New York-based Rithm Capital executives have played it cautious with capital deployment amid a higher rate environment, and it’s a strategy that paid off in 2022. The company announced Wednesday that its approach resulted in an $864.8 million profit in 2022 — higher than the $705.5 million the prior year.

However, in Q4 2022, profits declined to $81.8 million, down from $124.5 million in the third quarter. 

“2022 was a transformational year for us in many ways. We navigated some of the more difficult fixed-income markets. We’ve seen the Federal Reserve raising rates seven times for a total of 425 basis points,” Michael Nierenberg, chairman and CEO, said during a call with analysts. “Capital Markets essentially shut down during different periods, but we managed to grow or book value by 5% during 2022 to generate a good return on equity of 15%.” 

In the mortgage business, Rithm Capital, formerly known as New Residential Investment, spent part of 2022 integrating its mortgage companies New Rez and Caliber. The company reduced its expenses, dramatically cutting its workforce by 56%, to deal with a shrinking mortgage market. Its performance last year relied on the servicing portfolio instead. 

Rithm’s mortgage business delivered a combined pre-tax income of $23.9 million in the fourth quarter. Originations experienced a $65.5 million loss, despite a 66% decline in general and administrative expenses. Meanwhile, servicing contributed $89.3 million in profits during that period. 

The origination volume declined to $7.9 billion from October to December, down from $13.8 billion in the previous quarter and $38.1 billion in the same period in 2021. Gain-on-sale margins, however, increased from 1.71% in Q3 2022 to 1.81% in Q4 2022. 

The production is expected to be even lower in the first quarter of 2023, with a volume between $5 billion and $7 billion. 

Servicing to the rescue

The company’s mortgage servicing rights portfolio (MSRs) totaled $609 billion in unpaid principal balance (UPB) as of December 31, 2022, up from $615 billion as of September 30, 2022. 

“If you think about the housing and mortgage market, the weighted average mortgage rate for Fannie Mae and Freddie Mac loans in the United States is 3.62%, and for Ginnie Mae borrowers is 3.57%,” Nierenberg said. “I bring this up as the refi opportunities are way out of the money with mortgage rates currently north of 6% – they should continue to lead to great performance in the MSR sector.” 

Nierenberg commented on Wells Fargo exiting the correspondent channel and reducing its servicing portfolio. He said if the risk-adjusted returns are attractive, Rithm will pounce on the opportunities. 

“To the extent that things come out a little bit cheaper than where we’re able to create them, we’re going to be all over,” Nierenberg said. 

Looking forward, Nierenberg said 2023 will be “hard” due to volatility, but the Fed is closer to “being done” with rate hikes. 

“I think you’ll see a fair amount more volatility in the market this year. We’ll continue to monitor rate moves and, at some point, likely put on some mortgages and hedge out some of our MSR portfolios,” he said

An update on other businesses

Regarding Rithm’s other businesses, Genesis Capital LLC, a business purpose lender, originated $481 million through the fourth quarter of 2022. The strategy with Genesis is to grow its servicing capabilities and expand its product set, including rental hold loans. 

In the single-family rental space, the company had 3,750 units at the end of December, unchanged quarter over quarter. The stabilized occupancy was 93%.

Rithm halted its acquisitions very early in the year, expecting home prices would decline and rates would increase. Transactions, however, have been very slow as we move forward in 2023, according to Nierenberg. 

“We’ll be back acquiring units at some point later in the year,” he said.

To diversify its business, Rithm acquired a share of 50% at Senlac Ridge Partners in December, later renamed GreenBarn Investment Group. The partnership will accelerate GreeBarn’s strategy of building a vertically integrated and diversified commercial real estate debt and equity business. 

In addition, Rithm expects to expand to Europe in the second quarter of this year. 

The company’s stock was trading at $9.49 on Wednesday afternoon, up by 2.65% after the earnings report.