Annual report pursuant to Section 13 and 15(d)

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

v3.3.1.900
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
12 Months Ended
Dec. 31, 2015
Receivables [Abstract]  
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.
 
 
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

 
$
4,386

 
3

 
8.00
%
 
8.27
%
 
0.3
 
100.0
%
 
$
17,767

 
$
103,582

 
7.79
%
Corporate Bank Loans
 
201,249

 
129,765

 
5,218

 
4

 
22.42
%
 
18.47
%
 
1.0
 
0.0
%
 
45,687

 
107,715

 
22.08
%
B-Notes
 

 

 

 

 
%
 
%
 
0
 
%
 

 
18,748

 
12.00
%
Whole Loans
 

 

 

 

 
%
 
%
 
0
 
%
 

 
155

 
4.00
%
Total Real Estate Related and other Loans Held-for-Sale, Net (D)
 
$
238,449

 
$
149,198

 
$
9,604

 
7

 
20.54
%
 
16.88
%
 
0.9
 
15.6
%
 
$
63,454

 
$
230,200

 
14.82
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Loans Held-for-Sale, Net (E)(F)
 
$
922

 
$
532

 
$
96

 
4

 
62.02
%
 
2.84
%
 
1.6
 
100.0
%
 
$
766

 
$
3,854

 
23.48
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime Mortgage Loans Subject to Call Option
 
$
380,806

 
$
380,806

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
406,217

 
 

(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.
(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, 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.
(D)
Loans which are more than 3% of the total current carrying value (or $4.5 million) at December 31, 2015 are as follows:
 
 
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)
 
$
141,865

 
$
125,793

 
$
621,088

 
1

 
22.50
%
 
22.50
%
 
1.0
Individual Mezzanine Loan (3)
 
19,433

 
19,433

 
114,111

 
1

 
8.00
%
 
8.00
%
 
0.5
Others (4)
 
77,151

 
3,972

 
22,500

 
5

 
20.00
%
 
8.78
%
 
0.6
 
 
$
238,449

 
$
149,198

 
 
 
7

 
20.54
%
 
16.88
%
 
0.9

(1)
For Others, represents weighted average yield and weighted average coupon.
(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.
(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.
(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.

(E)
The following is an aging analysis of past due residential loans held-for-sale as of December 31, 2015:
 
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

 
$
156

 
$
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.

(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:
Year of Maturity (1)
 
Outstanding
Face Amount
 
Carrying Value
 
Number of
Loans
Delinquent (2)
 
$
63,454

 
$

 
4

2016
 
19,433

 
19,433

 
1

2017
 

 

 

2018
 

 

 

2019
 
155,562

 
129,765

 
2

2020
 

 

 

Thereafter
 

 

 

Total
 
$
238,449

 
$
149,198

 
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:
 
Held for Sale
 
Held for Investment
 
Real Estate
Related Loans
 
Residential
Mortgage Loans
 
Residential
Mortgage Loans
 
NPL Reverse
Mortgage Loans
Balance at 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
)
 

Balance at 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
)
 

Sales

 
(233,349
)
 

 

Transfer to held-for-sale

 
246,121

 
(246,121
)
 

Valuation (allowance) reversal on loans
3,303

 
(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

 

 

 

Other
(368
)
 
(6
)
 

 

Balance at December 31, 2015
$
149,198

 
$
532

 
$

 
$


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 (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
)
 
$

Charge-offs (B)
 
14,345

 
160

 

Sales
 

 

 

Valuation (allowance) reversal on loans
 
(9,284
)
 
(257
)
 

Balance at December 31, 2015
 
$
(70,865
)
 
$
(251
)
 
$


(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 four, three and three loans which were written off, sold, restructured, or paid off at a discounted price during 2015, 2014 and 2013, respectively.

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:
 
 
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.
 
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:
 
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
%

(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 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.