| REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTAGE LOANS |
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
Loans are accounted for based on management’s strategy for the loan, and on whether the loan was credit-impaired at the date of acquisition. Purchased loans that Newcastle has the intent and ability to hold for the foreseeable future or until maturity or payoff are classified as held-for-investment. Alternatively, loans acquired with the intent to sell are classified as held-for-sale.
The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans at September 30, 2015. 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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Loan Type |
Outstanding
Face Amount |
|
Carrying
Value (A) |
|
Loan
Count |
|
Weighted
Average
Yield |
|
Weighted Average Coupon |
|
Weighted Average Life
(Years) (B) |
|
Floating Rate Loans as a % of Face Amount |
|
Delinquent Face Amount (C) |
Mezzanine Loans |
$ |
37,200 |
|
|
$ |
19,433 |
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|
3 |
|
|
8.00 |
% |
|
8.27 |
% |
|
0.4 |
|
100.0 |
% |
|
$ |
17,767 |
|
Corporate Bank Loans |
193,029 |
|
|
123,369 |
|
|
4 |
|
|
22.39 |
% |
|
18.32 |
% |
|
1.1 |
|
— |
% |
|
45,687 |
|
Total Real Estate Related and other Loans Held-for-Sale, Net |
$ |
230,229 |
|
|
$ |
142,802 |
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|
7 |
|
|
20.43 |
% |
|
16.70 |
% |
|
1.0 |
|
16.2 |
% |
|
$ |
63,454 |
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Residential Mortgage Loans Held-for-Sale, Net (D) |
$ |
925 |
|
|
$ |
569 |
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4 |
|
|
69.30 |
% |
|
2.83 |
% |
|
1.7 |
|
100.0 |
% |
|
$ |
766 |
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Subprime Mortgage Loans Subject to Call Option |
$ |
392,342 |
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$ |
392,342 |
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(A) |
Carrying value includes negligible interest receivable for the residential housing loans. |
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(B) |
The weighted average life is based on the timing of expected principal reduction on the assets. |
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(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 September 30, 2015, $63.5 million face amount of real estate related and other loans was on non-accrual status.
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(D) |
Loans acquired at a discount for credit quality. |
The following is a summary of real estate related and other loans by maturities at September 30, 2015:
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Outstanding |
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Number of |
Year of Maturity (1) |
Face Amount |
|
Carrying Value |
|
Loans |
Period from October 1, 2015 to December 31, 2015 |
$ |
63,453 |
|
|
$ |
— |
|
|
4 |
|
2016 |
19,433 |
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|
19,433 |
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1 |
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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 |
147,343 |
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|
123,369 |
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2 |
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2020 |
— |
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— |
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— |
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Thereafter |
— |
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— |
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— |
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Total |
$ |
230,229 |
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|
$ |
142,802 |
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|
7 |
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(1) |
Based on the final extended maturity date of each loan investment as of September 30, 2015.
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Activities relating to the carrying value of Newcastle’s real estate related and other loans and residential mortgage loans are as follows:
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Held-for-Sale |
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Real Estate Related and Other Loans |
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Residential Mortgage Loans |
Balance at December 31, 2014 |
$ |
230,200 |
|
|
$ |
3,854 |
|
Purchases / additional fundings |
— |
|
|
— |
|
Interest accrued to principal balance |
19,497 |
|
|
— |
|
Principal paydowns |
(46,696 |
) |
|
(131 |
) |
Sales |
(55,574 |
) |
|
(2,912 |
) |
Valuation (allowance) reversal on loans |
(7,461 |
) |
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(223 |
) |
Accretion of loan discount, other amortization and other income |
3,203 |
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|
(13 |
) |
Other |
(367 |
) |
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(6 |
) |
Balance at September 30, 2015 |
$ |
142,802 |
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|
$ |
569 |
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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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Real Estate Related and Other Loans |
|
Residential Mortgage Loans |
Balance at December 31, 2014 |
$ |
(75,926 |
) |
|
$ |
(154 |
) |
Charge-offs (A) |
14,345 |
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|
160 |
|
Valuation (allowance) reversal on loans |
(7,461 |
) |
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(223 |
) |
Balance at September 30, 2015 |
$ |
(69,042 |
) |
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$ |
(217 |
) |
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(A) |
The charge-offs for real estate related loans represent four loans. Two loans were sold, one loan was restructured, and one loan was written off. The charge-offs for residential mortgage loans represent the sale of two loans.
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The table below summarizes the geographic distribution of real estate related and other loans and residential mortgage loans at September 30, 2015:
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Real Estate Related
and Other Loans |
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Residential Mortgage Loans |
Geographic Location |
Outstanding Face Amount |
|
Percentage |
|
Outstanding Face Amount |
|
Percentage |
Western U.S. |
$ |
— |
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|
— |
% |
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$ |
— |
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|
— |
% |
Northeastern U.S. |
7,967 |
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|
9.6 |
% |
|
523 |
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|
56.6 |
% |
Southeastern U.S. |
7,754 |
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|
9.3 |
% |
|
263 |
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|
28.4 |
% |
Midwestern U.S. |
— |
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|
— |
% |
|
139 |
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|
15.0 |
% |
Southwestern U.S. |
3,711 |
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4.5 |
% |
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— |
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— |
% |
Foreign |
63,454 |
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|
76.6 |
% |
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— |
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— |
% |
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$ |
82,886 |
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100.0 |
% |
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$ |
925 |
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100.0 |
% |
Other |
147,343 |
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(A) |
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$ |
230,229 |
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(A) Primarily includes corporate bank loans which are not directly secured by real estate assets.
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.
Securitization of Subprime Mortgage Loans
The following table presents information on the retained interests in Newcastle’s securitizations of subprime mortgage loans at September 30, 2015:
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Subprime Portfolio |
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I |
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II |
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Total |
Total securitized loans (unpaid principal balance) (A) |
$ |
285,550 |
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|
$ |
408,323 |
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$ |
693,873 |
|
Loans subject to call option (carrying value) |
$ |
285,301 |
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|
$ |
107,041 |
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$ |
392,342 |
|
Retained bonds (fair value) (B) |
$ |
2,926 |
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|
$ |
— |
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|
$ |
2,926 |
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(A) |
Average loan seasoning of 122 months and 104 months for Subprime Portfolios I and II, respectively, at September 30, 2015.
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(B) |
The retained interests include retained bonds of the securitizations with negligible monthly interest cash flows until principal payment is available. The fair value of which is estimated based on pricing service quotation. The weighted average yield of the retained bonds was 21.2% as of September 30, 2015.
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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 September 30, 2015:
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Subprime Portfolio |
|
I |
|
II |
Loan unpaid principal balance (UPB) |
$ |
285,550 |
|
|
$ |
408,323 |
|
Weighted average coupon rate of loans |
5.59 |
% |
|
4.46 |
% |
Delinquencies of 60 or more days (UPB) (A) |
$ |
60,932 |
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$ |
122,962 |
|
Net credit losses for the nine months ended September 30, 2015 |
$ |
12,455 |
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$ |
16,432 |
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Cumulative net credit losses |
$ |
284,485 |
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$ |
353,529 |
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Cumulative net credit losses as a % of original UPB |
18.9 |
% |
|
32.5 |
% |
Percentage of ARM loans (B) |
51.0 |
% |
|
63.4 |
% |
Percentage of loans with original loan-to-value ratio >90% |
11.0 |
% |
|
16.9 |
% |
Percentage of interest-only loans |
1.8 |
% |
|
3.5 |
% |
Face amount of debt (C) |
$ |
281,301 |
|
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$ |
406,027 |
|
Weighted average funding cost of debt (D) |
0.56 |
% |
|
0.34 |
% |
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(A) |
Delinquencies include loans 60 or more days past due, in foreclosure, under bankruptcy filing or REO. |
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(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. |
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(C) |
Excludes face amount of $4.0 million of retained notes for Subprime Portfolio I and overcollateralization of $0.2 million and $2.3 million on Subprime Portfolio I and II, respectively, at September 30, 2015.
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(D) |
Includes the effect of applicable hedges, if any. |
Newcastle received negligible cash inflows from the retained interests of Subprime Portfolios I and II during the nine months ended September 30, 2015 and 2014.
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.
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