True or False? — T/F: New Residential and Michael Nierenberg

Here are eight examples that will review knowledge about Mike Nierenberg and New Residential (answers and explanations are provided after all of the true or false questions are listed):

• 1 — New Residential Mortgage Corp. was founded before the 2007–2009 financial crisis. — T or F

• 2 — Mike Nierenberg has served as President and Chief Executive Officer of NRZ since the company was established. — T or F

• 3 — At the end of 2018, New Residential was the tenth largest owner of mortgage servicing rights (MSRs) in the United States. — T or F

• 4 — Mike Nierenberg became Board Chairman of New Residential in early 2019. — T or F

• 5 — NRZ controlled less than 20 percent of the non-Agency mortgage market at the end of 2018. — T or F

• 6 — As of September 6, 2019, New Residential’s most recent business acquisition was Guardian Asset Management. — T or F

• 7 — New Residential has completed one public offering of preferred stock as of September 6, 2019. — T or F

• 8 — The total returns of NRZ’s common shares outperformed both the Bloomberg mortgage REIT Index and the S&P 500 Index during a six-year period from May 2013 to the end of June 2019. — T or F

Answers and Explanations: NRZ and Mike Nierenberg

1 — False. NRZ was established in 2013 as a mortgage real estate investment trust (REIT) that trades on the New York Stock Exchange.

2 — True. Mike Nierenberg has been CEO and President of New Residential since the company’s inception (May 2013). The continuity of management has proven to be a major advantage for New Residential as the mortgage industry continues to change and consolidate.

3 — False. As 2019 got underway, New Residential Investment Corp. ranked as the fifth largest owner of MSRs in the nation with a portfolio of $539 billion unpaid principal balance (UPB). During the past decade, banks have sold more than $3 trillion of mortgage servicing rights. NRZ has been approved for ownership of MSRs in all 50 states since 2016. During the second quarter of 2019, New Residential issued a Freddie Mac Capital Markets MSR note — the first of its kind ($829 million).

4 — False. Michael Nierenberg became NRZ’s Board Chairman in 2016.

5 — False. Based on end-of-year data for 2018, New Residential controlled about 37 percent of the non-Agency market.

6 — True. The 100 percent purchase of Guardian Asset Management by NRZ was announced August 19, 2019. About two months earlier, New Residential announced a 50 percent investment in Covius Holdings, a leading provider of technology-enabled services to the mortgage and financial services industries. Both acquisitions reflect NRZ’s ongoing strategy of a “whole pie” approach to the mortgage industry. This strategy is designed to capture an increasingly larger share of mortgage-related revenues throughout the entire residential mortgage process.

7 — False. Prior to 2019, New Residential did not issue any preferred stock. During 2019, NRZ has completed two separate offerings of cumulative fixed-to-floating rate preferred shares — Series A initially set at 7.5 percent and Series B issued at 7.125 percent.

8 — True. While the Bloomberg mortgage REIT Index increased by 38.4 percent, total returns of New Residential’s common stock were 142 percent from the time that NRZ was founded in May 2013 through the end of the second quarter 2019. During the same period, the S&P 500 Index rose by 109.3 percent.

True or False, Part 2: Shellpoint Mortgage Servicing

This is the second of three articles examining true or false questions involving residential mortgages. Part one discussed New Residential Investment Corp. (NYSE: NRZ) and Michael Nierenberg (head of NRZ’s executive management team). This segment will analyze Shellpoint Mortgage Servicing (SMS).

True or False? — T/F: Shellpoint

Shown below are six questions that examine Shellpoint Mortgage Servicing (answers are shown after all of the true/false questions):

• 1 — The Shellpoint Partners transaction was completed by New Residential in July 2018 and included Shellpoint Mortgage Servicing. — T or F

• 2 — After the proposed acquisition of select Ditech assets is finalized by NRZ, Shellpoint will be a Top 5 Servicer. — T or F

• 3 — Shellpoint services only qualified mortgages (QM) that are based on underwriting guidelines established by federal housing agencies. — T or F

• 4 — SMS has been a Top 10 mortgage servicer since 2015. — T or F

• 5 — Hundreds of bank failures since 2008 caused the mortgage servicing business to change dramatically. — T or F

• 6 — Mortgage servicing has become less complicated during the past decade. — T or F

Answers and Explanations: Shellpoint

1 — True. In addition to acquiring a mortgage servicing company (Shellpoint), NRZ also acquired ancillary mortgage-related companies that included a mortgage originator, title insurance business, a real estate owned (REO) management company and an appraisal business.

2 — True. The pending Ditech transaction (during Ditech’s second bankruptcy proceeding in a two-year period) is an attractive buying opportunity for New Residential. This purchase represents an unusually large block of mortgage servicing rights (MSRs) that are not typically available at one time. It should be noted that NRZ’s purchase agreement does not include Ditech’s reverse mortgage operations/liabilities. New Residential is one of the few companies with the financial strength to execute a bulk transaction of this size — with an unpaid principal balance (UPB) of approximately $62 billion of MSRs.

3 — False. While many bank-owned mortgage servicers typically process only QM loans, Shellpoint’s non-bank ownership provides the freedom to handle both qualified mortgages and non-qualified mortgages (non-QM), a rapidly growing piece of the residential mortgage business.

4 — False. At the time that New Residential acquired Shellpoint (the purchase process was started in 2017 and finalized during 2018), SMS was the 15th-largest non-bank mortgage servicer in the United States. NRZ ownership has been an instrumental part of Shellpoint’s processing and revenue growth during 2018–2019. For example, Shellpoint was servicing approximately $50 billion of mortgage loans based on the UPB of the underlying mortgages in November 2017. The UPB total grew to $109 billion by the end of 2018.

5 — True. From 2003 to 2007, the FDIC (Federal Deposit Insurance Corporation) closed 10 banks. During the next five-year period from 2008 to 2012, the FDIC closed 465 banks. With this kind of upheaval among banking institutions throughout the country, disruptions in normal mortgage processing and servicing were unavoidable — especially since banks frequently handled both mortgage originations and servicing. The resulting administrative problems and financial challenges caused many banks to reduce their role in all phases of the residential mortgage process.

6 — False. Complicated assets such as Agency/non-Agency residential mortgage-backed securities (RMBS) and MSRs have played a much larger role in mortgage servicing success during the last 10 years. The added levels of complexity have made it clear: there are only a few servicers that understand what is needed and also have the necessary industry relationships and financial resources. The increased complexity also places a premium on mortgage-related companies that are willing (and able) to devote substantial capital to improving technology-based aspects throughout residential mortgage operations — from mortgage origination to closings, servicing, asset ownership and securitizing. While banking institutions have been cutting expenses across the board since the Great Recession, New Residential has made new investments in mortgage-related technology (such as Covius Holdings) and has transformed the entire residential mortgage industry.

True or False, Part 3: NewRez

This is the final article in a three-part residential mortgage assets series with a series of true or false statements. The first two segments assessed New Residential Investment Corp. (NYSE: NRZ), Mike Nierenberg (head of NRZ’s executive management team) and Shellpoint Mortgage Servicing. This part will review NewRez.

True or False? — T/F: NewRez

The following questions will focus on NewRez (explanations and answers are provided in the next section):

• 1 — NewRez was formerly known as New Penn Financial. — T or F

• 2 — NRZ acquired NewRez in 2013. — T or F

• 3 — NewRez will be a Top 15 non-bank mortgage originator once the pending NRZ acquisition of proposed Ditech operations is completed. — T or F

• 4 — NewRez offers only non-qualified mortgages (non-QM) — T or F

• 5 — Soon after New Residential acquired NewRez, the NewRez team’s size was reduced by 50 percent in an effort to cut expenses. — T or F

• 6 — NewRez is approved to lend in 24 states. — T or F

• 7 — The combined residential mortgage market share for the top five U.S. banks dropped from 50 percent in 2011 to 21 percent in 2019. — T or F

• 8 — Non-QM loans offered by NewRez are called Smart Series Mortgages. — T or F

Answers and Explanations: NewRez

1 — True. A few months after NRZ acquired New Penn Financial, the company was rebranded as NewRez (NewRez Mortgage in Texas and Arkansas) to reflect the new ownership as well as the nationwide scope of this rapidly growing and non-traditional residential mortgage originator.

2 — False. The company currently known as NewRez was initially founded in 2008, and New Residential acquired NewRez as part of the 2018 Shellpoint Partners deal.

3 — True. While New Residential’s proposed purchase (announced June 18, 2019) of some Ditech assets excludes specific operations such as reverse mortgages, the agreement includes most of Ditech’s forward assets along with some office spaces and employees. As noted by Michael Nierenberg (head of NRZ’s executive management team), “The acquisition of these origination and servicing operations from Ditech, in addition to those already operated through NewRez and Shellpoint Mortgage Servicing, will further our position as an industry leading originator and servicer.”

4 — False. NewRez makes qualified mortgages (QM) as well as non-QM loans. This allows NewRez to offer borrowers a wide range of choices for residential mortgage options.

5 — False. One of the first steps taken after NRZ acquired NewRez was to triple the size of the NewRez team. This growth strategy is diametrically opposed to the approach taken by most banks during the last 10–12 years. For example, Bank of America alone has shrunk the number of their employees by more than 100,000 since 2010. It is worth noting that management expert Tom Peters expressed his candid thoughts about downsizing when he published a book a few years ago with this title: “The Circle of Innovation: You Can’t Shrink Your Way to Greatness.”

6 — False. NewRez is a nationwide mortgage originator approved to lend in 49 states and the District of Columbia via lending channels that include joint venture partners, wholesale, correspondent lending, direct-to-consumer and retail.

7 — True. This significant downward residential mortgage lending trend for the largest traditional lenders is also mirrored by most other banking institutions. At the same time, market share for alternative lenders like NewRez has increased from about 10 percent in 2010 to 50 percent in recent results.

8 — True. Smart Series Mortgages offered by NewRez include non-traditional jumbo mortgages (SmartEdge), condo mortgages that don’t fit federal agency condominium guidelines (SmartCondo), a second chance qualification process for borrowers with a recent bankruptcy, foreclosure or short sale (SmartTrac), an investor cash flow mortgage (SmartVest), loans for borrowers qualifying with assets only (SmartFunds) and a bank statement program for self-employed borrowers (SmartSelf). Retired individuals in particular often have difficulty obtaining a QM loan — the NewRez Smart Series Mortgages allow more practical mortgage choices for retired borrowers as well as many other home buyers.

NRZ and Mike Nierenberg: Common Stock Dividends

New Residential has paid out almost $3 billion in total dividends since the company was founded in 2013. NRZ’s quarterly dividend of $0.50 per common share has remained unchanged for two years and represents an annualized yield of 13.7 percent based on the New York Stock Exchange closing price September 6, 2019 ($14.51). Mike Nierenberg is the CEO, President and Chairman of New Residential Investment Corp.

This is the final part in a series examining investment decisions by New Residential Investment Corp. (NYSE: NRZ). The first two articles assessed partnership collaborations and non-traditional strategies. This segment will take a closer look at NRZ’s opportunistic approaches to acquisitions. For NRZ, this decision-making strategy includes a combination of selective timing, contrarian thinking and advance planning. As suggested by Craig D. Lounsbrough, attractive opportunities can come in all sizes: “We stand around waiting for the ‘big’ opportunity while we bypass all the ‘small’ opportunities that would have created that ‘big’ opportunity.”

New Residential Investment Strategies: Selective Timing

“Timing is everything” generally means that investment opportunities do not last forever. In emphasizing an opportunistic mentality for investing in mortgage-related assets, New Residential’s Michael Nierenberg has created a best-in-class financial services company in only six years. While “opportunity only knocks once” is a popular perspective suggesting that opportunities are restricted in quantity, NRZ has managed multiple opportunistic successes that include the following:

• Purchasing Mortgage Servicing Rights (MSRs) from Banks at an Early Point — For many decades, banks held specialized mortgage-related assets like MSRs on their balance sheets. There was not a practical need for an active MSR trading market because these assets rarely changed hands. When the Federal Reserve required banking institutions to improve capital reserves (in response to the 2007 financial crisis), most banks had few choices but to sell mortgage servicing rights and other mortgage assets. In conjunction with facilitating a nationwide trading market for MSRs, New Residential became a selective and large-scale buyer — NRZ is currently one of the largest non-bank owners of mortgage servicing rights in the nation.

• Recognizing the Non-Agency Mortgage Opportunity — The previous bank domination of the mortgage industry led to an almost exclusive focus on Agency versions of mortgages (loans based on underwriting criteria defined by federal housing agencies). In addition to requiring prudent timing, New Residential’s increased use of non-Agency mortgages and associated call rights required an active management style — NRZ now controls about one-third of the non-Agency market.

• Issuing Low-Cost Preferred Stock to Reduce Debt Ratios — Preferred stocks count as equity and can be used by companies to add capital while reducing traditional debt ratios. However, issuing preferred stocks in the mortgage industry is usually limited to companies with a financial history of 10–20 years or more. Because of New Residential’s strong balance sheet and leading industry position, NRZ was recently placed in a unique and compelling position to issue preferred stock only six years after the company was founded — during the last 60 days, the company issued two series of cumulative fixed-to-floating rate preferred shares.

• Buying Assets as the Mortgage Industry Consolidates — The Great Recession in combination with a rapidly changing competitive environment forced many industry participants to sell assets, cut costs and change business strategies. New Residential initially entered the mortgage sector in 2013 as industry consolidation was well underway. Since then, NRZ has periodically had “the pick of the litter” in assessing new business opportunities. The biggest challenge for the New Residential management team has possibly been to be ultra-selective in choosing the “right opportunities” in terms of pricing, capturing more mortgage-related revenue and industry dynamics. During 2017–2018, NRZ focused on the acquisition of a non-traditional and non-bank nationwide mortgage originator, a non-bank mortgage servicing company and several other ancillary mortgage businesses. During 2019, selective and opportunistic acquisitions have included a purchasing agreement for the forward assets (primarily MSRs, the operating platform and mortgage servicing operations) of Ditech Holding during current bankruptcy proceedings. In a recent announcement dated August 19, New Residential reported the 100 percent purchase of Guardian Asset Management — a national provider of property management and field services to asset management firms, financial institutions and government agencies.

FYI — Michael (Mike) Nierenberg and NRZ: Overview Since Inception (May 2013)

Michael Nierenberg has served as New Residential’s Chief Executive Officer and President since 2013 and as Board Chairman since 2016. New Residential Investment Corp. is a mortgage real estate investment trust (REIT) that trades on the New York Stock Exchange with ticker symbol NRZ. The company’s stock market capitalization is $5.88 billion ($14.16 per share) as of August 16, 2019. During a 3-year period ending August 16, New Residential common shares traded between $13.30 and $18.75 on the NYSE.

This is the second in a three-part series analyzing investment strategies employed by New Residential Investment Corp. (NYSE: NRZ). Part one described the non-traditional and disruptive approach used by Michael Nierenberg (head of NRZ’s executive management group) and the New Residential team. This article will show how the company frequently takes a partnership approach when investing. Collaborating is regularly viewed as an effective and prudent strategy — as exemplified by these observations:

• “Collaboration is multiplication.” (John C. Maxwell)

• “If you want to go fast, go alone. If you want to go far, go together.” (African proverb)

• “Great things in business are never done by one person.” (Steve Jobs)

• “When you need to innovate, you need collaboration.” (Marissa Mayer)

New Residential Investment Strategies: Collaborating and Partnering

In today’s ultra-competitive business world, collaboration with other companies is often a tricky proposition — especially within the mortgage and financial services sectors. Unlike most of their competitors, NRZ and Michael Nierenberg have included partnering and collaborating as a core investment strategy since the company was formed in 2013. Here are four examples:

SpringCastle and Prosper Consumer Loans — Residential mortgages have many similarities to other forms of debt such as consumer loans. New Residential entered into the SpringCastle consumer loan portfolio investment as a joint-venture in 2013. NRZ’s ownership interest was originally 30 percent. The partnership also involved the Blackstone Group and OneMain Holdings. After OneMain sold their interest to New Residential and Blackstone in 2016, NRZ’s ownership increased to 54 percent. The Prosper investment was initiated in 2017 and is a joint venture with four partners. In addition to cash flow benefits, the Prosper loan portfolio includes warrants that currently provide New Residential with an 8-percent ownership interest in Prosper, a California-based leader in the peer-to-peer lending industry.

New Mortgage-Related Technology — For many years, consumers have been frustrated by the relative lack of new technologies in the mortgage business. At the same time, mortgage company employees have been saddled with legacy software programs and databases that make it difficult to work with other mortgage businesses in order to expedite closings and accurately complete multiple mortgage-related tasks. The foreclosure crisis during and after the Great Recession was amplified by inadequate technology and documentation procedures. To focus on overcoming these recurring challenges, New Residential acquired a 25 percent partnership interest in Covius, a provider of technology-related solutions.

Agreements to Cooperate — Collaboration does not always require a partnership in which parties share ownership rights. New Residential is involved in a joint marketing agreement with Matic that encompasses several kinds of insurance needs for consumers, a work sharing agreement with Auction.com addressing foreclosure auctions and a cooperative brokerage arrangement with Altisource.

Internal Collaboration — The overall residential mortgage process overlaps with a number of separate businesses. These include mortgage origination, underwriting, appraisal management, title insurance, closings, servicing and securitizing. Even when banks dominated the mortgage origination business, there were very few formal connections among all of the different pieces of the mortgage pie. During the past 10 years, the mortgage industry has consolidated as various mortgage-related companies exited the business or reduced mortgage roles — some via formal bankruptcy proceedings and others in strategic combinations that facilitated cost-cutting. With a management structure that already featured a collaborative mentality, New Residential adopted a “whole pie” mortgage-related investment strategy with a view toward connecting the pieces in a way that has rarely been seen to date. NRZ has added subsidiaries that include Shellpoint Mortgage Servicing, NewRez (non-traditional mortgage originator that operates in 49 states), eStreet (appraisal management) and Avenue 365 (lender services and title insurance). In addition to expediting and improving the mortgage process, NRZ’s internal partnership approach also facilitates New Residential’s capabilities to originate, service and securitize non-Agency loan products such as non-qualified mortgages (non-QM).

A reminder — The NRZ Investments series will continue with “Part 3: Opportunistic Acquisitions.”

FYI — NRZ: Common and Preferred Dividends

New Residential’s quarterly dividend of $0.50 per common share has remained unchanged for two years and represents an annualized yield of 14.1 percent based on the NYSE closing price August 16, 2019 ($14.16). NRZ recently issued Series A and Series B cumulative fixed-to-floating rate preferred shares with Series A initially set at 7.5 percent and Series B issued at 7.125 percent.

This is the first article in a series that will discuss investments made by New Residential Investment Corp. (NYSE: NRZ). The initial segment reviews non-traditional strategies used by NRZ. This transformative approach is epitomized by the following insights:

• “Disruptive innovation can hurt, if you are not the one doing the disrupting.” (Clay Christensen)

• “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” (Charles Darwin)

• “Instead of thinking outside the box, get rid of the box.” (Deepak Chopra)

• “At least 40% of all businesses will die in the next 10 years… if they don’t figure out how to change their entire company to accommodate new technologies.” (John Chambers)

• “In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility. That’s it — because nothing else is sustainable, everything else you create, somebody else will replicate.” (Jeff Bezos)

New Residential: Disrupting Traditions and Transforming the Mortgage Industry

During the past 50 years, very few industries have been more traditional and non-disruptive than the residential mortgage sector. The prevailing lack of change and failure to upgrade to new technologies is at least in part explained by aggressive cost-cutting and sticking with prevailing business practices. Multiple variations of “If it’s not broke, don’t fix it” have been periodically used by financial services and mortgage company executives to explain why mortgage practices have remained unchanged for so long.

However, the Great Recession during 2007–2009 made it clear that perhaps residential mortgages and mortgage providers were not in such perfect condition after all. Adding to the need for disruptive and transformative changes in the mortgage business were increasingly frustrated borrowers — financial consumers that wanted more choices and flexibility when they made what is for many the biggest investment of their lives. With this backdrop, New Residential and Mike Nierenberg (head of NRZ’s executive management team) acted as mortgage-industry disruptors when they formed the company in 2013 and began to transform the industry with investment strategies like these:

Investing in Hard-to-Replicate Assets — The wisdom reflected by the Jeff Bezos observation in the opening paragraph deserves some additional emphasis at this point. Mortgages have been a “cookie-cutter” investor asset and consumer product for several decades, with little or no differentiation from one mortgage company to another. When modest innovations were made, they were quickly copied by mortgage-industry competitors if the idea proved to be a successful one. Mike Nierenberg built upon the value of hard-to-replicate investments, initially with mortgage servicing rights (MSRs) and then non-Agency residential mortgage-backed securities (RMBS) and mortgage-related businesses such as NewRez and Shellpoint Mortgage Servicing.

Specializing and Adopting a Non-Bank Ownership Framework — Until recent years, banking institutions dominated the residential mortgage field. It was not unusual for key federal and state legislation to be written only with the tacit support of the banking lobby, and as recently as 2010 traditional residential lenders such as banks held in excess of a 90-percent market share. Mike Nierenberg and NRZ chose to specialize in residential mortgages and to avoid a bank ownership strategy by forming a mortgage REIT (real estate investment trust) that trades on the New York Stock Exchange. Based on recent data, non-traditional mortgage originators such as NewRez now have at least a 50-percent market share for residential mortgages.

Making Mortgages and Mortgage-Related Investments More Customer-Centric — Until the digital information age, the mortgage industry was largely a marketer-centric one in which the seller controlled the flow of information. As both investors and consumers switched to a preference for customer centricity, “traditional” mortgages were no longer an automatic choice. NewRez is a non-traditional and non-bank lender that offers non-qualified mortgages (non-QM) to borrowers in 49 states. Total shareholder returns for New Residential’s common shares from May 2013 through June 2019 was 142 percent. In a comparable time frame, the S&P 500 Index rose by 109.3 percent and the Bloomberg mortgage REIT Index increased by 38.4 percent.

A reminder — The NRZ Investments series will continue with “Part 2: Collaboration with Partners.”

For mortgage-related companies, there has been no shortage of barriers to overcome during the past decade. This article summarizes five prominent illustrations of these challenges and how Michael Nierenberg and New Residential Investment Corp. overcame them.

New Residential (NYSE: NRZ) — Overcoming Obstacles in the Mortgage Industry

The path to success in today’s residential mortgage sector is littered with obstacles such as the following at almost every turn:

Capital Resources — Residential properties and underlying mortgages are expensive assets involving trillions of dollars: $33 trillion in overall value and $10 trillion in mortgage loans. Whether buying mortgage-related assets or financing individual mortgages, providers need a steady and substantial flow of capital to remain financially healthy.

• NRZ — New Residential was established six years ago as a publicly traded mortgage real estate investment trust (REIT). As a profitable New York Stock Exchange (NYSE) company, NRZ has access to financing markets. In a recent example (February 20, 2019), the company completed a public offering of 40 million common stock shares ($15.89 per share as of June 21). The capability to securitize non-Agency and non-qualified mortgages (non-QM) is now mandatory for contemporary mortgage companies. New Residential recently securitized about $600 million of non-QM mortgages issued by an NRZ subsidiary (NewRez).

Industry and Business Culture — Regardless of how innovative a mortgage company and its leadership is, each business can be constrained by the norms and traditions of the existing industry. This potential barrier is also impacted by the segmented nature of the overall mortgage process because multiple providers are involved at different stages — each with a different culture and way of doing things.

• NRZ — The recent origin of New Residential (2013) has freed the company from an often-obsolete organizational culture that exists in many older banking institutions and other traditional financial services enterprises. The REIT framework of NRZ facilitates non-bank ownership that avoids additional barriers. To create built-in cohesion among different phases of the mortgage process, New Residential has acquired several mortgage-related businesses such as NewRez and Shellpoint Mortgage Servicing.

Legal Requirements — Both real estate and mortgages are governed by national, state and local guidelines and legal processes. Companies trading on the NYSE (as New Residential does) are also subject to stringent requirements covering securities.

• NRZ — At an early stage (since 2016), New Residential was approved for ownership of mortgage servicing rights (MSRs) in all 50 states, to act as a mortgage servicer for Freddie Mac and Fannie Mae and to function as an FHA lender. NewRez is qualified to operate in 49 states and the District of Columbia.

Technology and Innovation — Investments in new technology are routinely expensive. But borrowers and investors have high expectations regarding technological capabilities. The advances in technology since 2000 have changed almost everything, but the mortgage industry has been slow to innovate and react to the speed of change.

• NRZ — During the past six years, New Residential and Mike Nierenberg have employed unconventional business strategies and transformed the way that the residential mortgage business operates. For example, Mike Nierenberg was a pioneer in facilitating the investment market for MSRs and excess mortgage servicing rights. NRZ recently announced a strategic technology-related investment in Covius Holdings, a leading provider of technology-related services to the financial industry.

Geography — Starting with the popular phrase of “Location, location and location” (often referred to as the three most important considerations when buying real estate), mortgage activities are defined by a specific location for each property. Geographical constraints can impact recurring decisions such as financing, acquiring mortgage businesses and enhancing investment results.

• NRZ — With recent acquisitions, New Residential took a critical step toward the company’s objective of capturing the entire consumer value chain for residential mortgages on a nationwide basis. NRZ’s businesses now include investing, loan originating, title insurance, appraisals, mortgage servicing, REO (real estate owned) management and settlement services. As noted above, New Residential’s business reach currently extends to 49–50 states in many cases.

Mike Nierenberg and New Residential Investment

• Michael (Mike) Nierenberg — NRZ’s President, CEO and Board Chairman.

• NRZ Dividend Yield — Based on the June 21, 2019 closing price of New Residential ($15.89), the 2018 dividend of $2 per share (paid quarterly) represents a yield of 12.5 percent.

The challenge for residential mortgage companies is clear — current and prospective customers want more customer-friendly experiences in their dealings with mortgage service providers throughout the entire mortgage process. At the same time, even though many mortgage lenders and other mortgage-related businesses have seemingly embraced the concept of being customer-centric and customer-friendly, very few are actually delivering customer-friendly business practices and actions on a daily basis.

But there is a silver lining in this particular cloud — New Residential Investment Corp. (NYSE: NRZ) has achieved many notable successes associated with customer-oriented strategies. This article provides an overview of the two primary challenges faced by residential mortgage providers and what NRZ did about it.

Customer-Friendly Residential Mortgages: Overcoming the Challenges

If customer friendliness and customer centricity are so important to success in the mortgage industry, it is fair to ask why more companies do not have tangible customer-friendly actions and results to substantiate a commitment to these principles. Here are two key industry challenges and the solutions applied by New Residential:

The Biggest Barrier: Organizational Culture — As noted by Charles Kettering, “The world hates change, yet it is the only thing that has brought progress.” Key decision-makers in many organizations have an enduring perception that legacy business practices are still working. Change can always be difficult, especially if the management-influenced culture is committed to a variation of “If it’s not broke, don’t fix it” attitude. A further complication emerges in the residential mortgage process because company executives have periodically concluded that customer-centric methods are needed only in the early sales process and not in later phases such as mortgage servicing. To add to the challenges, traditional mortgage lenders frequently have a deeply embedded sales and operational culture that was built over several decades.

• NRZ’s Solution — New Residential avoided the multiple challenges associated with having a legacy organizational culture by starting with a new company in 2013. NRZ is organized as a mortgage real estate investment trust (REIT) that trades on the New York Stock Exchange. The non-bank ownership structure has also helped New Residential to avoid the traditional organizational culture associated with banking institutions. For example, NRZ acquired a non-bank loan originator (NewRez) and a non-bank mortgage servicing company (Shellpoint) in 2018. NewRez provides non-traditional and customer-friendly services and products such as non-qualified mortgages (non-QM) in 49 states.

Lack of Innovative Leadership — The critical combination of innovation and leadership was described by William Pollard: “Without change there is no innovation, creativity, or incentive for improvement. Those who initiate change will have a better opportunity to manage the change that is inevitable.” Despite the prudence and wisdom of this observation, the mortgage business has traditionally focused on innovations that reduce costs rather than solve recurring customer problems. Mortgage-related companies are also often plagued by constant turnover in the executive suite, and this distinct lack of continuity impedes effective and innovative leadership.

• NRZ’s Solution — Michael Nierenberg has been an innovator in the residential mortgage market for more than two decades. During the past six years, he has served continuously as NRZ’s Chief Operating Officer and has transformed the way that the residential mortgage business operates. To facilitate New Residential’s capacity to initiate customer-friendly change in the mortgage industry, the company recently made a strategic investment in Covius, a leading provider of technology-related support to the financial services sector. In addition to providing mortgage services that are customer-friendly, New Residential has also produced investor-friendly investment results. NRZ has built a specialized portfolio involving hard-to-replicate assets and has become one of the largest non-bank owners of mortgage servicing rights (MSRs) in the nation.

New Residential Investment Corp. and Michael (Mike) Nierenberg

• Mortgage Servicing Rights (MSRs) — NRZ is the fifth largest owner of MSRs in the United States.

• NRZ Management Continuity — Michael Nierenberg has served as President and CEO of NRZ since 2013 and as Board Chairman since 2016.

Within the residential mortgage industry, New Residential Investment Corp. represents the leading example of vertical integration in progress. Established in 2013, New Residential is a mortgage real estate investment trust that trades on the New York Stock Exchange (NRZ) — the company is led by Mike Nierenberg. This article will evaluate six success factors that have enabled NRZ to make steady progress toward owning the whole mortgage pie.

NRZ — A Laser Focus on Capturing the Whole Residential Mortgage Pie

New Residential and NRZ’s executive management team have been working toward the goal of whole mortgage pie ownership for several years. After the company acquired Shellpoint (finalized about 10 months ago), Mike Nierenberg described the transaction: “This acquisition has proven to be a critical step forward towards our objective of capturing the entire consumer value chain.” Here are especially noteworthy aspects of NRZ’s vertical integration success:

• Continuity in Leadership — Vertical integration is especially challenging when the top leadership of a company keeps changing. Mike Nierenberg has been President/CEO of NRZ since inception (2013) and Board Chairman since May 2016.

• Opportunistic Investments — Prudent timing and pricing requires extensive due diligence and patience before assets are bought (or sold). NRZ has employed an active management style that often involves purchasing misunderstood assets at a steep discount and acquiring companies when the industry is consolidating.

• Hard-to-Replicate Assets — By focusing on specialized investments like mortgage servicing rights (MSRs) and non-Agency residential mortgage-backed securities (RMBS) that are difficult for other companies to replicate, NRZ has added a striking competitive advantage to the company’s whole pie strategy.

• Shareholder-Centric Outcomes — Rather than focusing on a “pie in the sky” strategy that emphasizes future outcomes while sacrificing current positive results, NRZ has integrated each new “piece of the pie” in a prudent fashion that supports current cash flow, earnings, dividends and steady growth in book value (increasing every year since New Residential’s inception). NRZ paid out $693 million in common share dividends during 2018 and more than $2.4 billion in total dividends to shareholders since inception (May 2013). Based on the May 17 closing price of New Residential ($16.62), the 2018 dividend of $2 per share (paid quarterly) represents a yield of 12 percent.

• Leading (Instead of Following) and Growing (Instead of Shrinking) — When companies acquire other businesses, it is not unusual for a key motivation to be a rush to match a competitor’s previous actions (following, not leading). Similarly it is common to read about job cuts and layoffs after acquisitions, especially when banks combine operations (as many have since the 2007 financial crisis). For example, Corilyn Shropshire reported the following in April 2019: “Almost 500 Chicago-area workers will lose their jobs due to Fifth Third Bank’s acquisition of MB Financial Bank, Fifth Third confirmed Tuesday.” On a larger scale, Brian Moynihan (Bank of America’s CEO) stated in 2018 that the company had cut about 100,000 jobs in the previous decade. In a vivid illustration of growing rather than shrinking, NRZ expanded the NewRez team by 300 percent after New Residential acquired the non-traditional mortgage lender in 2018.

• Non-Bank Strategies — NRZ has capitalized on non-bank ownership strategies throughout the company’s 6-year history. An early emphasis was on acquiring MSRs when banks were forced to sell these critical mortgage-related assets in order to improve capital reserves. With 2018 acquisitions, New Residential acquired a non-bank loan originator that lends in 49 states and the District of Columbia (NewRez) and the 15th-largest non-bank servicer in the United States (Shellpoint Mortgage Servicing).

New Residential Investment — Publicly Traded REIT (NYSE: NRZ)

As summarized in a May 2019 article, “NRZ’s executive management team (led by Michael Nierenberg) has not hesitated to employ unconventional business strategies and bold courses of action that consistently enable New Residential to stand out from the mortgage crowd in a positive way.” Here is additional information about Michael (Mike) Nierenberg and New Residential:

Mike Nierenberg — New Residential’s Board Chairman, President and Chief Executive Officer.

NRZ — New Residential is the fifth largest owner of MSRs in the United States.

Owning real estate has enjoyed a positive long-term reputation as an investment strategy. Wealthy individuals often attribute much of their financial success to ownership of real estate:

• “Ninety percent of all millionaires become so through owning real estate.” (Andrew Carnegie)

• “The major fortunes in America have been made in land.” (John D. Rockefeller)

However, prior to 1960 one of the major concerns about real estate was that smaller investors could not easily participate in the most expensive real estate developments like those that helped millionaires and billionaires such as Carnegie and Rockefeller to become wealthy. The creation of REITs was an innovative and effective solution to address this challenge.

Specialized REITs from 1960 to 2019

Here is a brief review of real estate investment trusts through the years:

The Beginning of REITs (1960) — President Dwight D. Eisenhower signed the final legislation that was designed to provide improved investor access to income-producing property investments. Real estate investment trusts are permitted to finance, own and operate real estate. From inception, REITs have a capital structure that provides access to equity and debt markets not readily available to typical investors and real estate owners.

Focusing on Specialized Real Estate Investments — A number of real estate investment trusts gradually opted to focus on specialized investment opportunities. One of the earliest examples involved shopping malls and community shopping centers (1961) and railroad-related real estate (1967). This was followed by lodging and resorts (1970), apartments and warehouse facilities (1971) and office buildings (1972).

The Tax Reform Act of 1976 — This legislation allowed REITs to be formed as corporations as well as trusts.

Securitization of Real Estate Assets — Mortgage-backed securities first appeared around 1968 and were followed by collateralized mortgage obligations (CMO) in 1983. By the 1990s, mortgage-backed securities (MBS) became common. Securitization of real estate assets facilitated increased investments in REITs by institutional money managers such as pension funds and hedge funds.

Six Decades Later: $3 Trillion in Gross Assets — The REIT concept is now used in more than 30 countries throughout the world. The number of public REITs (including New Residential) operating in the United States today is about 200.

Current Guidelines for REIT Structure — Among the requirements for qualifying to operate as a real estate investment trust: (1) Must be established as a trust, corporation or association. (2) Cannot be an insurance company or financial institution. (3) Must invest 75 percent or more of assets in real estate. (4) Must receive 75 percent or more of income from mortgage interest or property income. (5) Must pay out 90 percent or more of taxable income as dividends. For example, the 2018 dividend (paid quarterly) for New Residential represents a yield of 11.9 percent based on the April 23 closing price ($16.75) on the New York Stock Exchange.

New Residential — Mortgage REIT Strategies

New Residential Investment Corp. was established as a real estate investment trust in 2013 and specializes in mortgage-related investments. Residential mortgages represent a $10 trillion market in the United States. But as impressive as that market size is, it is just the “tip of the iceberg” when investors take a closer look at residential mortgage investment opportunities. For example, as both banks and mortgage servicers change, it is important to consider new and specialized assets such as non-Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). Because banking institutions have been required to increase capital reserves, banks have sold MSRs worth more than $3 trillion during the past decade — and New Residential is now one of the nation’s largest non-bank purchasers of mortgage servicing rights.

During 2018, some of the NRZ highlights included: (1) New Residential issued mortgage securitizations totaling $3.8 billion. (2) The return on equity for NRZ’s whole loan portfolio was 20 percent. (3) NRZ acquired NewRez (mortgage originator approved to lend in 49 states) and Shellpoint Mortgage Servicing.

New Residential Investment — Board Chairman/CEO: Mike Nierenberg

• Mortgage Servicing Rights (MSRs) Ownership — During 2018, NRZ acquired 19 percent of the total MSRs sold. New Residential has been qualified for MSR ownership in all states since 2016.

• Mike Nierenberg — President and Chief Executive Officer of NRZ since 2013 and Board Chairman since May 2016.

Despite the controversial nature of the foreclosure process, it emerged as a prominent aspect of the credit crisis that started in 2007 — impacting about 4 percent of all U.S. housing units at the peak. In comparison, the recent national foreclosure rate (using 2018 data) has returned to pre-crisis levels of approximately 0.5 percent. This article provides an overview of current challenges and solutions for foreclosures involving residential mortgages.

The Impact and Challenges of Residential Housing Foreclosures

Here are four primary illustrations of current challenges related to the foreclosure process for residential mortgages:

Foreclosures Are Higher in “Judicial States” — Some states require that lenders employ judicial procedures for foreclosures. This entails a longer timeline for foreclosure and requires supplying evidence of delinquencies to courts instead of simply issuing a notice of default (without court involvement) in non-judicial states. The judicial states have a higher foreclosure rate (about 1 percent in 2018) than non-judicial states and have not yet returned to pre-crisis levels. During the peak period of foreclosures, the judicial states had a foreclosure rate of about 5 percent compared to 2.5 percent for non-judicial states. Recent data shows that judicial states have slightly more than 40 percent of all residential mortgages and about 68 percent of mortgages in foreclosure proceedings.

Loans Originated During 2004–2008 — The period leading up to the recent financial crisis produced a disproportionate share of foreclosures. While the mortgages originated between 2004 and 2008 represent just under 15 percent of total mortgages in the United States, this pool generated almost 60 percent of current foreclosures.

Unsuccessful Sales at Foreclosure Auctions — The foreclosure process ends with a public auction. This usually involves a “minimum bid” stipulated by the first mortgage holder in order to cover the amount of the outstanding debt (and related legal costs in many cases). When auction bids do not reach the minimum amount, the lender typically becomes the new owner. By doing this, the lender avoids an accounting loss on their balance sheet. The property becomes known as “real estate owned” (REO), a term that describes lender ownership. With the high volume of foreclosures in some areas, this has become another controversial part of recent foreclosures because of the negative impact that REO properties often have on local property values and rental rates.

Bank-Owned Mortgage Servicing Companies — For several decades, the loan origination and mortgage servicing roles were frequently intertwined by bank ownership. While these traditional bank roles have decreased during the past 10 years, banking institutions still have a significant impact in this area. With a few exceptions, bank-owned mortgage servicers have favored asset sales and foreclosures as the primary strategies for dealing with mortgage delinquencies. In contrast, non-bank mortgage servicing companies are more likely to employ workout strategies and improved collections processes instead of a foreclosure strategy.

New Residential — Foreclosure Strategies and Solutions

As noted above, the foreclosure process should not be viewed as a winning strategy for either investors or borrowers. New Residential Investment Corp. (a publicly traded mortgage REIT) represents a working example of how opportunistic investment strategies can incorporate solutions to the foreclosure challenges summarized in this article. During 2018 New Residential acquired a non-bank mortgage servicing company (Shellpoint) and a non-bank loan originator (NewRez). With New Residential’s non-bank specialty mortgage servicing strategy, the emphasis on foreclosure avoidance and loan workouts can facilitate re-performing loans (mortgages that were delinquent but are now current) and improve loan performance. NRZ’s return on equity (ROE) was 20 percent for the whole loan portfolio during 2018.

New Residential Investment — Publicly Traded REIT (NYSE: NRZ)

• Subsidiaries Acquired by NRZ in 2018 — NewRez and Shellpoint Mortgage Servicing.

• Michael Nierenberg — President, CEO and Board Chairman of New Residential.

• Stock Market Valuation of NRZ — $6.95 billion ($16.87 per share) as of April 24, 2019.

To take advantage of the unique investment opportunities being created in the world of real estate investment trusts, a financial services company must have intuitive leaders to bring them up to par. Whatever blend of industry insight, flexible capital, and fundamental business relationships a trust uses, these ingredients are essential to take advantage of the opportunities associated with residential mortgage loans. One company that is leveraging their blend of capitol, industry intuition, and pivotal business relationships to uncover niche opportunities is New Residential Investment Corp. Based out of New York, New York, New Residential is led by one of the best executive teams in the business.
New Residential focuses on investments in: excess mortgage servicing rights; residential mortgage backed securities; residential mortgage loans and other opportunistic investments. And anyone in dealing in such securities will tell you that constant vigilance and natural instincts are needed to succeed. Furthermore, these skills, talents and abilities need to be throughout an organization especially in the C Suites. To get a sense of the success New Residential Investment Corp has had and where they are going, one needs to examine the three men leading the trust.

Presidential Prowess
The mission of New Residential is to target assets that generate stable long-term cash flows and employ conservative capital structures to generate returns throughout different interest rate environments. While the ends are universally sound, achieving such ends is the tricky part. Finding and managing the right assets requires fearless leadership. Enter Michael Nierenberg.
Made Chief Executive Officer and President of New Residential in November 2013 and appointed as Chairman in May 2016, Mr. Nierenberg has been bringing the trust to new heights for almost 6 years now. Prior to his position with New Residential, Mr. Nierenberg served as managing director and head of Global Mortgages and Securitized Products at Bank of America Merrill Lynch. Before starting with BoA Merrill Lynch, in 2008, he led worked with JP Morgan heading up their Global Securitized Products while simultaneously serving as a member of the bank’s management committee. Before his time with JP Morgan, Mr. Nierenberg worked with Bear Stearns for fourteen years in a wide array of senior leadership positions. Senior leadership positions like head of interest rate and foreign exchange trading operations, co-head of structured products and co-head of mortgage-backed securities trading. From 2006 to 2008, he was a member of Bear Stearns’s Board of Directors. Prior to joining Bear Stearns, Mr. Nierenberg spent seven years at Lehman Brothers building the company’s adjustable rate mortgage business.
Speaking on the companies 2017 Annual Report, Nierenberg said this of New Residential:
The way that we view the company it’s a very unique one, which is different than other mortgage REITs and quite frankly virtually impossible to recreate in today’s environment. We put the company in what we believe to be a great position as the new tax bill and other initiatives from the administration would likely cause the Fed to raise rates three to four times this year and lead to higher rates.”
Hindsight is 20/20 and the Fed has done exactly as Nierenberg and his team predicted. In 2018, the Fed raised the interest rate four times to the current rate of 2.25% to 2.50%. While discussions of the Fed rate now usually revolve around an inverted curve yield or even a bottoming out of the yield, New Res was positioned to take advantage of the Fed’s recent moves.
Finding Financial Functionality
Chief Financial Officer of New Residential is Nick Santoro. “We are excited to welcome Nick to New Residential as the new Chief Financial Officer,” said Michael Nierenberg during the announcement of Mr. Santoro’s appointment. “With over 20 years of financial management experience, Nick is a strong addition to our team.” Prior to working with New Residential Nick was the Chief Accounting Officeer at FXCM from 2012 to 2015. During his time there he took care of the directing financial reporting, accounting, tax and financial planning activities.
High-Level Accounting Oversight
David Schneider is currently serving as the Chief Accounting Officer. Once a fighting Ram, Mr. Schneider earned a bachelor’s degree in Accounting from Fordham University. Working as Senior Vice President at Fortress since 2014, Mr. Schneider focuses on the financial reporting, internal controls and subservicer oversight for the Company. Beginning his career at Deloitte & Touche LLP, Mr. Schneider spent a little over seven years performing financial statement audits of global investment banks, leading the implementation of SOX 404 compliance and consulting on the SIPC liquidation of Lehman Brothers Inc. Before he joined Fortress, Mr. Schneider was a vice president at JPMorgan Chase. There he was advising on the structuring of securitizations and MSR transfers, while also helping to expand the internal control framework within Mortgage Banking.

To get more information on New Residential’s Executive Team visit their website at https://www.newresi.com/about/leadership/executive-management

Originally published at https://www.dailyforexreport.com on March 13, 2019.