Quarterly report pursuant to Section 13 or 15(d)

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

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REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
 6 Months Ended
Jun. 30, 2013
Real Estate Related Loans Residential Mortgage Loans And Subprime Mortgage Loans  
REAL ESTATE RELATED LOANS, RESIDENTIAL MORTGAGE LOANS, SUBPRIME MORTGAGE LOANS
5.
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans at June 30, 2013. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.
 
    
Outstanding
                
Weighted
    
Weighted
    
Weighted
Average
    
Floating Rate Loans as a %
    
Delinquent
  
    Face    
Carrying
    
Loan
    
Average
    
Average
    
Maturity
    
of Face
    
Face
  
Loan Type
  
Amount
    
Value (A)
    
Count
    
Yield
    
Coupon
    
(Years) (B)
    
Amount
    
Amount (C)
  
Mezzanine Loans
   $ 430,584     $ 350,127       15       9.07 %     8.74 %     1.0       75.7 %   $ 12,000  
Corporate Bank Loans
     783,448       363,337       7       14.03 %     5.72 %     1.5       72.3 %     —  
B-Notes
     110,944       94,040       4       10.65 %     5.30 %     1.1       79.3 %     —  
Whole Loans
     29,923       29,923       2       4.81 %     3.78 %     0.7       97.3 %     —  
Total Real Estate Related and other Loans Held-for-Sale, Net
   $ 1,354,899     $ 837,427       28       11.25 %     6.60 %     1.3       74.5 %   $ 12,000  
                                                                 
Non-Securitized Manufactured Housing Loan Portfolio I
   $ 565     $ 146       15       68.47 %     7.77 %     0.9       0.0 %   $ 56  
Non-Securitized Manufactured Housing Loan Portfolio II
     2,780       2,120       105       15.46 %     10.04 %     5.3       9.5 %     35  
Total Residential Mortgage Loans Held-for-Sale, Net (D)
   $ 3,345     $ 2,266       120       18.89 %     9.66 %     4.5       7.9 %   $ 91  
 
                                                                
Securitized Manufactured Housing Loan Portfolio I (D)(E)
   $ 110,589     $ 94,909       2,984       9.45 %     8.62 %     6.3       0.7 %   $ 1,059  
Securitized Manufactured Housing Loan Portfolio II (D)(E)
     140,828       138,895       5,027       7.70 %     9.64 %     5.5       16.5 %     2,285  
Residential Loans (D)(E)
     51,886       39,528       185       7.66 %     2.43 %     5.9       100.0 %     7,455  
Total Residential Mortgage Loans Held-for-Investment, Net
   $ 303,303     $ 273,332       8,196       8.30 %     8.04 %     5.8       25.0 %   $ 10,799  
                                                                 
Subprime Mortgage Loans Subject to Call Option
   $ 406,217     $ 406,217                                                  
 
(A)
Carrying value includes interest receivable of $0.1 million for the residential housing loans and principal and interest receivable of $4.8 million for the manufactured housing loans.
(B)
The weighted average maturity is based on the timing of expected principal reduction on the assets.
(C)
Includes loans that are 60 or more days past due (including loans that are in foreclosure, or borrower’s in bankruptcy) or considered real estate owned (“REO”). As of June 30, 2013, $140.7 million face amount of real estate related and other loans was on non-accrual status.
(D)
Loans acquired at a discount for credit quality.
(E)
The following is an aging analysis of past due residential loans held-for-investment as of June 30, 2013:
 
   
30-59 Days
    
60-89 Days
    
Over 90 Days
          
Total Past
          
Total Outstanding
  
   
Past Due
    
Past Due
    
Past Due
    
REO
    
Due
    
Current
    
Face Amount
  
Securitized Manufactured Housing Loan Portfolio I
   $ 337     $ 170     $ 452     $ 437     $ 1,396     $ 109,193     $ 110,589  
Securitized Manufactured Housing Loan Portfolio II
   $ 1,184     $ 371     $ 1,383     $ 531     $ 3,469     $ 137,359     $ 140,828  
Residential Loans
   $ 875     $ 405     $ 6,561     $ 489     $ 8,330     $ 43,556     $ 51,886  
 
Newcastle’s management monitors the credit qualities of the Manufactured Housing Loan Portfolios I and II primarily by using aging analyses, current trends in delinquencies and actual loss incurrence rates.
  
The following is a summary of real estate related and other loans by maturities at June 30, 2013:
 
   
Outstanding
          
Number of
  
Year of Maturity (1)
  
Face Amount
    
Carrying Value
    
Loans
  
Delinquent (2)
   $ 12,000     $ —       1  
Period from July 1, 2013 to December 31, 2013
     87,151       29,272       2  
2014
     814,634       414,636       11  
2015
     58,302       55,794       5  
2016
     101,134       99,511       3  
2017
     95,104       82,786       4  
2018
     —       —       —  
Thereafter
     186,574       155,428       2  
Total
   $ 1,354,899     $ 837,427       28  

(1)
Based on the final extended maturity date of each loan investment as of June 30, 2013.
(2)
Includes loans that are non-performing, in foreclosure, or under bankruptcy.
 
Activities relating to the carrying value of Newcastle’s real estate related and other loans and residential mortgage loans are as follows:

   
Held-for-Sale
    
Held-for-Investment
  
   
Real Estate Related
    
Residential Mortgage
    
Residential Mortgage
    
Reverse
  
   
and Other Loans
    
Loans
    
Loans
    
Mortgage Loans
  
Balance at December 31, 2012
   $ 843,132     $ 2,471     $ 292,461     $ —  
Purchases / additional fundings
     139,096       —       —       35,138  
Interest accrued to principal balance
     12,673       —       —       —  
Principal paydowns
     (153,263 )     (180 )     (22,125 )     —  
Sales
     (9,318 )                        
Spin-off of New Residential
     —       —       —       (35,865 )
Valuation (allowance) reversal on loans
     (2,262 )     (12 )     749       —  
Loss on repayment of loans held-for-sale
     —                          
Accretion of loan discount and other amortization
     6,689       —       2,201       727  
Other
     680       (13 )     46       —  
Balance at June 30, 2013
   $ 837,427       2,266     $ 273,332     $ —  
  
The following is a rollforward of the related loss allowance.

   
Held-For-Sale
    
Held-For-Investment
  
   
Real Estate Related
    
Residential Mortgage
    
Residential Mortgage
  
   
and Other Loans
    
Loans
    
Loans (A)
  
Balance at December 31, 2012
   $ (182,062 )   $ (1,072 )   $ (22,478 )
Charge-offs
     60       121       2,641  
Valuation (allowance) reversal on loans
     (2,262 )     (12 )     749  
Balance at June 30, 2013
   $ (184,264 )   $ (963 )   $ (19,088 )
 
(A)
The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.
 
The table below summarizes the geographic distribution of real estate related and other loans and residential mortgage loans at June 30, 2013:
 
   
Real Estate Related and Other Loans
    
Residential Mortgage Loans
  
Geographic Location
  
Outstanding Face Amount
    
Percentage
    
Outstanding Face Amount
    
Percentage
  
Western U.S.
   $ 146,173       25.1 %   $ 184,106       60.0 %
Northeastern U.S.
     103,867       17.8 %     9,746       3.2 %
Southeastern U.S.
     86,867       14.9 %     67,706       22.1 %
Midwestern U.S.
     62,707       10.8 %     11,677       3.8 %
Southwestern U.S.
     77,187       13.3 %     33,363       10.9 %
Foreign
     105,227       18.1 %     50       0.0 %
    $ 582,028       100.0 %   $ 306,648       100.0 %
Other
     772,871    
(A)
                  
    $ 1,354,899                          
 
(A)
Includes corporate bank loans which are not directly secured by real estate assets.
 
During the first six months of 2013, Newcastle increased its investment in the outstanding debt of a portfolio company of a private equity fund managed by an affiliate of Newcastle’s manager, which is in the media industry. Newcastle purchased from third parties an aggregate face amount of $381.1 million for an aggregate purchase price of $139.3 million during this period. As of June 30, 2013, Newcastle held $540.7 million face amount (or 44.9% of the total outstanding) of this debt with a carrying value of $209.1 million and was committed to purchase additional $84.9 million face amount of debt for approximately $32.9 million, but had not yet settled these purchases as of June 30, 2013.

Securitization of Subprime Mortgage Loans

The following table presents information on the retained interests in Newcastle’s securitizations of subprime mortgage loans at June 30, 2013:
 
   
Subprime Portfolio
        
      I    
II
    
Total
  
Total securitized loans (unpaid principal balance) (A)
   $ 401,031     $ 536,893     $ 937,924  
Loans subject to call option (carrying value)
   $ 299,176     $ 107,041     $ 406,217  
Retained interests (fair value) (B)
   $ 2,152     $ —     $ 2,152  
 
(A)
Average loan seasoning of 95 months and 77 months for Subprime Portfolios I and II, respectively, at June 30, 2013.
(B)
The retained interests include retained bonds of the securitizations. The fair value of which is estimated based on pricing models. Newcastle’s residual interests were written off in 2010. The weighted average yield of the retained bonds was 24.34% as of June 30, 2013.
 
Newcastle has no obligation to repurchase any loans from either of its subprime securitizations. Therefore, it is expected that its exposure to loss is limited to the carrying amount of its retained interests in the securitization entities, as described above. A subsidiary of Newcastle gave limited representations and warranties with respect to Subprime Portfolio II and is required to pay the difference, if any, between the repurchase price of any loan in such portfolio and the price required to be paid by a third party originator for such loan. Such subsidiary, however, has no assets and does not have recourse to the general credit of Newcastle.

The following table summarizes certain characteristics of the underlying subprime mortgage loans, and related financing, in the securitizations as of June 30, 2013:
 
   
Subprime Portfolio
  
      I    
II
  
Loan unpaid principal balance (UPB)
   $ 401,031     $ 536,893  
Weighted average coupon rate of loans
     5.80 %     4.93 %
Delinquencies of 60 or more days (UPB) (A)
   $ 111,458     $ 212,516  
Net credit losses for the six months ended June 30, 2013
   $ 12,669     $ 18,678  
Cumulative net credit losses
   $ 233,086     $ 275,397  
Cumulative net credit losses as a % of original UPB
     15.5 %     25.3 %
Percentage of ARM loans (B)
     50.8 %     64.3 %
Percentage of loans with original loan-to-value ratio >90%
     10.5 %     17.1 %
Percentage of interest-only loans
     27.4 %     3.7 %
Face amount of debt (C)
   $ 397,031     $ 536,893  
Weighted average funding cost of debt (D)
     0.56 %     0.51 %
 
(A)
Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or real estate owned.
(B)
ARM loans are adjustable-rate mortgage loans. An option ARM is an adjustable-rate mortgage that provides the borrower with an option to choose from several payment amounts each month for a specified period of the loan term. None of the loans in the subprime portfolios are option ARMs.
(C)
Excludes face amount of $4.0 million of retained notes for Subprime Portfolio I at June 30, 2013.
(D)
Includes the effect of applicable hedges.
 
Newcastle received negligible cash inflows from the retained interests of Subprime Portfolios I and II during the six months ended June 30, 2013 and 2012.

The loans subject to call option and the corresponding financing recognize interest income and expense based on the expected weighted average coupons of the loans subject to call option at the call date of 9.24% and 8.68% for Subprime Portfolio’s I and II, respectively.