New Residential Investment Corp. (NYSE:NRZ) Files An 8-K Results of Operations and Financial Condition
Item 2.02. Results of Operations and Financial Condition.
In this Current Report on Form 8-K, references to we, us, our,
New Residential, New Residential Investment Corp. or the Company
refer to New Residential Investment Corp. and its consolidated
subsidiaries, except where it is made clear that the term means
only the parent company or as is otherwise required by the
context.
As part of a previously announced public offering, the Company
disclosed the following estimated preliminary results of
operations for its fourth quarter and full year ended December31,
2016.
Estimated Preliminary Financial Results for the Quarter
and Year Ended December 31, 2016
Three Months Ended December 31, 2016
Year Ended December 31, 2016
Net Income per Diluted Share
$0.87 to $0.91
$2.09 to $2.13
Core Earnings (non-GAAP) per Diluted Share*
$0.59 to $0.63
$2.12 to $2.16
*Core Earnings is a non-generally accepted accounting principles
(GAAP) measure. A reconciliation of estimated preliminary Net
Income to Core Earnings is set forth below.
For the fourth quarter of 2016, we estimate that Net Income will
be in the range of $0.87 to $0.91 per diluted share and that Core
Earnings will be in the range of $0.59 to $0.63 per diluted
share. For the full year of 2016, we estimate that Net Income
will be in the range of $2.09 to $2.13 per diluted share and that
Core Earnings will be in the range of $2.12 to $2.16 per diluted
share. A reconciliation of Net Income to Core Earnings is set
forth below.
We have provided ranges, rather than specific amounts, for the
preliminary operating results described above primarily because
our closing procedures for the quarter and year ended December
31, 2016 are not yet complete and, as a result, our final results
upon completion of the closing procedures may vary from the
preliminary estimates. These estimates, which are the
responsibility of our management, were prepared by our management
in connection with the preparation of our financial statements
and are based upon a number of assumptions. Additional items that
may require adjustments to the preliminary operating results may
be identified and could result in material changes to our
estimated preliminary operating results. Estimates of operating
results are inherently uncertain and we undertake no obligation
to update this information. Ernst Young LLP has not audited,
reviewed, compiled or performed any procedures with respect to
this preliminary financial information. Accordingly, Ernst Young
LLP does not express an opinion or provide any form of assurance
with respect thereto.
The primary drivers of our estimated preliminary operating
results for the quarter were (i) changes in interest rates and
prepayment speeds, (ii) the execution of two call rights
transactions and a related securitization, and (iii) several
acquisitions of MSRs, in each case as further described below:
Market interest rates, and expectations regarding future
market interest rates, increased markedly during the fourth
quarter, which increased the value of our interests in
mortgage servicing rights (MSRs) (which include MSRs, excess
mortgage servicing rights (Excess MSRs) and rights to the
basic fee component of MSRs). Higher interest rates are
generally associated with lower prepayment rates for
residential mortgage loans, since they increase the cost of
borrowing for homeowners. Lower prepayment rates, in turn,
generally extend the duration of our expected future cash
flows from our interests in MSRs, which tends to increase the
value of these assets.
We called non-agency residential mortgage backed securities
(residential MBS or RMBS) relating to 14 securitizations of
seasoned residential mortgage loans with an aggregate unpaid
principal balance (UPB) of approximately $416.9 million. We
subsequently completed a securitization of approximately
$274.2 million UPB of performing loans acquired as part of
our calls.
NRM acquired MSRs on residential mortgage loans with a total
UPB of approximately $82.1 billion for an aggregate purchase
of approximately $572.5 million.
Reconciliation of Estimated Preliminary Net Income to Core
Earnings Results
Three Months Ended December 31,
Three Months Ended December 31,
Year Ended December 31,
Year Ended December 31,
(dollars in thousands, except per share
amounts)
Low
High
Low
High
Net Income attributable to common stockholders
$
219,694
$
229,746
$
498,990
$
509,042
Impairment
38,297
38,297
87,980
87,980
Other Income adjustments:
Other Income
Change in fair value of investments in excess mortgage
servicing rights
(17,100
)
(17,100
)
7,297
7,297
Change in fair value of investments in excess mortgage
servicing rights, equity method investees
(7,918
)
(7,918
)
(16,526
)
(16,526
)
Change in fair value of investments in servicer advances
12,097
12,097
7,769
7,769
Gain on consumer loans investment
(9,943
)
(9,943
)
Gain on remeasurement of consumer loans investment
(71,250
)
(71,250
)
(Gain) loss on settlement of investments, net
11,114
11,114
55,404
55,404
Unrealized gain on derivative instruments
(20,882
)
(20,882
)
(12,378
)
(12,378
)
Unrealized (gain) loss on other asset-backed securities
2,096
2,096
2,322
2,322
Gain on transfer of loans to real estate owned
(3,696
)
(3,696
)
(18,356
)
(18,356
)
Gain on Excess MSR recapture agreements
(614
)
(614
)
(2,802
)
(2,802
)
Other (income) loss
1,809
1,809
6,842
6,842
Total Other Income adjustments
(23,094
)
(23,094
)
(51,621
)
(51,621
)
Other Income and Impairment attributable to non-controlling
interests
(16,333
)
(16,333
)
(26,303
)
(26,303
)
Change in fair value of investments in mortgage servicing
rights
(104,144
)
(104,144
)
(104,144
)
(104,144
)
Non-capitalized transaction related expenses
1,472
1,472
9,493
9,493
Incentive compensation to affiliate
28,997
28,997
42,197
42,197
Deferred taxes
21,650
21,650
34,648
34,648
Interest income on residential mortgage loans, held-for-sale
5,706
5,706
18,356
18,356
Limit on RMBS discount accretion related to called deals
(23,990
)
(23,990
)
(30,233
)
(30,233
)
Adjust consumer loans to level yield
(5,071
)
(5,071
)
7,470
7,470
Core Earnings of equity method investees:
Excess mortgage servicing rights
5,975
5,975
18,206
18,206
Core Earnings
$
149,159
$
159,211
$
505,039
$
515,091
Net Income Per Share of Common Stock, Diluted
$
0.87
$
0.91
$
2.09
$
2.13
Core Earnings Per Share of Common Stock, Diluted
$
0.59
$
0.63
$
2.12
$
2.16
Weighted Average Number of Shares of Common Stock
Outstanding, Diluted
251,299,730
251,299,730
238,486,772
238,486,772
The reconciliation of estimated preliminary Net Income to Core
Earnings results was calculated across the low and high Net
Income ranges based on our preliminary estimates of the expected
base case differences between Net Income and Core Earnings.
Similar to the estimated preliminary operating results noted
above, our final reconciliation upon completion of our closing
procedures may vary from the preliminary estimates.
We have four primary variables that impact our operating
performance: (i) the current yield earned on our investments,
(ii) the interest expense under the debt incurred to finance our
investments, (iii) our operating expenses and taxes and (iv) our
realized and unrealized gains or losses, including any
impairment, on our investments. Core Earnings is a non-GAAP
measure of our operating performance, excluding the fourth
variable above, and adjusts the earnings from the consumer loan
investment to a level yield basis. Core Earnings is used by
management to evaluate our performance without taking into
account: (i) realized and unrealized gains and losses, which
although they represent a part of our recurring operations, are
subject to significant variability and are generally limited to a
potential indicator of future economic performance; (ii)
incentive compensation paid to our Manager; (iii) non-capitalized
transaction-related expenses; and (iv) deferred taxes, which are
not representative of current operations.
While incentive compensation paid to the Companys manager may be
a material operating expense, the Company excludes it from Core
Earnings because (i) from time to time, a component of the
computation of this expense will relate to items (such as gains
or losses) that are excluded from Core Earnings, and (ii) it is
impractical to determine the portion of the expense related to
Core Earnings and non-Core Earnings, and the type of earnings
(loss) that created an excess (deficit) above or below, as
applicable, the incentive compensation threshold. To illustrate
why it is impractical to determine the portion of incentive
compensation expense that should be allocated to Core Earnings,
the Company notes that, as an example, in a given period, it may
have Core Earnings in excess of the incentive compensation
threshold but incur losses (which are excluded from Core
Earnings) that reduce total earnings below the incentive
compensation threshold. In such case, the Company would either
need to (a) allocate zero incentive compensation expense to Core
Earnings, even though Core Earnings exceeded the incentive
compensation threshold, or (b) assign a pro forma amount of
incentive compensation expense to Core Earnings, even though no
incentive compensation was actually incurred. The Company
believes that neither of these allocation methodologies achieves
a logical result. Accordingly, the exclusion of incentive
compensation facilitates comparability between periods and avoids
the distortion to the Companys non-GAAP operating measure that
would result from the inclusion of incentive compensation that
relates to non-Core Earnings.
With regard to non-capitalized transaction-related expenses,
management does not view these costs as part of the Companys core
operations, as they are considered by management to be similar to
realized losses incurred at acquisition. Non-capitalized
transaction-related expenses are generally legal and valuation
service costs, as well as other professional service fees,
incurred when the Company acquires certain investments, as well
as costs associated with the acquisition and integration of
acquired businesses.
In the fourth quarter of 2014, the Company modified its
definition of Core Earnings to include accretion on held-for-sale
loans as if they continued to be held-for-investment. Although
the Company intends to sell such loans, there is no guarantee
that such loans will be sold or that they will be sold within any
expected timeframe. During the period prior to sale, the Company
continues to receive cash flows from such loans and believe that
it is appropriate to record a yield thereon. This modification
had no impact on Core Earnings in 2014 or any prior period. In
the second quarter of 2015, the Company modified its definition
of Core Earnings to exclude all deferred taxes, rather than just
deferred taxes related to unrealized gains or losses, because the
Company believes deferred taxes are not representative of current
operations. This modification was applied prospectively due to
only immaterial impacts in prior periods. In the fourth quarter
of 2015, the Company modified its definition of Core Earnings to
limit accreted interest income on RMBS where the Company receives
par upon the exercise of associated call rights based on the
estimated value of the underlying collateral, net of related
costs including advances. The Company made the modification in
order to be able to accrete to the lower of par or the net value
of the underlying collateral, in instances where the net value of
the underlying collateral is lower than par. The Company believes
this amount represents the amount of accretion it would have
expected to earn on such bonds had the call rights not been
exercised. This modification had no impact on Core Earnings in
prior periods.
Management believes that the adjustments to compute Core Earnings
specified above allow investors and analysts to readily identify
and track the operating performance of the assets that form the
core of the Companys activity, assist in comparing the core
operating results between periods, and enable investors to
evaluate the Companys current core performance using the same
measure that management uses to operate the business. Management
also utilizes Core Earnings as a measure in its decision-making
process relating to improvements to the underlying fundamental
operations of the Companys investments, as well as the allocation
of resources between those investments, and management also
relies on Core Earnings as an indicator of the results of such
decisions. Core Earnings excludes certain recurring items, such
as gains and losses (including impairment as well as derivative
activities) and non-capitalized transaction-related expenses,
because they are not considered by management to be part of the
Companys core operations for the reasons described herein. As
such, Core Earnings is not intended to reflect all of the
Companys activity and should be considered as only one of the
factors used by management in assessing the Companys performance,
along with GAAP Net Income which is inclusive of all of the
Companys activities.
The primary differences between Core Earnings and the measure the
Company uses to calculate incentive compensation relate to (i)
realized gains and losses (including impairments), (ii)
non-capitalized transaction-related expenses and (iii) deferred
taxes (other than those related to unrealized gains and losses).
Each are excluded from Core Earnings and included in the Companys
incentive compensation measure (either immediately or through
amortization). In addition, the Companys incentive compensation
measure does not include accretion on held-for-sale loans and the
timing of recognition of income from consumer loans is different.
Unlike Core Earnings, the Companys incentive compensation measure
is intended to reflect all realized results of operations. The
Gain on Remeasurement of Consumer Loans Investment was treated as
an unrealized gain for the purposes of calculating incentive
compensation and was therefore excluded from such calculation.
Core Earnings does not represent and should not be considered as
a substitute for, or superior to, Net Income or as a substitute
for, or superior to, cash flow from operating activities, each as
determined in accordance with U.S. GAAP, and our calculation of
this measure may not be comparable to similarly entitled measures
reported by other companies.
The information in this Item 2.02 is being furnished and shall
not be deemed to be filed for purposes of Section18 of the
Securities Exchange Act of 1934, as amended (the Exchange Act),
or otherwise subject to the liabilities of that section, nor
shall it be incorporated by reference into any of the Companys
filings under the Securities Act of 1933, as amended, or the
Exchange Act, unless expressly set forth as being incorporated by
reference into such filing.
Item 8.01. Other Events.
As part of a previously announced public offering, the Company
disclosed certain information regarding recent developments and
updated certain risk factors it previously disclosed in its Form
10-Q for the quarter ended September 30, 2016, each of which is
set forth below.
Recent Developments
Pending Acquisitions of MSRs
$97.0 Billion UPB of MSRs from CitiMortgage, Inc.
On January 27, 2017, our wholly owned subsidiary New Residential
Mortgage LLC (NRM) entered into an agreement to purchase MSRs and
related servicer advances with respect to approximately $97.0
billion unpaid principal balance (UPB) of seasoned Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan
Mortgage Corporation (Freddie Mac) residential mortgage loans
from CitiMortgage, Inc. (Citi), an affiliate of one of our joint
book-running managers, for a purchase price of approximately
$950.0 million and $32.0 million, respectively. NRM also entered
into an agreement to which Nationstar will subservice the
portfolio on behalf of NRM, subject to government-sponsored
enterprises (GSE) and other regulatory approvals. Citi has agreed
to continue to subservice the portfolio on an interim basis. NRM
will acquire the related servicer advances upon the transfer of
servicing. The disinterested members of our board of directors
selected Nationstar, which is majority-owned by an affiliate of
Fortress, after consideration of proposals from various potential
subservicers.
We expect to complete this acquisition in the first quarter of
2017, subject to GSE and other regulatory approvals and other
customary closing conditions. We intend to fund the purchase
price with a portion of the proceeds of the previously announced
public offering as well as debt financing. There can be no
assurance that the acquisition or related financing will be
completed as anticipated, or at all.
The foregoing transactions are collectively referred to herein as
the Citi Transaction. The Citi Transaction, the PHH Transaction
and the other MSR transactions described below are collectively
referred to herein as the MSR Transactions. The closing of the
previously announced public offering is not conditioned on the
completion of any of the MSR Transactions.
$72.0 Billion UPB of MSRs from PHH
As previously announced, on December 28, 2016, NRM entered into
an agreement with PHH Mortgage Corporation and its subsidiaries
(PHH) to purchase MSRs and related servicer advances with respect
to approximately $72.0 billion UPB of seasoned Fannie Mae,
Freddie Mac and private-label residential mortgage loans for a
purchase price of approximately $612.0 million and $300.0
million, respectively. PHH will continue to subservice the
portfolio on behalf of NRM. We expect to settle this transaction
beginning in the second quarter of 2017, subject to (i) PHH
shareholder approval, (ii) GSE and other regulatory approvals and
(iii) other customary closing conditions. There can be no
assurance that the acquisition or related financing will be
completed as anticipated, or at all.
Recently Completed Acquisitions of MSRs
$32.3 Billion UPB of MSRs from Walter
On October 3, 2016, NRM acquired from Ditech Financial LLC
(Ditech), a subsidiary of Walter Investment Management Corp., the
MSRs and related servicer advances with respect to approximately
$32.3 billion UPB of Fannie Mae residential mortgage loans for a
purchase price of approximately $212.7 million and $27.4 million,
respectively. Ditech subservices the portfolio on behalf of NRM.
The agreement with Ditech, which was entered into on August 8,
2016, gives NRM the ability to purchase on a flow basis the MSRs
relating to new residential mortgage loans originated or
purchased by Ditech and pooled into Fannie Mae, Freddie Mac or,
if applicable, Government National Mortgage Association,
securities (the Walter Flow MSRs). The agreement has an initial
three year term, with annual, one-year renewals thereafter,
subject to certain termination rights. Purchases of Walter Flow
MSRs are subject to GSE and regulatory approvals.
$4.8 Billion UPB of MSRs from Walter
On December 1, 2016, NRM acquired from Ditech, the MSRs and
related servicer advances with respect to approximately $4.8
billion of Fannie Mae and Freddie Mac residential mortgage loans
for a purchase price of approximately $26.4 million and $3.9
million, respectively. Ditech subservices the portfolio on behalf
of NRM.
$32.5 Billion UPB of MSRs from WCO
In December 2016, NRM acquired from Walter Capital Opportunity,
LP and its subsidiaries (WCO) and Ditech the MSRs and related
servicer advances with respect to approximately $32.5 billion UPB
of Fannie Mae and Freddie Mac residential mortgage loans for a
purchase price of approximately $244.3 million and $34.8 million,
respectively. Ditech subservices the portfolio on behalf of NRM.
$12.5 Billion UPB of MSRs from FirstKey
In December 2016, NRM acquired from FirstKey Mortgage, LLC
(FirstKey) the MSRs and related servicer advances with respect to
approximately $12.5 billion UPB of Fannie Mae and Freddie Mac
residential mortgage loans for a purchase price of approximately
$89.1 million and $2.1 million, respectively. FirstKey will
continue to subservice the portfolio, pending transfer to NRMs
designated subservicer.
Financing of Non-Agency Excess MSRs
On October 12, 2016, we entered into a $345.0 million corporate
loan secured by non-agency Excess MSRs. The loan bears interest
equal to 5.68% per annum and matures in July 2021.
Refinancing of Servicer Advances
During the fourth quarter, we refinanced $1.4 billion of floating
rate debt with $500 million of three-year and $400 million of
five-year fixed rate term notes issued in October 2016, and $500
million of three-year fixed rate notes issued in November 2016.
In December 2016, we refinanced $800 million of fixed rate term
notes with a weighted average maturity of 2.5 years and weighted
average cost of funds of 3.58% per annum with $400 million of
four-year and $400 million of five-year fixed rate term notes
with a weighted average cost of funds of 3.48% per annum.
Refinancing of SpringCastle Consumer Loan
Investment
On October 25, 2016, we completed a $1.7 billion refinancing of
our SpringCastle America Funding, LLC, SpringCastle Credit
Funding, LLC and SpringCastle Finance Funding, LLC (collectively,
SpringCastle) consumer-loan backed securitization. The
refinancing reduced the weighted average cost of funds from 4.5%
to 3.6% per annum.
Call Rights
During the fourth quarter of 2016, we called non-agency RMBS
indebtedness relating to 14 securitizations of seasoned
residential mortgage loans with an aggregate UPB of approximately
$416.9 million. We subsequently completed a securitization of
approximately $274.2 million UPB of performing loans acquired as
part of our call rights strategy. Including these 14
securitizations, in 2016, we called 50 securitizations totaling
approximately $1.2 billion UPB, and, as of December 31, 2016, the
UPB of the loans subject to our remaining call rights is
approximately $160 billion.
Risk Factors
Completion of the pending MSR Transactions is subject
to various closing conditions, involves significant costs, and we
cannot assure you if, when or the terms on which such
transactions will close. Failure to complete some or all of the
pending MSR Transactions could adversely affect our future
business and results of operations.
The Company and Citi have announced an agreement for the purchase
and sale of approximately $97.0 billion UPB of MSRs and related
servicer advances for an aggregate purchase price of
approximately $982.0 million. The Company has also engaged in
additional similar transactions, including an agreement for the
purchase and sale of approximately $72.0 billion UPB of MSRs and
related servicer advances from PHH for an aggregate purchase
price of approximately $912.0 million. These transactions
generally contain similar terms, representations and warranties,
covenants and indemnification provisions, and are subject to
similar conditions precedent, such as regulatory and GSE
approvals, as described elsewhere in this Form 8-K. The PHH
transaction is also subject to approval by PHH stockholders. The
completion of each of the pending MSR Transactions, as
applicable, is subject to the satisfaction of these closing
conditions, and we cannot assure you that such conditions will be
satisfied and that some or all of the MSR Transactions will be
successfully completed on their current terms, if at all. The
closing of the previously announced public offering is not
conditioned on the completion of any of the MSR Transactions. In
the event that any of the MSR Transactions are not consummated,
we will have spent considerable time and resources, and incurred
substantial costs, many of which must be paid even if the MSR
Transactions are not completed.
Our business and the value of our assets could be
materially and adversely affected if the any of the
counterparties to the MSR Transactions is unable to adequately
perform its duties as a result of, among other
things:
its failure to comply with applicable laws and regulation;
its failure to maintain sufficient liquidity or access to
sources of liquidity;
its failure to perform its loss mitigation obligations;
its failure to perform adequately in its external audits;
a failure in or poor performance of its operational systems
or infrastructure;
regulatory or legal scrutiny, enforcement proceedings,
consent orders or similar actions regarding any aspect of its
operations, including, but not limited to, servicing
practices and foreclosure processes lengthening foreclosure
timelines;
its failure to subservice the mortgage loans related to any
MSRs acquired by us in accordance with applicable laws,
requirements or our subservicing agreement with the
counterparties to the MSR Transactions; or
any other reason.
In addition, if a servicer, subservicer or other counterparty
experienced any of the failures or regulatory scrutiny described
above, then we could become subject to heightened regulatory or
legal scrutiny by virtue of being a counterparty of these
entities. Such scrutiny could result in our incurring meaningful
additional costs or fines or being subject to material
operational requirements or restrictions, each of which could
adversely affect our business and results of operations.
We rely heavily on mortgage servicers and
subservicers to achieve our investment objectives and have no
direct ability to influence their performance.
The value of the assets we may acquire to the MSR Transactions
will be dependent on the satisfactory performance of the
servicing obligations of the relevant mortgage servicer or
subservicer under our subservicing agreement or interim servicing
agreement with these counterparties. Our duties and obligations
with respect to the MSRs and advances that we may acquire from
these counterparties are defined through contractual agreements
with the related GSEs, generally referred to as Servicing Guides
(the Servicing Guidelines), or private-label servicing contracts.
Our investment in MSRs is subject to all of the terms and
conditions of the applicable Servicing Guidelines or
private-label servicing contracts. Under the Servicing Guidelines
or any such private-label servicing contract, a servicer may be
terminated by the applicable GSE or securitization counterparty
for any reason, with or without cause, for all or any portion of
the loans being serviced for such GSE or related securitization
trust. We will be the legal owner of the MSRs acquired in the MSR
Transactions. If the relevant servicers or subservicers in the
MSR Transactions do not perform in accordance with the Servicing
Guidelines, the related private-label servicing contract or our
subservicing agreement, or otherwise cease to be viewed by the
related counterparty as a credible servicer, we may be terminated
by such counterparty and may lose all, or a portion of, our
investments serviced by these counterparties.
In order to realize any value on our MSRs if we are terminated,
among other things, in many cases, a new servicer must be willing
to pay for the right to service the applicable mortgage loans
while assuming responsibility for the liabilities associated with
origination and prior servicing of such mortgage loans. In
addition, any payment received from a successor servicer may not
be in an amount sufficient to cover the value of our MSRs or
allocated to us at all.
We will have significant counterparty concentration
risk in Citi, PHH, Ditech and Nationstar.
If the pending MSR Transactions are consummated, a material
portion of our MSR portfolio will be subserviced by each of Citi,
PHH, Ditech or Nationstar Mortgage LLC (Nationstar) (each, a
Subservicer and together, the Subservicers). Nationstar is
currently the servicer for a significant portion of our loans,
and the loans underlying our Excess MSRs and servicer advances.
The selection of Nationstar as subservicer in the Citi
Transaction extends our relationship with Nationstar, which could
further exacerbate our counterparty concentration and default
risks. If each Subservicers respective servicing performance
deteriorates, or in the event that a Subservicer files for
bankruptcy or if a Subservicer is unwilling or unable to continue
to subservice MSRs for us, our expected returns on these
investments would be severely impacted. In addition, if a
Subservicer becomes subject to a regulatory consent order or
similar enforcement proceeding, that regulatory action could
adversely affect us in several ways. For example, the regulatory
action could result in delays of transferring servicing from an
interim Subservicer to our designated successor Subservicer or
cause the Subservicers performance to degrade. Any such
development would negatively affect our expected returns on these
investments, and such affect could be material to our business
and results of operations. On January 23, 2017, the CFPB
announced a consent order against Citi. We do not know what, if
any, impact this order may have on Citi or our expected
investment returns on the Citi Transaction. We closely monitor
each Subservicers mortgage servicing performance and overall
operating performance, financial condition and liquidity, as well
as its compliance with applicable regulations and GSE servicing
guidelines. We have various information, access and inspection
rights in our respective agreements with the Subservicers that
enable us to monitor their financial and operating performance
and credit quality, which we periodically evaluate and discuss
with each Subservicers respective management. However, we have no
direct ability to influence each Subservicers performance, and
our diligence cannot prevent, and may not even help us
anticipate, a severe deterioration of each Subservicers
respective servicing performance on our MSR portfolio.
Our ability to finance assets serviced by the
servicer and subservicer of the assets acquired in the MSR
Transactions may depend on these parties cooperation with our
lenders and compliance with certain covenants.
We intend to finance some or all of the MSRs or servicer advances
acquired in the MSR Transactions, and as a result, we will be
subject to substantial operational risks associated with these
parties in connection with any such financing. In our current
financing facilities for Excess MSRs and servicer advances, the
failure of the related servicer to satisfy various covenants and
tests can result in an amortization event and/or an event of
default. Our lenders may require us to include similar provisions
in any financing we obtain relating to the MSRs and servicer
advances serviced by the servicer and subservicer of the assets
acquired in the MSR Transactions. If we decide to finance such
assets, we will not have direct ability to control any partys
compliance with any such covenants and tests and the failure of
any party to satisfy any such covenants or tests could result in
a partial or total loss on our investment. Some lenders may be
unwilling to finance any assets subserviced by any servicer or
subservicer of the assets acquired in the MSR Transactions under
any circumstances.
In addition, any financing for the MSRs and servicer advances
related to MSRs acquired in the MSR Transactions is subject to
regulatory approval and the agreement of the relevant servicer or
subservicer to be party to such financing agreements. If we
cannot get regulatory approval or these parties do not agree to
enter into such financing agreements, we may not be able to
obtain financing on favorable terms or at all.
A sale of MSRs and servicer advances from any
counterparty to the MSR Transactions could be re-characterized as
a pledge of such assets in a bankruptcy proceeding.
We believe that these counterparties transfer to us of MSRs and
servicer advances to the MSR Transactions will constitute a sale
of such assets, in which case such assets would not be part of
these counterparties bankruptcy estate. A bankruptcy trustee, or
any other counterparty in interest in a bankruptcy proceeding,
however, might assert that MSRs and servicer advances transferred
to us were not sold to us but were instead pledged to us as
security for these counterparties obligation to repay amounts
paid by us to these counterparties to the related purchase
agreement. We generally create and perfect security interests
with respect to the MSRs that we acquire, though we do not do so
in all instances, including certain of the MSR Transactions. If
such assertion were successful, all or part of the MSRs and
servicer advances transferred to us to the related purchase
agreement would constitute property of these counterparties
bankruptcy estate, and our rights against these counterparties
would, at best, be those of a secured creditor with a lien on
such assets. Under such circumstances, cash proceeds generated
from our collateral would constitute cash collateral under the
provisions of the U.S. bankruptcy laws. Under U.S. bankruptcy
laws, the servicer could not use our cash collateral without
either (a) our consent or (b) approval by the bankruptcy court,
subject to providing us with adequate protection under the U.S.
bankruptcy laws.
If such a recharacterization occurs, the validity or
priority of our security interest in the MSRs and servicer
advances acquired from these counterparties could be challenged
in a bankruptcy proceeding of these counterparties.
If the purchases to the related purchase agreement are
recharacterized as set forth above, we nevertheless generally
have created and perfected or, prior to, or simultaneously with,
acquiring the related MSRs, will perfect, security interests with
respect to the MSRs that we may have purchased from these
counterparties by including a pledge of collateral in the related
purchase agreement and filing financing statements in appropriate
jurisdictions. Nonetheless, to the extent we have created and
perfected a security interest, our security interests may be
challenged and ruled unenforceable, ineffective or subordinated
by a bankruptcy court. If this were to occur, or if we have not
created a security interest, then these counterparties
obligations to us with respect to purchased MSRs and servicer
advances would be deemed unsecured obligations, payable from
unencumbered assets to be shared among all of these
counterparties unsecured creditors. In addition, even if the
security interests are found to be valid and enforceable, if a
bankruptcy court determines that the value of the collateral is
less than these counterparties underlying obligations to us, the
difference between such value and the total amount of such
obligations will be deemed an unsecured deficiency claim and the
same result will occur with respect to such unsecured claim. In
addition, even if the security interest is found to be valid and
enforceable, these counterparties would have the right to use the
proceeds of our collateral subject to either (a) our consent or
(b) approval by the bankruptcy court, subject to providing us
with adequate protection under U.S. bankruptcy laws. These
counterparties also would have the ability to confirm a chapter
11 plan over our objections if the plan complied with the
cramdown requirements under U.S. bankruptcy laws.
Even if we are successful in arguing that we own the MSRs and
servicer advances purchased under the purchase agreement with
these counterparties, we may need to seek relief in the
bankruptcy court to obtain turnover and payment of amounts
relating to such assets, and there may be difficulty in
recovering payments in respect of such assets that may have been
commingled with other funds of these counterparties.
The interim servicing agreement and subservicing
agreements with the servicer and subservicer of the assets
acquired in the MSR Transactions could be rejected in a
bankruptcy proceeding.
If any servicer or subservicer of the assets acquired in the MSR
Transactions were to file, or to become the subject of, a
bankruptcy proceeding under the United States Bankruptcy Code or
similar state insolvency laws, such party (as
debtor-in-possession in the bankruptcy proceeding) or the
bankruptcy trustee could reject its interim servicing or
subservicing agreement, as applicable, with us and terminate its
obligation to service the MSRs or servicer advances in which we
have an investment. Any claim we have for damages arising from
the rejection of an interim servicing or subservicing agreement
would be treated as a general unsecured claim for purposes of
distributions from the partys bankruptcy estate.
Any purchase agreement to which we purchase MSRs or
servicer advances from a counterparty to the MSR Transactions
could be rejected in a bankruptcy proceeding of such
counterparty.
Any counterparty to the MSR Transactions (as debtor-in-possession
in the bankruptcy proceeding) or a bankruptcy trustee appointed
in such counterpartys bankruptcy proceeding could seek to reject
our purchase agreement or subservicing agreement with such
counterparty and thereby terminate such counterpartys obligation
to acquire the MSRs and servicer advances or service the MSRs and
servicer advances transferred to our subservicing agreement. If
the bankruptcy court approved the rejection, we would have a
claim against such counterparty for any damages from the
rejection and the resulting transfer of servicing of our MSRs to
another subservicer may result in significant cost and may
negatively impact the value of our MSRs.
The servicer or subservicer of the assets acquired in
the MSR Transactions could discontinue servicing or may be
unwilling to continue servicing or subservicing for
us.
Upon a discontinuance or bankruptcy of any servicer or
subservicer of the assets acquired in the MSR Transactions,
because we do not and in the future may not have the employees,
servicing platforms, or technical resources necessary to service
mortgage loans, we would need to engage an alternate servicer or
subservicer which may not be readily available on acceptable
terms or at all.
A bankruptcy of any of our Subservicers may default
our MSR and advance financing facilities and negatively impact
our ability to continue to purchase MSRs and servicer
advances.
If any of our Subservicers were to file for bankruptcy or to
become the subject of a bankruptcy proceeding, it could result in
an event of default under certain of our financing facilities. We
would not have the ability to continue funding the purchase of
MSRs and servicer advances under such financing facilities that
we may have previously agreed to purchase. Notwithstanding this
inability to fund, such Subservicer may try to force us to
continue making such purchases. If it is determined that we are
in breach of our obligations under our purchase agreements, any
claims that we may have against such Subservicer may be subject
to offset against claims such Subservicer may have against us by
reason of this breach.
The performance of loans underlying MSRs acquired in
the MSR Transactions may be adversely affected by the performance
of parties who service or subservice these mortgage
loans.
The performance of the acquired assets is subject to risks
associated with inadequate or untimely servicing. Our ability to
monitor the activities of our servicers or subservicers is
limited. If our servicers or subservicers commit a material
breach of their obligations as a servicer, we may be subject to
damages if the breach is not cured within a specified period of
time following notice. Poor performance by a servicer or
subservicer may result in greater than expected delinquencies and
foreclosures and losses on the mortgage loans underlying our
MSRs. A substantial increase in our delinquency or foreclosure
rate or the inability to process claims could adversely affect
our ability to access the capital and secondary markets for our
financing needs.
Mortgage servicing is heavily regulated at the U.S.
federal, state and local levels and the selection of Nationstar
to be the subservicer in connection with the Citi Transaction may
not obtain regulatory approval.
Mortgage servicers must comply with U.S. federal, state and local
laws and regulations. These laws and regulations cover topics
such as licensing; allowable fees and loan terms; permissible
servicing and debt collection practices; limitations on
forced-placed insurance; special consumer protections in
connection with default and foreclosure; and protection of
confidential, nonpublic consumer information. The volume of new
or modified laws and regulations has increased in recent years,
and states and individual cities and counties continue to enact
laws that either restrict or impose additional obligations in
connection with certain loan origination, acquisition and
servicing activities in those cities and counties. The laws and
regulations are complex and vary greatly among the states and
localities, and in some cases, these laws are in conflict with
each other or with U.S. federal law. In connection with the Citi
Transaction, there is no assurance that the servicing transfer
agreement and the selection of Nationstar will obtain regulatory
approval. If regulatory approval for such transfer is not
obtained, we may incur incremental costs and expenses in the
approval of another replacement subservicer.
The counterparties to the MSR Transactions have been
and are subject to certain federal and state regulatory matters
and certain other litigation.
The counterparties to the MSR Transactions have been and continue
to be subject to regulatory and governmental examinations,
information requests and subpoenas, inquiries, investigations and
threatened legal actions and proceedings. In connection with
formal and informal inquiries, the respective counterparties to
the MSR Transactions may receive numerous requests, subpoenas and
orders for documents, testimony and information in connection
with various aspects of its activities, including whether certain
of its residential loan servicing and originations practices,
bankruptcy practices and other aspects of its business comply
with applicable laws and regulatory requirements. Such
counterparties cannot provide any assurance as to the outcome of
any of the aforementioned actions, proceedings or inquiries, or
that such outcomes will not have a material adverse effect on its
reputation, business, prospects, results of operations, liquidity
or financial condition.
We have engaged and may in the future engage in a
number of acquisitions (including the MSR Transactions), and we
may be unable to successfully integrate the acquired assets and
assumed liabilities in connection with such
acquisitions.
As part of our business strategy, we regularly evaluate
acquisitions of complementary assets. Achieving the anticipated
benefits of such acquisitions is subject to a number of
uncertainties, including, without limitation, whether we are able
to integrate the acquired assets and manage the assumed
liabilities efficiently. It is possible that the integration
process could take longer than anticipated and could result in
additional and unforeseen expenses, the disruption of our ongoing
business, processes and systems, or inconsistencies in standards,
controls, procedures, practices and policies, any of which could
adversely affect our ability to achieve the anticipated benefits
of such acquisitions. There may be increased risk due to
integrating the assets into our financial reporting and internal
control systems. Difficulties in adding the assets into our
business could also result in the loss of contract counterparties
or other persons with whom we or the respective counterparties to
such acquisitions conduct business and potential disputes or
litigation with contract counterparties or other persons with
whom we or such counterparties conduct business. We could also be
adversely affected by any issues attributable to any
counterpartys operations that arise or are based on events or
actions that occur prior to the closing of such acquisitions. The
integration process is subject to a number of uncertainties, and
no assurance can be given that the anticipated benefits will be
realized in their entirety or at all or, if realized, the timing
of their realization. Failure to achieve these anticipated
benefits could result in increased costs or decreases in the
amount of expected revenues and could adversely affect our future
business, financial condition, operating results and cash flows.
Due to the costs of engaging in a number of acquisitions
(including the MSR Transactions), we may also have difficulty
completing more acquisitions in the future.
There may be difficulties with integrating the loans
into Nationstars servicing platform, which could have a material
adverse effect on our results of operations, financial condition
and liquidity.
In connection with the Citi Transaction, all of Citis interim
servicing obligations will be subsequently transferred to
Nationstar, subject to GSE and other regulatory approvals. The
ability to integrate and service the assets acquired in the Citi
Transaction and in all similar future transactions will depend in
large part on the success of Nationstars development and
integration of expanded servicing capabilities with Nationstars
current operations. We may fail to realize some or all of the
anticipated benefits of the transaction if the integration
process takes longer, or is more costly, than expected.
Potential difficulties we may encounter during the integration
process with the assets acquired in the Citi Transaction or
future similar acquisitions include, but are not limited to, the
following:
the integration of the portfolio into Nationstars information
technology platforms and servicing systems;
the quality of servicing during any interim servicing period
after we purchase the portfolio but before Nationstar assumes
servicing obligations from the seller or its agents;
the disruption to our ongoing businesses and distraction of
our management teams from ongoing business concerns;
incomplete or inaccurate files and records;
the retention of existing customers;
the creation of uniform standards, controls, procedures,
policies and information systems;
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