
|
|
$ |
3,854 |
|
|
$ |
— |
|
|
$ |
— |
|
Purchases / additional fundings |
— |
|
|
— |
|
|
— |
|
|
— |
|
Interest accrued to principal balance |
27,717 |
|
|
— |
|
|
— |
|
|
— |
|
Principal paydowns |
(46,696 |
) |
|
(134 |
) |
|
— |
|
|
— |
|
Sales |
(55,574 |
) |
|
(2,925 |
) |
|
— |
|
|
— |
|
Valuation (allowance) reversal on loans |
(9,284 |
) |
|
(257 |
) |
|
— |
|
|
— |
|
Accretion of loan discount and other amortization |
3,203 |
|
|
— |
|
|
— |
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|
— |
|
Other |
(368 |
) |
|
(6 |
) |
|
— |
|
|
— |
|
Balance at December 31, 2015 |
$ |
149,198 |
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|
$ |
532 |
|
|
$ |
— |
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$ |
— |
|
The following is a rollforward of the related loss allowance:
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Held for Sale |
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Held for Investment |
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Real Estate Related and Other Loans |
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Residential Mortgage Loans |
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Residential Mortgage Loans (A) |
Balance at December 31, 2012 |
|
$ |
(182,062 |
) |
|
$ |
(1,072 |
) |
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$ |
(22,478 |
) |
Charge-offs (B) |
|
68,546 |
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|
143 |
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|
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 |
) |
|
$ |
— |
|
Charge-offs (B) |
|
14,345 |
|
|
160 |
|
|
— |
|
Sales |
|
— |
|
|
— |
|
|
— |
|
Valuation (allowance) reversal on loans |
|
(9,284 |
) |
|
(257 |
) |
|
— |
|
Balance at December 31, 2015 |
|
$ |
(70,865 |
) |
|
$ |
(251 |
) |
|
$ |
— |
|
|
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(A) |
The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality. |
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(B) |
The charge-offs for real estate related loans represent four, three and three loans which were written off, sold, restructured, or paid off at a discounted price during 2015, 2014 and 2013, respectively.
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The average carrying amount of Newcastle’s real estate related and other loans was approximately $172.8 million, $270.1 million and $761.7 million during 2015, 2014 and 2013, respectively, on which Newcastle earned approximately $36.8 million, $49.3 million and $81.5 million of gross interest revenues, respectively.
The average carrying amount of Newcastle’s residential mortgage loans was approximately $2.4 million, $90.5 million and $282.7 million during 2015, 2014 and 2013, respectively, on which Newcastle earned approximately $0.1 million, $8.3 million and $27.3 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, 2015:
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Real Estate Related and Other Loans |
|
Residential Mortgage Loans |
Geographic Location |
|
Outstanding Face Amount |
|
Percentage |
|
Outstanding Face Amount |
|
Percentage |
Northeastern U.S. |
|
$ |
7,967 |
|
|
9.6 |
% |
|
$ |
523 |
|
|
56.7 |
% |
Southeastern U.S. |
|
7,754 |
|
|
9.3 |
% |
|
260 |
|
|
28.2 |
% |
Midwestern U.S. |
|
— |
|
|
— |
% |
|
139 |
|
|
15.1 |
% |
Southwestern U.S. |
|
3,712 |
|
|
4.5 |
% |
|
— |
|
|
— |
|
Foreign |
|
63,454 |
|
|
76.6 |
% |
|
— |
|
|
— |
|
|
|
$ |
82,887 |
|
|
100.0 |
% |
|
$ |
922 |
|
|
100.0 |
% |
Other |
|
155,562 |
|
|
(A) |
|
|
|
|
|
|
$ |
238,449 |
|
|
|
|
|
|
|
(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.
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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, 2015:
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Subprime Portfolio |
|
I |
|
II |
|
Total |
Total securitized loans (unpaid principal balance) (A)
|
$ |
274,956 |
|
|
$ |
389,827 |
|
|
$ |
664,783 |
|
Loans subject to call option (carrying value) |
$ |
273,765 |
|
|
$ |
107,041 |
|
|
$ |
380,806 |
|
Retained interests (fair value) (B)
|
$ |
2,911 |
|
|
$ |
— |
|
|
$ |
2,911 |
|
|
|
(A) |
Average loan seasoning of 125 months and 107 months for Subprime Portfolios I and II, respectively, at December 31, 2015.
|
|
|
(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 21.80% as of December 31, 2015.
|
The following table summarizes certain characteristics of the underlying subprime mortgage loans, and related financing, in the securitizations as of December 31, 2015 (unaudited, except stated otherwise):
|
|
|
|
|
|
|
|
|
|
Subprime Portfolio |
|
I |
|
II |
Loan unpaid principal balance (UPB) (A) |
$ |
274,956 |
|
|
$ |
389,827 |
|
Weighted average coupon rate of loans |
5.52 |
% |
|
4.36 |
% |
Delinquencies of 60 or more days (UPB) (A)(B) |
$ |
54,197 |
|
|
$ |
108,817 |
|
Net credit losses for year ended |
|
|
|
December 31, 2015 |
$ |
13,295 |
|
|
$ |
27,942 |
|
December 31, 2014 |
$ |
25,225 |
|
|
$ |
34,102 |
|
Cumulative net credit losses |
$ |
285,324 |
|
|
$ |
363,618 |
|
Cumulative net credit losses as a % of original UPB |
19.0 |
% |
|
33.4 |
% |
Percentage of ARM loans (C) |
51.4 |
% |
|
63.9 |
% |
Percentage of loans with loan-to-value ratio >90% |
10.6 |
% |
|
16.1 |
% |
Percentage of interest-only loans |
1.9 |
% |
|
3.4 |
% |
Face amount of debt (A) (D) |
$ |
269,765 |
|
|
$ |
389,827 |
|
Weighted average funding cost of debt (E) |
0.79 |
% |
|
0.69 |
% |
|
|
(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 and overcollateralization of $1.2 million on Subprime Portfolio I at December 31, 2015.
|
|
|
(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, 2015, 2014 and 2013.
|