Over the past few months, lenders have recorded record business when it comes to new originations and refinances. New Residential Investment Corp. is using its mortgage business profits to pull the company toward recovery after first and second-quarter losses due to COVID-19 challenges.
Primarily known for its servicing activities, NRIC operates a diversified business with multiple business lines, including NewRez – formerly New Penn Financial, Shellpoint Mortgage Servicing, title and settlement services provider Avenue 365 and eStreet, an appraisal management company. New Residential also made strategic investments in Covius Holdings, a provider of technology-enabled services to the financial services industry, and Guardian Asset Management, a provider of field services and property management.
NRIC’s mortgage banking affiliate, NewRez, funded $8.3 billion of residential loans in the second quarter of 2020, a decrease of 27.2% from last year. To put this in perspective, this represents one of the lowest showings so far among top 40 producers tracked by Inside Mortgage Finance.
Part of this annual decline can be attributed to the company being a mortgage REIT. NRIC saw an increase in margin calls from repo lenders during the height of the pandemic this spring.
But the company has shown substantial improvement from its first-quarter losses. The GAAP net loss of $8.9 million is a huge improvement from the first quarter’s loss of $1.6 billion.
“While March and April presented a number of significant challenges due to the COVID-19 pandemic, we made great progress on our road to recovery in Q2’20,” said Michael Nierenberg, New Residential chairman, president and CEO. “During the second quarter, we delivered on a number of key initiatives that we believe continue to position our company for success in the quarters ahead. With over $1 billion of cash on our balance sheet, our capitalization is as strong as ever.
“This capital provides us with additional financial flexibility and creates a pool of cash to deploy opportunistically,” Nierenberg continued. “We significantly reduced our mark to market exposure; today, approximately 95% of our investment portfolio is financed with non-daily mark to market financing.
“This was also an excellent quarter for our mortgage company, which generated over $200 million in pre-tax income, an increase of 127% quarter over quarter. We expect our origination and servicing businesses to continue providing significant profitability as we execute on our recapture goals, expand our market share and realize further efficiencies from our investments in technology.”
During its earnings call last week, Nierenberg laid out the company’s path to recovery.
Earlier this month, NewRez announced the formation of a strategic relationship with Salesforce, a global CRM provider. Leveraging Salesforce’s platform and CRM expertise, NewRez said it will transform its lending experience by deploying Salesforce Financial Services Cloud and Customer 360 to connect its loan origination, servicing and marketing efforts. With a single view of the borrower across every touchpoint, NewRez will be able to deliver highly differentiated, consistent and personalized experiences for its loan applicants and homeowners.
This new tech partnership will also allow the company to increase its efficiencies and employee productivity to drive sustainable growth, Nierenberg said, and this will help the company grow its direct-to-consumer channel and improve its recapture efforts, a key strategy for the company going forward.
“We have almost 4 million customers in our ecosystem on the servicing side,” Nierenberg said. “We need to keep as many of them as possible. We need to provide better service. And one of the thing and our main focus here in the direct-to-consumer channel will hopefully pay off as we retain more customers, we drive down our MSR amortization and we continue to create profits for our company as direct-to-consumer margins are very robust.”
As part of NewRez’ “road to recovery” initiatives, it set forth a goal to increase its recapture rate. In the second quarter, the company worked toward achieving its goal by growing its direct-to-consumer line by 44%.
NewRez is doubling down on its recapture goal, saying this is a good strategy for the company since its refinanceable population is much smaller than the industry average. At 33%, the company holds a much smaller refinance population than the industry’s 72% average. Currently the company’s recapture rate rests at 19%.
A report at the end of 2019 from Black Knight shows many lenders are struggling to keep repeat business as the recapture rate hit a 12-year low. The majority of this decline came over the past eight years, the report shows. Recapture rates hit rock bottom in the first quarter of 2019 at 18%.
Now, as lenders strive to stay ahead amid all-time lows in interest rates, even the largest mortgage lenders are looking to increase their recapture rate.
“Servicing activities are viewed as an extension of the client experience with the primary objective of establishing and maintaining positive, regular touchpoints with our clients, which positions us to recapture the clients’ next refinance or purchase mortgage transaction,” Quicken Loans said in its IPO filing. “Consequently, we view servicing as an integral component of the direct-to-consumer segment.”
“A mortgage which is originated from our servicing book has lower client acquisition costs compared to a mortgage originated in the Direct to Consumer segment,” Quicken Loans stated. “This is why we see our servicing book and related recapture originations as a key strategy for continued growth and profitability.”
Over the past decade, fintech companies that focussed on improving lenders’ digital mortgage experience transformed mortgage lending. Now, the focus has increasingly shifted to smart data. And companies that can utilize their data to predict movements by borrowers to help lenders retain the relationship will become increasingly essential.
In its road to recovery coming out of the pandemic, New Residential set forth several objectives:
Cash position: The company will look to strengthen its cash position to capitalize on opportunities amidst the ongoing volatility. With its current $1 billion in cash on its balance sheet, which is more than it has ever had before, the company will look to lower its risk profile.
Recapture: The company will look to protect its MSR through recapture. As previously mentioned, it will achieve this through its direct-to-consumer business, which is already up quarterly by 44%. The company said there is still much room for growth in this area, and the integration with Salesforce will play a large role.
Liquidity: The company will create additional liquidity for advanced financing. The company said it already estimated higher forbearance numbers due to COVID than what was really needed, ending the second quarter with $2.2 billion in unused capacity for advances.
Forbearance: While loans in forbearance decreased from its peak of 8.4% to 7.8%, the company will continue to focus on its servicing and working with homeowners who are dealing with COVID-19 hardships.
“Origination and servicing business continue to be a primary focus,” Nierenberg said. “The return on equity in that business has been very, very good. As we sit in this robust housing market, robust refinancing market, we want to make sure that we continue to perform extremely well there.”
Indeed, the originations business has propelled the company forward in the past several years. When NRIC acquired NewRez in 2018, the company made $38 million in pre-tax income. Along the way, it acquired the assets of Ditech, which are now fully integrated and are expected to make the company upwards of $800 million in 2020. The company today has more than 5,500 employees.
The origination volumes have increased from about $10 billion per year to $50 billion, and the company expects to hover near $45 to $50 billion in 2020, driving the servicing portfolio to about $300 billion by the end of the year.
Many lenders are heavily focused on originations during this time as mortgage lending is set to reach $3.14 trillion by the end of this year, the highest since 2003, as interest rates continue to hit new record lows.
Amid the pandemic, however, an increasing number of housing experts have called on this an opportunity to begin retaining servicing rights and placing more of a focus on the post-closing side of the business.
“Retain the servicing!,” Finance of America Mortgage President Bill Dallas said in a recent op-ed for HousingWire. “Why would we invest the time and effort to develop a relationship, then abruptly transfer the loan and orphan the customer? This is our opportunity to step up and help homeowners circumnavigate that arrangement.
“In the past quarter, Finance of America extended close to $10 billion of new loans to 20,000 customers and, for the first time, retained the relationship,” Dallas continued. “Simultaneously, we mobilized advisors in communities throughout America to reach out and help clients assess forbearance so they can take advantage of the lowest interest rates in history.”
As for New Residential, the company made major improvements in the second quarter, but still has many areas to focus on as it continues to recover from the pandemic.
“While we still have a lot of work to do, we are proud of the accomplishments and progress we made during Q2’20,” Nierenberg said. “Looking ahead, our focus remains on growing our operating businesses and prudently deploying capital in this low rate environment. We believe executing our strategy will help grow book value and create strong earnings for our shareholders in the near and long term.”
