New Residential Investment Corp.

Thank you, and welcome to New Residential second quarter earnings call. Today, with me, I have Wes Edens, Chairman of the Board; Ken Riis, CEO; Robert Williams, CFO; and Paul Stockamore, who manages our Excess MSR and 98 Street [ph] RMBS portfolio.

Certain statements made today may be forward-looking statements and not statements of fact. These statement described the company's current belief regarding events that, by their nature, are uncertain and outside the company's control.

The company's actual results may differ materially from the expectations expressed in any forward-looking statements. So do not place undue reliance on any forward-looking statements.

I encourage you to read the disclaimers in our earnings release and supplements regarding forward-looking statements and expected returns and to review our most recently filed documents with the SEC.

Thank you, and I would now like to turn the call over to Wes.

Great. Thanks, Sarah, and welcome, everyone.

Well this is our inaugural call for New Residential. We've had some calls with you, our shareholders and analysts, with regards to our spin activity and whatnot, but as a public as a company, this our first quarter.

It's actually exactly a 0.5 of the quarter as a company that spun off from Newcastle on May 15.

This is a business that has primary exposure to the U.S. residential housing markets and elements of that, as well as the consumer markets in the U.S.

Those are gigantic markets. We think that there's a tremendous amount of interesting things going on and the opportunities that is a vast one.

It's a portfolio that was constructed to perform well in high-volatility environments. It's a portfolio that we expect to perform very well in high-rate environments, and we've got a test of that thesis really right out of the blocks.

I think, 7 days after the company was spun out is when the Fed Chairman announced that they were contemplating reducing QE or eliminating QE. The market went through a tremendously volatile period in the month of May.

If you look at the -- some of the benchmark issues, so Fannie Mae, 3.5 had roughly an 8-point swing over the course of the quarter. It went from mid-105s down to mid-94s.

The AVX market, which is a good proxy for the non-agency investments that we invest in, again about a 10-point swing. I think the high was 76, the low, about 67.

10-year interest rates went up fairly dramatically in the quarter. I think the total volatility over the course of the was about 80 basis points.

Quarter-over-quarter rates up 63 basis points. Across all that backdrop, at the end of it all, our book value at the time of spin to a book value at the end of the quarter, we're up about 3.5%.

So we think a great start to the company and it's got a lot of interesting things ahead of it.

If we put out a supplement that I'll refer to and Paul will refer to as we go through the presentation, we went through a lot of efforts to try and make our disclosure on this top shelf, and I'm very happy with these initial presentation. Hopefully, you guys will like it as well.

If you'd flip on to it now, on Page 4, the highlight page. Let me just run through a handful of things that were notable that happened in the quarter and then in just a minute, I'll turn over to Paul.

So the first and most obvious notable fact was just the birth of the company, spin-off of New Residential. It was spun off from Newcastle in May 15.

Earlier in the quarter, on the first of May -- or first of April, excuse me, we made a very large consumer loan investment, a $241 million investment in a portfolio consumer loans that are partially owned and serviced by our brother company Springleaf. That portfolio had a very, very good quarter, and there's a lot of room to be optimistic about that, but I'll talk about that a little later.

The Excess MSR investment, it's about 50% of our balance sheet. It's invested in Excess MSRs.

We expect them to do well in higher-interest environments. That's exactly what happened.

We made some investments over the quarter that will Paul talk about. The pipeline for the MSR book right now is considerably more robust than it was even 60 days ago.

I think there's a lot of reason to be optimistic about the flow of products. The market continues to evolve.

It continues to become more and more competitive. At the same time, the forces that really we thought were in play at the beginning of this whole cycle, namely, higher capital requirements for the banks, more regulatory pressures.

Those pressures have only continue to increase. So we do think that there's a lot more to do.

We've settled on a big chunk of the MSRs that we had committed on back in January. We've got -- the remaining MSRs are keyed up to go here shortly that again Paul will talk about.

And then lastly, we continue to add to our non-agency positions. These are primarily floaty rate.

I think over 90% of the portfolio is actually floating rates. So they're very low duration portfolios of loans that are serviced by our other sister company, by Nationstar and again, Paul will talk about the investment characteristics of that.

So when you look at Page 5, we show the business has inherited extremely clean and very simple company to follow right now. About half of the portfolio is in the Excess MSRs that are producing returns right now and a high-teens and leverage basis.

The non-agency position, where we've got $630 million in assets, $270 million invested equities, so it's term-financed positions that are virtually all in service by Nationstar.

The consumer loan investment, which was a one-off idiosyncratic investment, I am more optimistic today that there may be other follow-on investments than there was before. We just thought that as a standalone basis was very attractive.

We think the returns on these are going to be plus or minus around 30%. I think that there's again room to be optimistic about it and even better than that.

So it's been a tremendous investment for us and one that has worked very well in the very short time that we owned it.

And then there's some tag-ins of our handful of residential mortgage loans. The agency RMBS portfolio, we've got questions from investors.

Because obviously, given all the volatility in the mortgage market over the course of the quarter, people are very concerned about how volatile is that and should they be concerned about it. At the of the day -- we have a page, a disclosure later on that you can flip to.

But at the end of the day, these are extremely short-term securities that have an initial interest rate caps of 500 basis points. They really are securities that have effective durations of about 1 year or so.

Paul will walk through the detail on that at the end. The price movement of them at the end of the quarter was actually very modest, given the fluctuations in the mortgage market.

And they're just there for '40 Act compliance.

So if you flip to the first action, the MSR portfolio, let me just make a couple of overall statements and I'll turn it over to Paul Stockamore.

The agency MSRs, the Fannie, Freddie and Ginnie Maes and the non-agency PLS portfolio. They obviously, have very different pre-payment and credit characteristics.

Paul can talk about kind of what they're doing on that. All of them are -- virtually all of them are loans that we think has some form of credit impairment, which is a specific form of investment that we have really targeted, and we'll talk about why we want to do that.

If you look at Page #8, then I will just turn it over to Paul. This is our attempt to lay out the portfolio with its kind of base case returns and then show the sensitivities to show you kind of what you're really rooting for, both in terms of prepayment speeds, recapture rates and then delinquencies and severities.

We inspect all of these a little bit differently.

So it's a portfolio that we are extremely happy with right now. It's about $600 million.

We're adding to it as we speak. And to walk through it and non-agency stuff, I'll turn it over to Paul.

Paul?

Thank you, Wes. So I'm going to start on Page 7 and just bringing the kind of portfolio that we've been able to selectively pick and choose over the last 18 months.

And so right now, the entire portfolio is about $300 billion of UPB. In the second quarter, we closed on approximately $104 billion UPB and invested $140 million.

And also, the profile, the stuff that we closed in the quarter is very consistent with the existing portfolio that we have.

As Wes mentioned, the portfolio is predominantly a credit impaired portfolio, which, again, we prefer and we've actually targeted. And the reasons we target it is that these borrowers typically have fewer refinance options, as well as they have some kind of credit stress, where we think that the performance of Nationstar and the servicer can overall drive to higher returns and improve the overall performance of the portfolio.

So walking through the portfolio, we really think about in 2 different ways. We think that we have an agency portfolio that is $162 billion of UPB and a non-agency portfolio that's $135 billion of UPB.

So let's take the agency portfolio. The characteristics right now is it's 5.1% WAC versus a 4.5% current coupons.

So a lot of these borrowers are close to being out of the money in terms of refinance options. The average loan age is about 5.5 years.

The credit characteristics look at the FICO and the LTV. These borrowers -- really, the only refinance option is through a hard plight government refinance program, where we have -- we've experienced recapture rates north of 50%.

And as well, the FICO score is a little bit credit distressed. And so these are ones that have fewer options.

In terms of performance with this portfolio, life to date, the speeds have come in at 18 PPR. In the quarter, they ticked up slightly, but again, those are really from borrowers who are utilizing that TARP Program and we've seen higher recapture rates.

And as well on the recapture rate side, to date, 31% in the quarter continue to see a positive trend. And really, for the portfolios that we've held for over a year, we've seen -- we are seeing recapture rates north of 50%.

On the non-agency portfolio, this is mainly the initial investment of $223 million. The portfolio right now is about $130 million UPB.

This portfolio is a little more seasoned than in the agency portfolio, 89 months. LTV is a little higher.

Delinquency is about 35%. Difference between non-agency and agency is that we actually collect the servicing fee on all borrowers regardless of the delinquency status.

So we're a little sensitive to what the delinquency rates.

In terms of prepayments, the speeds have consistently trended around the low-teens, anywhere from 14% to 16%. What this doesn't show is that, in fact, the default rate in this pool is actually close to 10% and the voluntary prepayment is close to 4%.

So when you look at the recapture rates, you think the recapture rates seem low. But it's only a relatively small percentage of the overall prepayment portfolio.

I'm going to turn to Page 9 and walk through some the actual performance to date. So beginning with -- in the second quarter, so of the stuff that we invested in the second quarter, we've invested $433 million.

We've received life-to-date $111 million of total cash flow. So approximately 26% of our overall investment over average holding period of 12 months.

Specifically in second quarter, we had -- we received $25 million, which again was -- we split roughly 50-50 between what we deem as interest income versus return in capital. Just phenomenal performance.

I'll just quickly go through the agency portfolio. So to highlight a few numbers, we're basically -- we've invested $381 million initially.

To date, we've received $73 million. And so that really brings in our cash basis.

So if subtract initial investment versus like-to-date, we're at $308 million. And the portfolio today after we adjusted for the marks is up to $395 million.

So net-net, we've -- our portfolio today is worth more than what we initially paid for it.

In terms of returns, we underwrote just 16% return and the absolute returns are 100 basis points higher so far at 17%.

Last comment on the -- for the MSRs in terms of pipeline, I'm on Page 10. The runoff in the portfolio is approximately $40 billion a year.

And so just looking at what we have in our near-term exclusive pipeline, which really we define as stuff that we're in very close -- we're very close to committing to, that basically covers any kind of run-off that we have for the year. Notwithstanding, we also have access to some of the new originations that Nationstar has on the [indiscernible] notch cover, our bond rate going -- or excuse me, our run-off going forward.

Away from that, we see a relatively large pipeline of $360 billion, which we have in various stages of dialogue. We think that the trends that we've seen in the market that we've identified pretty much since the beginning continue to hold true.

Banks are continuing to be sellers of non-core customers. We think that pressure from regulatory changes, Basel III especially, are also going to create more for selling and more opportunities, which we're very excited to take advantage of.

Now flipping to the non-agency RMBS portfolio on Page 11. This is basically a portfolio of heavily seasoned credit impaired securities.

We own a $928-million portfolio that we purchased for $630 million. And so it's really -- it's at a significant discount.

And the goal of the portfolio is how could we -- you can recover that current phase?

We like seasoned portfolios, we like seasoned loans and seasoned securities more than, call it, prime and new originates simply because we have a better insight into a borrower performance and delinquency trends. If you look at the performance summary to date, we broke it off by vintage.

Some interesting things to highlight is as you go further back into vintage, you see that pool just trying to clean up in terms of delinquency percentages, as well as the percentage of borrowers that continue to make -- not miss a payment are also improving as well.

This is important for us because our primary strategy is to have to -- is to target streets, which we know that we access loans. We continue to see a significant disconnect between where bond straight and where loans straight, and we think we can unlock that value differential through exercising our clean up call rights, which, to date, we've been successful in collapsing a couple deals in both Nationstar, and we are very optimistic in the future.

Over 94% of the portfolio that we have to date, Nationstar does control the call right.

Looking at the trends. Trends continue to enhance the overall performance of the portfolio.

Prepayments, these delinquencies, severities, all kind of backward indicators, that they that all show that they're improving year-over-year. What's even more interesting is that if you look at the last collateral trend, which is what we call the roller rate, that's more of a leading indicator, which gives you a sense of what's happening in the future.

These are the borrowers that are rolling growing from current into a delinquency status. And so even though it's a relatively small percentage going from 2.5% to 2%, it's a pretty meaningful change that actually is going to -- that we'll begin to see going forward.

One last thing to mention on the portfolio is that even though it is mostly a sub-prime all-take portfolio, we are -- competition of the bonds that we own are 84%. They're senior bonds.

And so they are -- represent a thick part of the capital structure that have significant amount of protection in terms of any kind of downturn.

In terms of performance, I'm on Page 12. In the quarter, we've purchased $180 million [indiscernible] for $140 million.

So there's that discount of $0.77. Then those purchases were also consistent with the portfolio we've been targeting.

We did successfully -- or Nationstar decollapsed 4 deals in the quarter. This is a relatively small event, but on the bonds that we held on those deals, we accelerated a 24-point gain.

In terms of marks and the performance, as Wes mentioned, there was heavy volatility in the quarter, but from Q1 to Q2, our marks in the portfolio are unchanged. And so we still have a $23 million unrealized gain.

And the last point to mention is that over $76 million of the portfolio, we were able to successfully finance in a facility that is not subject to margin calls.

So last thing to mention and in terms of what we're rooting for, for this portfolio, as you see in the sensitivities, the prepayments and default rates, as the economy continues to heal and housing market continues to improve, we think that there's upside in the portfolio, where we have -- currently, we have leverage returns of about 14.6%, which we think can meaningfully increase with the economic tailwinds.

In addition to that, looking at the last one, the percentage of UPB collapse, we think this is really what we're rooting for, where we have significant control over it. And we -- as you can see, our base case returns really don't factor in any kind of steel clutch, which we think is probably a very conservation assumption.

With the very modest 20% to 40% of the deals that own, if we could collapse those, we can drive returns up to this 20% level.

And with that, I'll turn it back to Wes to talk about consumer loans.

Great. Thanks, Paul.

Just really briefly on Page 13, this is a snapshot of the portfolio that we invested in. So you can see from the map, these are consumer loans, for the most part, in the Nation's heartland.

It was a total portfolio of about $4 billion in phase. We've paid about $3 billion for it.

It was financed with originally $2.2 billion in debt. Does not pay down the $2 billion.

You can see that we, at NRZ, own 30% ratably of this. There's a box from the left-hand side that gives you the profile of borrowers.

So the reason for the discount, really a couple of things. One, the economics of the underlying borrowers, a little bit less than where the market is.

You see a coupon rate in this 18%. That's 4,000 basis points or so less than the other portfolios, which we see are -- that are prime portfolios.

One, too, is FICO, a little low -- delinquencies and performance are a little bit less than where the market standards were. That's why we end up buying at a discount.

If you look at Page 14, the performance of the portfolio given the price that we paid for it has been exceptional thus far. The box at the bottom of collateral performance is the one that I would really point to.

If you look at the CDR, the charge-off rates, so this is the rate at which borrowers are actually being charge of within the portfolio. Second quarter 2011, so just to the tail end of the crisis, 17.6%.

That's dropped down to 13.6% in the second quarter 2012. That's continued to drop.

It's now 11.4% today. Again, for context, the prime portfolio in the consumer portfolio, we see frequently are 5% or less.

So there still is, we think, a fair bit of incremental performance that can come out of this. But obviously, the trends in these are extremely favorable.

And if you look at Page 15, one of the things that influence that, of course, is jobs, it's employment, and even as the recovery has been a modest one, it has been consistent one. And we think that's part of the biggest single factor for it.

Springleaf, our sister company, is going to take over the servicing as of the 1st of September, so we're just less than a month away from that. We are very happy with what their performance is.

That's a company -- there's some -- there's public information on them in the form of the bonds that they have outstanding. But they have had exceptional performance in that portfolio.

We think that they're going to do nothing but add to the service and collections of this portfolio.

And then on Page 16, what does this man in terms of the value of it? Basically, if you take the existing investment and look at what the upside would be if it were to sell for what we think is a fair price for it given the performance over time, they're much lower returns.

So we don't think they're 30% of the market return, obviously, but 15%, even 10%, the lifetime sensitivities. Now the way to read this table was at 10% rate of return, using the same underlying loss assumptions, you generate $129 million gain on a mark-to-market basis from $241 million invested.

If you dropped your CDR, which is what we think is in the process of happening right now, to 8%, that gain $129 million up to $237 million. So these are just to give you some sense of what it is that we're rooting for.

And again, as the, portfolio continues to perform, this is the kind of information that we're going to give to you.

So with that, one thing to turn back over to Paul just to -- Paul, why don't you walk through the agency updates, just to give to people some clarity on that. And then we'll turn it over to questions.

Sure. So on Page 17, really, the goal for this page is while we think this is a relatively small percentage of our overall portfolio, we wanted to give some substantial disclosure in terms of what we actually own.

The purpose of our agency arm book is predominately for '40 Act reasons. And so even though we hit the $1.1 billion portfolio, it has an extremely short duration and, in fact, the behavior of the portfolio really acts more like a treasury bill versus being more like a longer-duration asset.

The portfolio is 100% ARMS. The first coupon adjustment is close to 500 basis points.

So we think that's a meaningful protection in terms of any movement in interest rates. Over the quarter, the portfolio was down only $6 million relative to our overall book value.

That's less than 0.5%. And we think that going forward, this portfolio, being in the ARM portfolio, will just -- will move along interest rates.

Great, thanks. And actually, one thing, I'll turn it over to Robert Williams, CFO, to walk through the financial update.

Robert?

Sure. Thank you, Wes.

As we mentioned a couple of times, we spun New Residential out on May 15. So what's important is within the second quarter, the independent publicly traded company was in existence for 45 days.

However, under GAAP, we report our full quarter. So for the full quarter, we had GAAP income of $109 million, which is $0.43 per diluted share.

Core earnings for the full quarter was $37.5 million or $0.15 per diluted share. When we look at the post-spin of 45-day period, our GAAP income was $85 million or $0.33 per diluted share.

And again, core earnings for that post-spin 45-day period was $18 million or $0.07 for this, again, this post-spin period.

Our second quarter, common dividend was paid based on our earnings generated by New Residential as a standalone public company, or again for the second 45 days of the quarter.

We paid a common dividend of $80 million, which is $0.07 per share, which represented 100% of our core earnings.

Our quarterly results were impacted by having approximately $112 million of average owned invested cash for the quarter. If we'd invested this capital at 15% return for the quarter, our results would have increased by about $0.02 per diluted share.

A quick update on liquidity. Our cash available on invested pro forma basis after activity, after 2Q activity was approximately $60 million.

So with that, we'll open up the floor for questions.

If you could talk about -- it looks like on pool 7 and 8, the expected IRR on those defined. If you can could just give us some explanation behind that?

Sure. I mean, I think, what we've -- in general, what we've done in our portfolio, we've held our underwriting assumptions consistent.

And so while we've seen some pricing pressure in terms of, as we've continued to move along, we think that there is meaningful upside in the portfolio. And so while -- rather than adjusting our assumptions, we underwrite to a conservative yield.

And then as Wes mentioned, through driving improvements and delinquencies and as well as prepayments and recapture rates, we think that we'll be able to see higher-teens returns.

So I mean, I guess, in -- will there be any impact from the higher rates on those? And I guess, has that been flowing through?

Well, I mean, we obviously think that higher rates are going to impact prepayments. So we showed the range.

The sensitivity page we've put together was specifically to try and get people a very clear snapshot into what could happen if rates were to really move and thus, prepayments will really slow. So if you take, if you look at the page, if you go from a 15%, an underwritten rate across the portfolio down to a 5% rate, which I think is something that you would get if rates were up a couple of hundred basis points, the portfolio goes up in value on that one metric alone by about $0.5 billion.

So again, there are very few things in the plan that would actually go higher in value as rates would arise. This happens to be one of them, and this is a very, very clear kind metric to kind of look at in that regard.

But the IRR assumption does not reflect any of that through your assumptions?

It really doesn't. And as Paul said, we underwrite to where we underwrite and we've kind of reported it faithfully.

I think -- I hope you guys like the disclosure. We -- in addition to the aggregate disclosure we walk you through here, there is disclosure on every single pool and they'll ask to show what it is.

So obviously, that's designed to give you real visibility into what's going on. The aggregate numbers are what, of course, we pay attention to because that's what really drives our abilities to pay dividends and earn money and I think -- and generate returns for shareholders.

But the disaggregation of that, underpinning that portfolio by portfolio, is what you see in the back of this.

And then I was hoping you could walk through what the difference -- on the consumer loan portfolio, what the difference between the GAAP earnings and kind of the core earnings would be on that portfolio?

Hey, John -- John and Brian are in 2 different places. John, Brian, are you there?

Walk through it.

I mean, I think that the difference in the GAAP earnings is just the leverage, right? So it's a leverage and the fact that the leverage is basically paying -- the cash flows from the portfolio are paying down the leverage, so you're showing -- that's why the book value of the investment actually went up over the quarter because what happened essentially is we took cash flows and reduced the amount of debt.

Rather than bring in the cash earnings, that's where -- we didn't really change the mark on the portfolio. What happened is you're just basically adding to the book value by adding in the returns for the quarter.

That's the kind of the short answer to that.

Did you what made hop in on the core earnings versus GAAP on the consumer loans?

Yes, go ahead, John.

Sure. So the core earnings is actually really easy to explain.

The core earnings on the consumer loans is simply based on a level yield methodology. So all the cash flows from the loans are treated equally and the yield is even over time.

And that's kind of the easiest way to think about it and that's the way we underwrote the portfolio.

On a GAAP basis, based on the -- some of the loans not falling into our accounting regime where you can use a level yield, the GAAP basis earnings are going to be choppy over time based on your actual cash receipts, both on the interest side, on the coupon and on the charge-offs on the loans when they go and they default, is going to cause a great deal of choppiness from the GAAP side. So that's why we decided to go with a level yield methodology for our core earnings.

A couple of questions. If you look at the interest income reported on the -- for the quarter and divide it by whatever the average MSR is, what sort of effective yield would that suggest?

And is that the best way to really think about this portfolio?

I mean, I think it's not a bad proxy. So I mean, just think about the cash flows for the MSR book was...

No, no, the interest income. The one -- because a portion of the cash flows in the MSR and then they just -- it's like owning an IO.

It's just return of principals.

Yes. The -- well, the interest income is basically an estimate of what is returned on principle.

Right. And if you did -- divide A by B, what would that number look like?

It's the current return. It's actually is as reported.

So it's 17% return that we've shown in the overall portfolio. That's the interest income.

That's the current yield on it.

And that really is a -- and that seems to be tying in nicely to internal rate of returns as well, right?

It is. They basically are the same.

When it's on leverage like this, there's very little other things that can influence this, so it's really is the same thing.

When you look forward, we're probably going to see 2 sources of MSRs released either late this year or early next. Pricing is going to range everywhere from 60 basis points for highly distressed POS to probably over 100 basis points for clean MSRs.

There'll be more of the clean stuff coming over the next 3 to 4 years. Can you structure a levered capital situation where you not only can buy the historical business that you've been buying and made that 17% on, but perhaps also find a way to buy cleaner more leverageable servicing?

It's a really interesting question, Henry. We've got -- it has really been a market of 2 types of MSRs to date for the most part, which has been the credit impaired agency and then the PLS, which is, by definition, has been credit impaired.

And now with origination volumes being where they, you've seen a handful of portfolios that are trading on the new stop and certainly, we've seen that.

One window that we have into that activity is that to the extent that we have been rewriting business, in other words, recapturing the loans that been refinanced, the actual prepayment rate. which Is something we will break out as it becomes more meaningful over time, have really been next to 0.

So those are tremendous assets to own. And if you look back in the very first portfolio that we have, we have nearly $1 billion of new MSRs that we rewritten that we think is just solid gold.

Now I think when you look at the new portfolios, the risk of them, as the price goes higher, is you're dependence upon your refinance ability to recapture them gets higher and higher.

So for example, there was portfolio we looked at recently where we thought it was attractive from an economic standpoint. We didn't -- we would not have controlled the recapture in the same way that we have another portfolios and as a result, ended up passing on it.

We dropped our bid and passed on it because I just thought there was -- from a risk-adjusted standpoint, it was this out of sync with what this is.

I do think that as the second half of the year goes on, you are going to see a lot of action in the market on MSRs that are similar to what we own right now. So I do think there's a lot more of this to come in some form or another.

But this time next year, this time 2 years from now, I think the activity will be dominated by the new origination stuff. And so you'll have -- really have these 3 classes of MSRs to keep track of.

But do you think you can find a structure within NRZ that will allow you to buy these, we'll call them 9% to 10% yielding MSRs?

The -- we obviously -- our investment objectives are higher than that. So we would have to think that there was a better return on that.

And I think when you really look hard, and then MSRs are priced to 9% or 10% rate right now, there's a lot more downside than upside to that. And the -- it sounds like a very simplistic thing to say, I'll say it anyhow is that with an interest rate-sensitive investment like this, once it's prepared, it's gone, right?

So what you're doing, I mean, IOs don't run prepaid. Once they've hit prepaid, they're gone.

I get to be very conscious in those type of investments. And you can certainly add financial leverage to increase returns, but that's not been our position or statement thus far.

We can obviously improve it to hit the economics of this portfolio by leveraging it. We generated substantial returns without that and that's going to be our base case right now.

And what the structures look like on the new originations stuff, we'll have to see.

I think there's -- without kind of getting into the details, there are other ways, we think, that you can access those MSRs on a bit more of a kind of an operating basis that we think can generate the kinds of returns that we want. So hopefully, you'll see some good action from us in the second half this year along those lines.

And then on the consumer loan portfolio, and this may be overly simplistic, but these are real estate-secured, not real estate secured loans? And what is the real lever for turning those assets into cash?

The -- look, the consumer loan business is a gigantic one, $2.5 trillion, we have a big stake in our company, Springleaf, and -- so we are a very, very familiar with that portfolio in general. Again, these are, for the most part, unsecured.

When we say unsecured, in many cases, they have some form of collateral. The collateral could be about a car, even the mortgage on a house, but for the most part, they really are unsecured financings.

They are installment credit as opposed to revolving credit, right? And so the -- which makes them, from a static kind of loan analytical perspective, much to easier to understand and predict their behavior than of the revolving basis.

So we like the business a lot. This is a portfolio that was a legacy portfolio that was being sold.

It had some impairment in terms of its creditworthiness. It had impairments in terms of it's overall coupon.

That's why it traded at a discount where we don't think the rest of the market really does trade in discount, but -- so we're very happy with the acquisition.

But what's the magic to getting the customer to pay you?

People -- there's a rule on this country when people, for the most part, payback what they've borrowed. Not in every case, but that's what it is.

Are you then able to offer a future inducement of additional access to credit, or...

That's actually a big part of -- we're doing some really -- I mean, this is not the right call to talk about it, but we're doing some really interesting things of the consumer side. I hope we will be talking about it in the context of Springleaf sooner rather than later.

But we think that there's a lot you can do for those customers in addition to providing them just share capital, so...

On the -- I just wanted to get back to Doug's question on the performance of pool 7 and 8. And it looks like the CPRs are outside, a little bit outside of the bin [ph] you initially expected.

And just wanted to get out what the driver of was, whether it was HARP activity or perhaps it was expanding credit underwriting guidelines from competitors? Any more color on what's driving the increase in CPR?

If I'm wrong in that, it's not what's causing it, correct me.

Yes. I think you nailed it with the first point.

It's that each full [indiscernible] have a roughly high HARP concentration. And so in terms of timing of when Nationstar is able to target those borrowers and recapture those loans, it's unclear, but it's also defining [ph] population.

And so whether the pool prepays faster in the short term and then slows quicker, or it's more a level basis, we are -- what we're seeing is that Nationstar has been able to effectively go after those loans specifically and actually see a pretty impressive response rate. And so we think that some of that's going to taper as interest rates rise and as that population declines --

Okay, and I agree. We've seen Nationstar be very successful in recapture rates.

Is there any lag between when it's reported as a CPR and when it's reported as a recapture?

So the way we report recapture is actually when the load is actually redelivered. So let's assume that the period is about 45 days or so.

So there's a small lag in recapture rates.

Okay, got it. And then one follow up on the consumer loan.

I mean, obviously, it's funded today, but we've seen Springleaf be pretty successful in executing some term deals in a market at significantly higher leverage ratios and probably better funding costs. Once the portfolio is being serviced and you can get the rating agencies on board, any updated thoughts on accessing the term market with at least a portion of the portfolio?

Yes. The acquisition, we ended up funding, I think, at a better level than where the market was.

And I think a big part of the reason why we generated 30% returns on this is because the price ended up being opportunistic with respect to what financing we got in place. I think that's the short answer to that.

Specifically, on the question of refinance or restructuring this, I do think that there's a better debt that's available, as this portfolio has more experience and goes forward over time.

The overall cost of leverage on this transaction is about 3.75%. So on a nominal basis, it is higher than where the financing got done for Springleaf, certainly.

But 3.75% is a pretty sport rate to start with. So there could be -- there could definitely be some early return of capital.

To the extent that we want to deleverage it, [ph] something that's very, very plausible for us now. And we think the rates could be better.

But at the moment, with the current capital structure in place, it's generating plus or minus a 30% return, so it's something we're very happy with.

Okay. One last one.

As I look at [indiscernible] and look at the Excess MSR Fund 1 and 2, the amount of capital that's been raised for both of those funds, I mean, it seems pretty clear that the suggestion of pipeline is still a little bit than reported here. And perhaps if you could just comment on how we flip the capital being raised there, whether NSM [indiscernible] continues to expect to risk share or effectively, investment share in all the transactions, or if there's a different set of opportunities because...

No. Well, look.

Look, you're always -- it's an imperfect science of trying to estimate the future availability of investment and matching it up to investment dollar. So what we have done historically is we basically have kind of split investments roughly 1/3, 1/3, 1/3, between Nationstar, private equity funds and then NRZ, and that's we anticipate going forward.

That could change based on the size of the transaction, the nature of the transaction, et cetera, but I think that, that's a very good rule set to start to walk forward. I do think that there is the potential for some very large transaction, similar to what we saw over the last 12 months, to occur.

Because as I said in my opening remarks, I think that the forces that are compelling the banks to think hard about reducing exposure to the mortgage market, capital requirements, regulatory pressures, et cetera, have not abated, and in fact, in some cases, are actually rational increasing. So I think it's entirely possible, we're going to see some big portfolios coming out.

What Paul is really referencing in his pipeline report are things that are in the market now, that are actionable and things that we're working on. So there appears to be kind of a disconnect between what we think the aggregate opportunity is and the specific portfolios that are out there.

It's really that.

Actually, this is Brian, sitting in for Bose. I was just curious, what drove the decline in the average discount to used in the Excess MSRs, and just if you could help quantify the impact of that on the MSR valuation?

Yes. I mean, I think it was a combination of a couple of factors.

But, by and large, it was interest rates. And so as -- if you have a portfolio with an average coupon of 5% and let's say a 30-year fixed rate at 3.5%, just the refinance incentive for the portfolio is -- or call it, 150 basis points non average.

And that's -- that creates a lot of optionality and a lot of pricing variability. As interest rates rose in the quarter and as we got closer to borrowers being out of the money, we felt that the overall quality of the portfolio improved.

And as such, the discount rate -- we've brought discount rate in. The second factor, too, is admittedly, there's definitely more pricing pressure in markets here.

And so I think that the second component was just given the bit that we saw and call it, the overall activity in the quarter, we felt that a more, call it, mid-teens discount rate going in was consistent with where we were in the bidding of portfolios.

Great. Any way you can, I guess, quantify the impact that had on the valuation?

No. I mean, it's really the -- it's false.

You're looking at a bunch of different factors to try and come up with valuations. When you look at the price activity of the most liquid instruments, which would be the IOs, right, that's probably the single biggest factor, that was the actual market transactions on where thing are traded.

And I think our market valuations are conservative, kind of given the movement of those 2 things.

Just going -- looking to non-agency portfolio, what's the time frame for collapsing what you have left? Are you looking to make -- I mean, are there additional investments with the recent sell-off in that market?

Are you still looking to build that portfolio, or you're looking to sort of just collapse it and realize the gain?

No, absolutely. I mean, I think we're on a growth path of this portfolio.

I mean, Nationstar services, $100 billion-plus of the [indiscernible] University on call rates on mostly all of it, where we own 1% of that portfolio. And so it's really about staying strict within the terms of sourcing, the right part of the capital structure that really enhances the economics of the collapse.

And so -- but what we saw in the quarter, I mean, just given the corporate -- the technicals that ensued after kind of -- their break is the announcement on [indiscernible] really created a -- even more of a window in terms of buying opportunities. There was -- there are dealers right now sitting pretty heavy on inventories.

There was a large liquidation list in May and June as well, where we've put some pressure, downward pressure on pricing. Fortunately, for our portfolio, which is relatively seasoned, we didn't see much of the movement in pricing.

But in terms of near-term buying opportunities, absolutely. We'll be taking advantage of it.

It looks -- clearly, with the leverage returns in mid-teens and possibly higher than -- I mean, it -- there certainly is an investment [indiscernible] to be made to being in this business. But when you combine it with the serving, the MSRs, I think the goal of the vehicle was to lower the overall requirement to cost of capital, given the steadiness of the MSR, 5-, 6-year cash flows and the leverage.

I mean, what's the investment case that combine these 2 portfolios? I mean, do you think the market is going to recognize the stableness of -- and the received cash flows, even if you're using a little bit of leverage with this type of portfolio?

I mean, what -- just walk me through some of the combination of both basis?

I think it's actually very complementary between the 2. They're both related in the mortgage space, and mortgage space is a big one.

The MSR investments, the new investments tend to be episodic in nature. So there are and there will be continuing more floral arrangements.

You'll see more consistent investment additions from that side. But the nature of the businesses is it's been episodic sales on the part of financials institutions that have created kind of the investment opportunities.

The non-agency positions are related. They're different, but related.

And we think leveraged to the one with the none mark-to-market debt, generate mid-teens returns in this market of 0 percentage interest rates, still is still extremely attractive investments. And the -- I think that as Paul and the group had success in collapsing transactions and adding incrementally those returns, it makes that part of the business even more attractive and it's also business that happens kind of everyday, right?

There's -- that's still a very large market. It was couple of trillion dollars at the peak.

It's still $800 billion or 900 billion in non-agency securities that are out there. So it's a big environment market.

We see a lot of opportunities. And to the extent that we can actually focus of those with our servicing partner and control both the collapse, as well as the refinance and the collections activity of them, we think that those concerns are terrific.

And I do think that the combination of that over time actually adds to the stability and stableness of the earnings and thus, the dividends. And hopefully, our cost of capital will really reflect that.

You certainly have no peers, I mean, to really comp against. That's part of the market's confusion why you're not already getting a lower dividend yield requirement.

And then just on that point, on looking at new acquisitions, raising capital down the road? I mean, Wes, you talked about possibly using short-term alliance against your MSRs to buy a big portfolio and then to term it out later.

You have all seen -- [ph] know preferred in the capital structure. And your trust preferred that, that [indiscernible] left with the legacy company.

I mean, how come we -- what can we assume in terms of reasonable corporate debt in terms of leverage in the core debt market, what you do going forward. Would you choose some short-term borrowing to buy a big portfolio of that [indiscernible] on your screen?

Well, I think having the really leveraged balance sheet gives us a lot of financial flexibility to look at actions and that's obviously -- that's an intended result. So we do think that it gives us flexibility.

We're working on a bunch of different financing initiatives to try to make that a bit more actionable. We have looked at corporate stuff.

We had looked at different kind of the financing lines. Nothing is in place right now, but it's a very, very hot topic around the firm and we're looking to that.

Relating to that, to your point is exactly the right one, is you want to be in a position of -- to be opportunistic if this situation arises. But you don't have to have a bunch of capital sitting in your balance sheet, invested, in order to do so.

Right. So when you look at -- and finally, for me, you could -- you look at everything from the preferred market to converts, some of your peers, you'll see exchangeable notes.

I mean, are you looking at sort of everything?

We are. Except I'd say that the governing factor for me is, I think that the market will reward transparency and simplicity in virtually, every case.

And we've got an extremely concise business here. We've given -- gone at great lengths of great, tremendous transparency for the analyst investment community.

And before I did something that was really, I think, little bit fancier in the capital structure, we will think long and hard about it because I don't think that, that is necessarily always the long-term best solution, so...

Right. But as I've said, now, with your balance sheet, you could be involved with a large -- to them, a big MSR transaction came out there.

I mean, energy, it could be involve very easily with the size of your balance sheet here today?

Absolutely.