Here is some classic wisdom about the difficulty of finding the right answers:
- “Ask the right questions if you’re to find the right answers.” (Vanessa Redgrave)
- “There are no right answers to wrong questions.” (Ursula K. Le Guin)
- “Being boss doesn’t mean you have all the answers, just the brains to recognize the right one when you hear it.” (Katherine Plumber)
This is the first in a series that will take a closer look at “the right answers” — with a focus on residential mortgage challenges from three different perspectives. The initial article examines how Michael (Mike) Nierenberg has helped to shape and improve the residential mortgage market in the United States.
Michael Nierenberg — The Right Answers for Residential Mortgage Challenges
Finding the right answers to the right questions about residential mortgages has proven to be the challenge of a lifetime for Mike Nierenberg. During one of his previous roles (head of global mortgages and securitized products at Bank of America Merrill Lynch), he was described as “among the most highly skilled and knowledgeable people in the mortgage business”. Since 2013, Mike has been the President and Chief Executive Officer of New Residential Investment Corp. (NYSE: NRZ) — he has also served as Board Chairman of NRZ since 2016.
Mike (Michael) Nierenberg is now widely credited with creating a successful and one-of-a-kind mortgage company via his efforts for New Residential. But this was not a one-step or easy process, as it involved managing little-known real estate assets like mortgage servicing rights (MSRs) and transforming a mortgage industry that had been dominated by traditional lenders like banks for more than 50 years. As illustrated by the following examples of the right questions and answers, Mike and the rest of the NRZ team adopted a disruptive, non-traditional and active management style that has transformed the residential mortgage sector:
The First Question and Answer: Banks or Non-Banks? — While banking institutions play a leading financial role in the American economy, banks have always treated mortgages as a somewhat secondary consumer product. Mortgage innovation has not been perceived as “a sound investment” by banks, and traditional bank lenders frequently make only qualified mortgages (QM) that are controlled by rigid federal housing agency guidelines. With this historical background, Mike Nierenberg and the NRZ team formulated a non-bank answer to how New Residential should be organized — as a mortgage real estate investment trust (REIT) trading on the New York Stock Exchange.
The Second Question and Answer: Is Mortgage Servicing the Key? — Mortgage servicing companies have traditionally operated in the background of the residential mortgage process and were often owned by banks. Two events during the last 10-12 years forever changed this role: (1) the decision by many/most bank-owned mortgage servicing companies to pursue bankruptcy proceedings instead of a more flexible loan workout approach when borrowers were delinquent in making mortgage payments; and (2) the action taken by the Federal Reserve that forced banks to increase capital reserves by selling assets such as MSRs. Mike Nierenberg and NRZ portfolio managers recognized that these two events in combination with mortgage industry consolidation was a unique investment opportunity for New Residential. NRZ is now the fifth-largest owner of mortgage servicing rights in the nation and in 2018 New Residential acquired the 15th-largest non-bank mortgage servicing company — Shellpoint. As Mike Nierenberg commented in the 2018 NRZ Annual Report, “We have already seen strong synergies between Shellpoint assets and our MSR portfolio, and are excited about our ongoing relationship with the Shellpoint team.”
The Third Question and Answer: Reduce Employees or Hire More? — Since the 2007 financial crisis, banks have made a recurring series of layoffs that now total in the hundreds of thousands — one bank alone (Bank of America) has already passed the 100,000 mark for job reductions. On the other hand, Mike Nierenberg chose another path (and answer) for NRZ: hire more employees when mortgage-related acquisitions are made instead of eliminating jobs. In one recent example, New Residential green-lighted the decision to increase the size of the NewRez team by 300 percent after a 2018 acquisition by NRZ.
A reminder — The Right Answers series will continue with “Part 2: New Residential Investment.”
The Right Answers, Part 2: New Residential Investment
This is the second in a three-part series reviewing the best answers to key residential mortgage questions and issues. Part one described Michael Nierenberg, a prominent mortgage industry leader. This segment will discuss New Residential Investment Corp.
New Residential — The Right Answers for Today’s Mortgage Challenges
As memorialized by Bertrand Russell, questions (and the right answers) are sometimes muted by long-standing traditions: “In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.” Unfortunately, innovative leadership is often lacking in the mortgage industry, in part because entrenched traditional lenders such as banks have a vested interest in maintaining the “status quo” environment.
One of the positive outcomes from the 2007 financial crisis was more freedom to “hang a question mark” on many of the outmoded business practices in the residential mortgage sector. This healthy and long-overdue approach to questioning everything and not taking anything for granted with mortgages is most notably exemplified by New Residential Investment Corp. (NYSE: NRZ) and the company’s leadership team that is directed by Michael Nierenberg.
Here are three examples of how the right questions and answers have helped NRZ to improve the residential mortgage industry for both investors and borrowers:
(1) Question and Answer: Traditional or Non-Traditional? — Banking institutions often cite their long operating histories and traditions as an advantage, and the oldest banks in the nation have roots dating to as long ago as 1784. But as digital technologies assume a bigger and bigger role in the business world, “new” increasingly outweighs “old” on the scale of investment value. One prudent way to escape the old-fashioned legacies of a bygone banking era is for a mortgage company to start in the modern era — by forming the company in 2013, this was the right answer for Michael Nierenberg and New Residential. At the same time, NRZ’s management team realized that the boldest and most innovative approach to residential mortgages was to adopt a non-traditional framework as an REIT (real estate investment trust). However, this right answer also influenced NRZ in adopting a non-traditional framework for future day-to-day operating decisions as well.
(2) Question and Answer: Passive or Active Management of Assets? — Passive investing is a variation of “buy and hold” with little attention to timing of purchases or managing the investment after it is acquired. The attraction of passive asset management from the perspective of the managers is that it does not take much time and requires very little analysis or due diligence on an ongoing basis. A passive management style would produce current yields of less than 4 percent based on recent Agency-issued mortgage yields. The NRZ team set out to be better than passive or average for investors by assuming an opportunistic investing style that was time-consuming, required constant due diligence efforts and involved intensive daily management. The active management approach also proved to be the right answer for managing complex mortgage elements that are now standard in residential loans.
(3) Question and Answer: Cookie-Cutter Assets or Hard-to-Replicate Investments? — Real estate investors readily understand the difference between housing developments with hundreds of similar houses (often with three to five basic models) and historic neighborhoods with hard-to-replicate buildings. While potential competitors can easily replicate the cookie-cutter housing development units, the historic buildings are one-of-a-kind properties that defy attempts to replicate them on a large scale. Of course, some banks, mortgage companies and executives will avoid the hard-to-replicate answer because like active investing it takes much more time and effort to execute successfully. But for Michael Nierenberg and NRZ, the right answer has proven to be an almost total focus on unique, large-scale and hard-to-replicate mortgage-related assets — including mortgage servicing rights (MSRs), non-Agency residential mortgage-backed securities (RMBS), a non-bank mortgage servicing company (Shellpoint), a nationwide (operating in 49 states) non-bank mortgage originator (NewRez) and mortgage call rights.
A reminder — The Right Answers series will continue with “Part 3: Shellpoint and NewRez.”
The Right Answers, Part 3: Shellpoint and NewRez
This is the final part in a series about the most helpful answers to critical questions associated with contemporary residential mortgages. The first two articles provided an overview that focused on Mike Nierenberg and New Residential Investment Corp. (NYSE: NRZ). This segment will evaluate Shellpoint Mortgage Servicing and NewRez.
NewRez and Shellpoint Mortgage Servicing — The Right Answers
As noted in the first two articles of this three-part series, Mike Nierenberg and New Residential have transformed and improved the residential mortgage industry since NRZ was founded in 2013. The company is now arguably a best-in-class financial services company. But a major component in being market leaders (as New Residential and Mike Nierenberg are) is constantly finding new opportunities for growth and improvement.
About a year ago, the NRZ team produced an exceptional example of opportunistic growth by finalizing the acquisition of Shellpoint and NewRez. Here are three more examples of the right answers based on these recently added New Residential subsidiaries:
- Question and Answer: One Piece or the Whole Pie? — Which is better? Owning the whole pie or only one piece? While the answer might seem to be an easy and intuitive one, a successful “whole pie strategy” has effectively been as rare as a unicorn within the mortgage industry. The challenges preventing the whole pie approach have ranged from apparent legal barriers and geographical limitations to widely differing profit margins and technological disparities between multiple mortgage-related businesses. One of the most frequent complaints by mortgage borrowers is a variation of how the various parts of the overall residential mortgage process are so disconnected and poorly coordinated. Unless one company such as New Residential owns multiple pieces of the mortgage pie, very little can be done to improve the relationship among all of the pieces. By becoming a major owner of mortgage servicing rights (MSRs), NRZ set the stage for buying related mortgage businesses. In addition to acquiring a mortgage servicing company (Shellpoint) and mortgage originator (NewRez) in 2018, New Residential also acquired other companies that included a title insurance business, appraisal company and a real estate owned (REO) management business. Future acquisitions will depend primarily upon opportunistic and strategic availability.
- Question and Answer: Qualified or Non-Qualified Mortgages? — The answer for traditional lenders such as banks has typically been whatever maintains the status quo. Since 2015, non-qualified mortgages (non-QM) have emerged as a popular non-status-quo choice for both borrowers and investors. But for a traditional lender, QM loans continue to be the easier and quicker answer. Of course, the right answer is rarely the easiest and quickest answer. NewRez now operates in 49 states and the District of Columbia — and features non-QM loans among primary mortgage products. In addition to helping many well-qualified borrowers that have been turned down by traditional lenders, NewRez also offers non-traditional terms such as longer amortizations (more than 30 years) and interest-only that can lower monthly payments.
- Question and Answer: Agency or Non-Agency Assets? — When qualified mortgages are securitized, they become Agency versions of residential mortgage-backed securities (RMBS) that follow government-sponsored enterprise (GSE) or federal agency guidelines. With non-qualified mortgages, the securitization process does not involve federal housing agencies and the securitized non-QM asset is a non-Agency version. Securitizing non-QM loans involves what is probably considered by many traditional lenders as “too much work” and an extra step that can be avoided by offering only QM loans to prospective borrowers. New Residential has already securitized in excess of $600 million of non-QM loans that were originated by NewRez. NRZ portfolio managers have also periodically acquired non-Agency RMBS assets at opportunistic prices and risk-adjusted yields. These non-Agency investments include call rights that are exercisable at designated prices. As documented by Mike Nierenberg in NRZ’s 2018 Annual Report, “NRZ controls call rights to approximately $126 billion of mortgage collateral, which represents approximately 37% of the total non-agency universe. We successfully executed on this strategy in 2018 by calling 88 deals with $2.7 billion of UPB (unpaid principal balance) and issued securitizations totaling approximately an equal amount. Since inception of our call rights strategy, we have called 427 deals worth approximately $11 billion of UPB.”
FYI About Shellpoint, NewRez, Mike Nierenberg and NRZ
New Residential and Mike Nierenberg have produced investment returns that are substantially higher than mortgage REIT peers. NRZ’s 2018 return on equity for the whole loan portfolio was 20 percent. The company’s investment strategies include opportunistic and specialized assets such as mortgage-related businesses, mortgage servicing rights (MSRs), non-Agency residential mortgage-backed securities (RMBS) and mortgage call rights.