Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v2.3.0.15
FAIR VALUE OF FINANCIAL INSTRUMENTS
 9 Months Ended
Sep. 30, 2011
Notes to Financial Statements  
FAIR VALUE OF FINANCIAL INSTRUMENTS

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Summary Table

Newcastle held the following financial instruments at September 30, 2011:

 

                                             
    Principal
Balance or
Notional
Amount		     Carrying
Value		     Fair Value     Fair Value Method (A)   Weighted
Average
Yield/Funding
Cost		     Weighted
Average
Maturity
(Years)		  
Assets                                            
Non-Recourse VIE Financing Structures (F)                                            
Financial instruments:                                            
Real estate securities, available-for-sale*   $ 1,994,678     $ 1,437,893     $ 1,437,893     Broker quotations, counterparty quotations, pricing services, pricing models     9.28
 		 % 
  		     4.3
 		  
Real estate related loans, held-for-sale, net     1,054,225       815,140       822,484     Broker quotations, counterparty quotations, pricing services, pricing models     13.63 %      2.5  
Residential mortgage loans, held-for-investment, net     385,122       340,489       341,291     Pricing models     8.11 %      6.7  
Subprime mortgage loans subject to call option (B)     406,217       404,476       404,476     (B)     9.09 %      (B ) 
Restricted cash*     178,121       178,121       178,121                      
Derivative assets, treated as hedges (C)(E)*     104,205       1,384       1,384     Counterparty quotations     N/A       (C ) 
Non-hedge derivative assets (D)(E)*     36,428       999       999     Counterparty quotations     N/A       (D ) 
Operating real estate, held-for-sale             7,743       7,743                      
Other investments             18,883       18,883                      
Receivables and other assets             23,818       23,818                      
           
 
 
    
 
 
                      
            $ 3,228,946     $ 3,237,092                      
           
 
 
    
 
 
                      
Recourse Financing Structures and Unlevered Assets                                            
Financial instruments:                                            
Real estate securities, available-for-sale*   $ 376,342     $ 230,463     $ 230,463     Broker quotations, counterparty quotations, pricing services, pricing models     1.80 %      2.8  
Real estate related loans, held-for-sale, net     69,634       6,634       6,634     Broker quotations, counterparty quotations, pricing services, pricing models     24.30 %      1.2  
Residential mortgage loans, held-for-sale, net     6,182       3,031       3,031     Princing models     17.72 %      4.5  
Cash and cash equivalents*     205,180       205,180       205,180                      
Other investments             6,024       6,024                      
Receivables and other assets             2,775       2,775                      
           
 
 
    
 
 
                      
            $ 454,107     $ 454,107                      
           
 
 
    
 
 
                      

                                             
    Principal
Balance or
Notional
Amount		     Carrying
Value		     Fair Value     Fair Value Method (A)   Weighted
Average
Yield/Funding
Cost		     Weighted
Average
Maturity
(Years)		  
Liabilities                                            
Non-Recourse VIE Financing Structures (F) (G)                                            
Financial instruments:                                            
CDO bonds payable   $ 2,429,077     $ 2,428,294     $ 1,528,994     Pricing models     2.99 %      3.8  
Other bonds and notes payable     212,373       210,033       213,454     Pricing models, broker quotation     4.30 %      3.6  
Repurchase agreements     8,764       8,764       8,764     Market comparables     1.74 %      0.2  
Financing of subprime mortgage loans subject to call option (B)     406,217       404,476       404,476     (B)     9.09 %      (B ) 
Interest rate swaps, treated as hedges (C)(E)*     992,673       99,531       99,531     Counterparty quotations     N/A       (C ) 
Non-hedge derivatives (D)(E)*     316,922       32,525       32,525     Counterparty quotations     N/A       (D ) 
Accrued expenses and other liabilities             46,448       46,448                      
           
 
 
    
 
 
                      
            $ 3,230,071     $ 2,334,192                      
           
 
 
    
 
 
                      
Recourse Financing Structures and Other Liabilities (G)                                            
Financial instruments:                                            
Repurchase agreements   $ 212,164     $ 212,164     $ 212,164     Market comparables     0.33 %      0.2  
Junior subordinated notes payable     51,004       51,250       30,613     Pricing models     7.41 %      23.6  
Due to affiliates             1,532       1,532                      
Accrued expenses and other liabilities             19,511       19,511                      
           
 
 
    
 
 
                      
            $ 284,457     $ 263,820                      
           
 
 
    
 
 
                      

 

* Measured at fair value on a recurring basis.

 

(A) Methods are listed in order of priority. In the case of real estate securities and real estate related loans, broker quotations are obtained if available and practicable, otherwise counterparty quotations or pricing service valuations are obtained or, finally, internal pricing models are used. Internal pricing models are only used for (i) securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) loans or debt obligations which are private and untraded.

 

(B) These two items result from an option, not an obligation, to repurchase loans from Newcastle’s subprime mortgage loan securitizations (Note 4), are noneconomic until such option is exercised, and are equal and offsetting.

 

(C) Represents derivative agreements as follows:

 

                                 

Year of Maturity

   Weighted Average
Month of
Maturity		     Aggregate Notional
Amount		     Weighted Average
Fixed Pay Rate /
Cap Rate		     Aggregate
Fair Value
Asset /
(Liability)		  
Interest rate cap agreements which receive 1-Month LIBOR:                                
2015     Sep     $ 21,000       2.26 %    $ 192  
2016     Jul       77,905       2.66 %      1,084  
2017     Jan       5,300       1.86 %      108  
           
 
 
            
 
 
  
            $ 104,205             $ 1,384  
           
 
 
            
 
 
  
Interest rate swap agreements which receive 1-Month LIBOR:                                
2011     Dec     $ 91,401       5.00 %    $ (738 ) 
2014     Nov       15,313       5.08 %      (2,009 ) 
2015     Apr       531,770       5.44 %      (35,956 ) 
2016     May       180,155       5.04 %      (22,857 ) 
2017     Aug       174,034       5.24 %      (37,971 ) 
           
 
 
            
 
 
  
            $ 992,673             $ (99,531 ) 
           
 
 
            
 
 
  

 

(D) This represents two interest rate swap agreements with a total notional balance of $316.9 million, maturing in March 2014 and March 2015, and three interest rate cap agreements with a total notional balance of $36.4 million, maturing in August 2017 and January 2019. Newcastle entered into these hedge agreements to reduce its exposure to interest rate changes on the floating rate financings of CDO IV, CDO VI and CDO X. These derivative agreements were not designated as hedges for accounting purposes as of September 30, 2011.

 

(E) Newcastle’s derivatives fall into two categories. As of September 30, 2011, all derivatives were held within Newcastle’s nonrecourse CDO structures. An aggregate notional balance of $1.3 billion, which were liabilities at period end, are only subject to the credit risks of the respective CDO structures. As they are senior to all the debt obligations of the respective CDOs and the fair value of each of the CDO’s investments exceeded the fair value of the CDO’s derivative liabilities, no credit valuation adjustments were recorded. In addition, the credit ratings of two of Newcastle’s derivative counterparties were downgraded in the quarter ended September 30, 2011. However, such downgrades had no impact on the fair value or on the respective CDOs as all of these derivatives were a liability payable to the counterparties. An aggregate notional balance of $140.6 million were assets at period end and therefore are subject to the counterparty’s credit risk. No adjustments have been made to the fair value quotations received related to credit risk as a result of the counterparty’s “AA” credit rating. Newcastle’s significant derivative counterparties include Bank of America, Credit Suisse and Wells Fargo.

 

(F) Assets held within CDOs and other non-recourse structures are not available to satisfy obligations outside of such financings, except to the extent Newcastle receives net cash flow distributions from such structures. Furthermore, creditors or beneficial interest holders of these structures have no recourse to the general credit of Newcastle. Therefore, Newcastle’s exposure to the economic losses from such structures is limited to its invested equity in them and economically their book value cannot be less than zero. As a result, the fair value of Newcastle’s net investments in these non-recourse financing structures is equal to the present value of their expected future net cash flows.

 

(G) Newcastle notes that the unrealized gain on the liabilities within such structures cannot be fully realized.

 

Valuation Hierarchy

The methodologies used for valuing such instruments have been categorized into three broad levels which form a hierarchy.

Level 1 – Quoted prices in active markets for identical instruments.

Level 2 – Valuations based principally on other observable market parameters, including

 

  •   Quoted prices in active markets for similar instruments,

 

  •   Quoted prices in less active or inactive markets for identical or similar instruments,

 

  •   Other observable inputs (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates), and

 

  •   Market corroborated inputs (derived principally from or corroborated by observable market data).

Level 3 – Valuations based significantly on unobservable inputs.

 

  •   Level 3A – Valuations based on third party indications (broker quotes, counterparty quotes or pricing services) which were, in turn, based significantly on unobservable inputs or were otherwise not supportable as Level 2 valuations.

 

  •   Level 3B – Valuations based on internal models with significant unobservable inputs.

Newcastle follows this hierarchy for its financial instruments measured at fair value on a recurring basis. The classifications are based on the lowest level of input that is significant to the fair value measurement.

The following table summarizes such financial assets and liabilities measured at fair value on a recurring basis at September 30, 2011:

 

                                                 
    Principal Balance
or Notional		           Fair Value  
    Amount     Carrying Value     Level 2     Level 3A (1)     Level 3B (2)     Total  
Assets:                                                
Real estate securities, available-for-sale:                                                
CMBS   $ 1,492,614     $ 1,060,634     $ —       $ 877,301     $ 183,333     $ 1,060,634  
REIT debt     137,393       134,351       134,351       —         —         134,351  
ABS - subprime     270,430       150,904       —         86,888       64,016       150,904  
ABS - other real estate     52,623       40,010       —         32,566       7,444       40,010  
FNMA / FHLMC     210,673       222,558       222,558       —         —         222,558  
CDO     207,287       57,338       —         50,135       7,203       57,338  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Debt security total   $ 2,371,020       1,665,795       356,909       1,046,890       261,996       1,665,795  
   
 
 
                                          
Equity securities             2,561       —         —         2,561       2,561  
           
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Real estate securities total           $ 1,668,356     $ 356,909     $ 1,046,890     $ 264,557     $ 1,668,356  
           
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Derivative assets:                                                
Interest rate caps, treated as hedges   $ 104,205     $ 1,384     $ 1,384     $ —       $ —       $ 1,384  
Interest rate caps, not treated as hedges     36,428       999       999       —         —         999  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Derivative assets total   $ 140,633     $ 2,383     $ 2,383     $ —       $ —       $ 2,383  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Liabilities:                                                
Derivative Liabilities:                                                
Interest rate swaps, treated as hedges   $ 992,673     $ 99,531     $ 99,531     $ —       $ —       $ 99,531  
Interest rate swaps, not treated as hedges     316,922       32,525       32,525       —         —         32,525  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Derivative liabilities total   $ 1,309,595     $ 132,056     $ 132,056     $ —       $ —       $ 132,056  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  

 

(1) Third party pricing sources with significant unobservable inputs.

 

(2) Internal models with significant unobservable inputs.

 

Newcastle’s investments in instruments measured at fair value on a recurring basis using Level 3 inputs changed during the nine months ended September 30, 2011 as follows:

 

                                                 
    Level 3A  
    CMBS     ABS     Equity/Other
Securities 		    Total  
    Conduit     Other     Subprime     Other      
Balance at December 31, 2010   $ 840,227     $ 331,904     $ 83,582     $ 36,193     $ —       $ 1,291,906  
Transfers (A)                                                
Transfers from Level 3B     9,334       25,000       19,950       718       —         55,002  
Transfers into Level 3B     (88,464 )      —         (15,031 )      (7,548 )      (2,475 )      (113,518 ) 
CDO V deconsolidation     (59,970 )      (55,838 )      (5,107 )      —         —         (120,915 ) 
Total gains (losses) (B)                                                
Included in net income (C)     42,641       579       (23 )      (97 )      —         43,100  
Included in other comprehensive income (loss)     (106,312 )      35,881       (7,443 )      (571 )      (10,661 )      (89,106 ) 
Amortization included in interest income     17,078       5,567       3,995       280       1,995       28,915  
Purchases, sales and settlements                                                
Purchases     229,558       27,262       29,359       7,548       69,308       363,035  
Proceeds from sales     (125,358 )      (54,885 )      (6,573 )      —         —         (186,816 ) 
Proceeds from repayments     (36,910 )      (159,993 )      (15,821 )      (3,957 )      (8,032 )      (224,713 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at September 30, 2011   $ 721,824     $ 155,477     $ 86,888     $ 32,566     $ 50,135     $ 1,046,890  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
   
    Level 3B  
    CMBS     ABS     Equity/Other
Securities 		    Total  
    Conduit     Other     Subprime     Other      
Balance at December 31, 2010   $ 107,457     $ 21,146     $ 94,424     $ 8,985     $ 4,282     $ 236,294  
Transfers (A)                                                
Transfers from Level 3A     88,464       —         15,031       7,548       2,475       113,518  
Transfers into Level 3A     (9,334 )      (25,000 )      (19,950 )      (718 )      —         (55,002 ) 
CDO V deconsolidation     (32,289 )      (1,908 )      (14,568 )      (3,833 )      —         (52,598 ) 
Total gains (losses) (B)                                                
Included in net income (C)     5,107       722       (1,210 )      (65 )      3,385       7,939  
Included in other comprehensive income (loss)     23,931       14       3,307       (3,005 )      (1,613 )      22,634  
Amortization included in interest income     13,950       60       6,923       880       404       22,217  
Purchases, sales and settlements                                                
Purchases     4,501       25,000       25       —         10,192       39,718  
Proceeds from sales     (24,535 )      (721 )      (8,624 )      (348 )      (3,884 )      (38,112 ) 
Proceeds from repayments     (13,206 )      (26 )      (11,342 )      (2,000 )      (5,477 )      (32,051 ) 
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Balance at September 30, 2011   $ 164,046     $ 19,287     $ 64,016     $ 7,444     $ 9,764     $ 264,557  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  

 

(A) Transfers are assumed to occur at the beginning of the quarter. CDO V was deconsolidated on June 17, 2011.

 

(B) None of the gains (losses) recorded in earnings during the period is attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates.

 

(C) These gains (losses) are recorded in the following line items in the consolidated statement of income:

 

                 
    Nine Months Ended
September 30, 2011		  
    Level 3A     Level 3B  
Gain (loss) on settlement of investments, net   $ 44,604     $ 20,030  
Other income (loss), net     —         —    
OTTI     (1,504 )      (12,091 ) 
   
 
 
    
 
 
  
Total   $ 43,100     $ 7,939  
   
 
 
    
 
 
  
Gain (loss) on settlement of investments, net, from investments transferred into Level 3 during the period   $ —       $ —    

 

Securities Valuation

As of September 30, 2011, Newcastle’s securities valuation methodology and results are further detailed as follows:

 

                                                 
                Fair Value  

Asset Type

   Outstanding
Face
Amount		     Amortized
Cost
Basis (A)		     Multiple
Quotes (B)		     Single
Quote (C)		     Internal
Pricing
Models (D)		     Total  
CMBS   $ 1,492,614     $ 1,068,948     $ 607,774     $ 269,527     $ 183,333     $ 1,060,634  
REIT debt     137,393       136,760       40,167       94,184       —         134,351  
ABS – subprime     270,430       144,048       48,012       38,876       64,016       150,904  
ABS – other real estate     52,623       41,483       31,915       651       7,444       40,010  
FNMA / FHLMC     210,673       221,915       82,968       139,590       —         222,558  
CDO     207,287       67,893       —         50,135       7,203       57,338  
   
 
 
    
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Debt security total   $ 2,371,020       1,681,047       810,836       592,963       261,996       1,665,795  
   
 
 
                                          
Equity securities             1,112       —         —         2,561       2,561  
           
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  
Total           $ 1,682,159     $ 810,836     $ 592,963     $ 264,557     $ 1,668,356  
           
 
 
    
 
 
    
 
 
    
 
 
    
 
 
  

 

(A) Net of discounts (or gross of premiums) and after OTTI, including impairment taken during the period ended September 30, 2011.

 

(B) Management generally obtained pricing service quotations or broker quotations from two sources, one of which was generally the seller (the party that sold us the security). Management selected one of the quotes received as being most representative of fair value and did not use an average of the quotes. Newcastle’s methodology is to not use quotes from selling brokers, unless those quotes are the only marks available, or unless the quotes provided by other (non-selling) brokers or pricing services are, in management’s judgment, not representative of fair value. Even if Newcastle receives two or more quotes on a particular security that come from non-selling brokers or pricing services, it does not use an average because management believes using an actual quote more closely represents a transactable price for the security than an average level. Furthermore, in some cases there is a wide disparity between the quotes Newcastle receives. Management believes using an average of the quotes in these cases would generally not represent the fair value of the asset. Based on Newcastle’s own fair value analysis using internal models, management selects one of the quotes which is believed to more accurately reflect fair value. Newcastle never adjusts quotes received.

 

(C) Management was unable to obtain quotations from more than one source on these securities. The one source was generally the seller (the party that sold us the security) or a pricing service.

 

(D) Securities whose fair value was estimated based on internal pricing models are further detailed as follows:

 

                                                 
    Amortized
Cost Basis (A)		     Fair Value     Impairment
Recorded
In Current
Period		     Unrealized
Gains (Losses)
in Accumulated
OCI		     Assumption Ranges
            Discount
Rate		   Prepayment
Speed (E)		   Cumulative
Default Rate		   Loss Severity
CMBS – Conduit   $ 131,033     $ 164,045     $ 5,969     $ 33,012     12%   N/A   2% - 100%   30% - 100%
CMBS – Large loan / Single borrower     20,940       19,288       —         (1,652 )    9% - 16%   N/A   0% - 100%   0% - 100%
ABS – subprime     51,854       64,016       2,502       12,162     8%   0% - 8%   27% - 88%   60% - 100%
ABS – other RE     9,039       7,444       53       (1,595 )    8%   1% - 3%   38% - 63%   80% - 100%
CDO Securities     7,103       7,203       —         100     10% - 16%   0% - 6%   21% - 100%   21% - 100%
   
 
 
    
 
 
    
 
 
    
 
 
                  
Debt security total   $ 219,969     $ 261,996     $ 8,524     $ 42,027                  
Equity securities     1,112       2,561       —         1,449                  
   
 
 
    
 
 
    
 
 
    
 
 
                  
Total   $ 221,081     $ 264,557     $ 8,524     $ 43,476                  
   
 
 
    
 
 
    
 
 
    
 
 
                  

All of the assumptions listed have some degree of market observability, based on Newcastle’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class (e.g., CMBS projections are developed differently than home equity ABS projections) but conform to industry conventions. Newcastle uses assumptions that generate its best estimate of future cash flows of each respective security.

The prepayment vector specifies the percentage of the collateral balance that is expected to voluntarily pay off at each point in the future. The prepayment vector is based on projections from a widely published investment bank model which considers factors such as collateral FICO score, loan-to-value ratio, debt-to-income ratio, and vintage on a loan level basis. This vector is scaled up or down to match recent collateral-specific prepayment experience, as obtained from remittance reports and market data services.

Loss severities are based on recent collateral-specific experience with additional consideration given to collateral characteristics. Collateral age is taken into consideration because severities tend to initially increase with collateral age before eventually stabilizing. Newcastle typically uses projected severities that are higher than the historic experience for collateral that is relatively new to account for this effect. Collateral characteristics such as loan size, lien position, and location (state) also effect loss severity. Newcastle considers whether a collateral pool has experienced a significant change in its composition with respect to these factors when assigning severity projections.

Default rates are determined from the current “pipeline” of loans that are more than 90 days delinquent, in foreclosure, or are real estate owned (REO). These significantly delinquent loans determine the first 24 months of the default vector. Beyond month 24, the default vector transitions to a steady-state value that is generally equal to or greater than that given by the widely published investment bank model.

 

The discount rates Newcastle uses are derived from a range of observable pricing on securities backed by similar collateral and offered in a live market. As the markets in which Newcastle transacts have become less liquid, Newcastle has had to rely on fewer data points in this analysis.

 

(E) Projected annualized average prepayment rate.

Loan Valuation

Loans which Newcastle does not have the ability or intent to hold into the foreseeable future are classified as held-for-sale. As a result, these held-for-sale loans are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on broker quotations, pricing service quotations or internal pricing models. All the loans were within Level 3 of the fair value hierarchy. For real estate related loans, the most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments. For residential mortgage loans, significant inputs include management’s expectations of prepayment speeds, default rates, loss severities and discount rates that market participants would use in determining the fair values of similar pools of residential mortgage loans.

The following tables summarize certain information for real estate related loans and residential mortgage loans held-for-sale as of September 30, 2011:

 

                                                 
    Outstanding
Face
Amount 		    Carrying
Value		     Fair
Value		     Valuation
Allowance/
(Reversal) In
Current Year		     Significant Input Ranges        

Loan Type

           Discount Rate   Loss Severity        
Mezzanine   $ 560,563     $ 443,361     $ 448,665     $ (49,892 )    8.0% - 24.3%   0.0% - 100.0%        
Bank Loan     277,541       159,878       161,901       17,346     10.3% - 25.0%   0.0% - 74.0%        
B-Note     255,085       187,865       187,865       (11,151 )    6.4% - 26.2%   0.0% - 100.0%        
Whole Loan     30,670       30,670       30,687       —       4.2% - 7.1%   0.0% - 15.0%        
   
 
 
    
 
 
    
 
 
    
 
 
                  
Total Real Estate Related Loans Held-for-Sale, Net   $ 1,123,859     $ 821,774     $ 829,118     $ (43,697 )                 
   
 
 
    
 
 
    
 
 
    
 
 
                  
           
                      Valuation
Allowance/
(Reversal) In
Current Year		     Significant Input Ranges
    Outstanding
Face
Amount 		    Carrying
Value		     Fair Value       Discount Rate   Prepayment
Speed		   Constant
Default
Rate		   Loss
Severity

Loan Type

                
Non-securitized Manufactured Housing Loans I   $ 775     $ 200     $ 200     $ 81     47.9%   3.0%   53.0%   75.0%
Non-securitized Manufactured Housing Loans II     5,407       2,831       2,831       (929 )    15.6%   5.0%   12.7%   80.0%
   
 
 
    
 
 
    
 
 
    
 
 
                  
Total Residential Mortgage Loans Held-for-Sale, Net   $ 6,182     $ 3,031     $ 3,031     $ (848 )                 
   
 
 
    
 
 
    
 
 
    
 
 
                  

Loans which Newcastle has the intent and ability to hold into the foreseeable future are classified as held-for-investment. Loans held-for-investment are carried at the aggregate unpaid principal balance adjusted for any unamortized premium or discount, deferred fees or expenses, an allowance for loan losses, charge-offs and write-downs for impaired loans.

The following table summarizes certain information for residential mortgage loans held-for-investment as of September 30, 2011:

 

                                                 
                      Valuation
Allowance/
(Reversal) In
Current Year		     Significant Input Ranges
    Outstanding
Face
Amount 		    Carrying
Value		     Fair
Value		       Discount Rate  

Prepayment

Speed

  

Constant

Default
Rate

   Loss Severity

Loan Type

                
Securitized Manufactured Housing Loans I   $ 139,116     $ 115,357     $ 117,960     $ 568     9.5%   3.0%   4.0%   75.0%
Securitized Manufactured Housing Loans II     184,615       180,926       179,125       2,011     7.6%   5.0%   3.5%   80.0%
Residential Loans     61,391       44,206       44,206       3,748     5.0% - 7.0%   0.0% - 4.0%   0.0% - 3.0%   0.0% - 50.0%
   
 
 
    
 
 
    
 
 
    
 
 
                  
Total Residential Mortgage Loans, Held-for-Investment, Net   $ 385,122     $ 340,489     $ 341,291     $ 6,327                  
   
 
 
    
 
 
    
 
 
    
 
 
                  

Derivatives

Newcastle’s derivative instruments are valued using counterparty quotations. These quotations are generally based on valuation models with model inputs that can generally be verified and which do not involve significant judgment. The significant observable inputs used in determining the fair value of our Level 2 derivative contracts are contractual cash flows and market based interest rate curves. Newcastle’s derivatives are recorded on its balance sheet as follows:

 

                     
        Fair Value  
    Balance sheet location   September 30,
2011		     December 31,
2010		  
Derivative Assets                    
Interest rate caps, designated as hedges   Derivative Assets   $ 1,384     $ 4,537  
Interest rate caps, not designated as hedges   Derivative Assets     999       2,530  
       
 
 
    
 
 
  
        $ 2,383     $ 7,067  
       
 
 
    
 
 
  
Derivative Liabilities                    
Interest rate swaps, designated as hedges   Derivative Liabilities   $ 99,531     $ 136,575  
Interest rate swaps, not designated as hedges   Derivative Liabilities     32,525       40,286  
       
 
 
    
 
 
  
        $ 132,056     $ 176,861  
       
 
 
    
 
 
  

The following table summarizes information related to derivatives:

 

                 
    September 30,
2011		     December 31,
2010		  
Cash flow hedges                
Notional amount of interest rate swap agreements   $ 992,673     $ 1,473,669  
Notional amount of interest rate cap agreements     104,205       104,205  
Amount of (loss) recognized in OCI on effective portion     (79,034 )      (118,608 ) 
Deferred hedge gain (loss) related to anticipated financings, which have subsequently occurred, net of amortization     314       357  
Deferred hedge gain (loss) related to dedesignation, net of amortization     (576 )      1,343  
Expected reclassification of deferred hedges from AOCI into earnings over the next 12 months     1,750       2,289  
Expected reclassification of current hedges from AOCI into earnings over the next 12 months     (42,787 )      (63,541 ) 
Non-hedge Derivatives                
Notional amount of interest rate swap agreements     316,922       343,570  
Notional amount of interest rate cap agreements     36,428       36,428  

The following table summarizes gains (losses) recorded in relation to derivatives:

 

                                     
        Three Months Ended
September 30,		     Nine Months Ended
September 30,		  
    Income statement location   2011     2010     2011     2010  
Cash flow hedges                                    
Gain (loss) on the ineffective portion   Other income (loss)   $ (1,181 )    $ 83     $ (881 )    $ (85 ) 
Gain (loss) immediately recognized at dedesignation   Gain (loss) on sale of investments; Other income (loss)     —         (7,279 )      (13,796 )      (10,558 ) 
Amount of gain (loss) reclassified from AOCI into income, related to effective portion   Interest expense     (12,824 )      (20,304 )      (51,532 )      (63,426 ) 
Deferred hedge gain reclassified from AOCI into income, related to anticipated financings   Interest expense     15       14       43       461  
Deferred hedge gain (loss) reclassified from AOCI into income, related to effective portion of dedesignated hedges   Interest expense     497       (1,025 )      1,799       (4,172 ) 
Non-hedge derivatives gain (loss)   Other income (loss)     (2,109 )      (1,861 )      194       (5,992 )