New Residential Investment Corp.’s first-quarter earnings repeat the logic of rising interest rates lowering origination profits but increasing servicing gains, as reported by companies such as Mr. Cooper and Ocwen last week.
The real estate investment trust reported on Tuesday $690 million in net income for the first quarter, a 267% increase from the prior quarter.
The main contribution came from the servicing portfolio. NRIC is the largest nonbank mortgage servicer in the country.
The MSR portfolio totaled $626 billion in unpaid principal balance in March, compared to $629 billion in December. The company reported $575 million in revenue arising from the fair value of MSRs alone.
Income from servicing before taxes totaled $906.3 million in the first quarter, up dramatically from $118 million in the prior quarter. The performance in the first quarter 2022 includes a $845 million fair value increase on the MSR portfolio. MSR values tend to initially increase as mortgage rates rise and borrowers are less likely to refinance.
According to Michael Nierenberg, CEO of New Residential, the company generated a 5% return to shareholders and grew its book value by 10% in the first quarter.
“We have interest rate hedges in place, which protects our long-duration assets along with our MSR portfolio, which would only help to increase our book value as we go forward based on expected Fed actions,” he said during a call with analysts.
Despite the positive performance on the servicing portfolio, NRIC’s origination volume is slowing, as it has for most originators.
NRIC, the fourth largest nonbank originator in the U.S., funded $26.9 billion in mortgages in the first quarter, down from $82.3 million in the previous quarter. For the second quarter, it forecasts funded volume between $17 billion and $22 billion.
The total gain-on-sale margin declined to 1.53% in the first quarter, from 1.65% in the last three months of 2021. It was higher than the first quarter of 2021, when margins were 1.42%. The segment’s pre-tax income dropped 68.5% quarter-over-quarter to $55.9 million.
“As we all know, the origination business, which had been extremely profitable the past couple of years, is now in the middle of a serious contraction and will remain this way for the near future,” the executive said.
But there are some reasons to be optimistic about NRIC’s future performance. NRIC has begun to reduce costs. Expenses went from $899 million in the fourth quarter of 2021 to $802 million in the first quarter of 2022.
And the integration of the Newrez and Caliber Home Loans platforms, to be complete by the end of the second quarter, will drive further savings of at least $175 million to $200 million, according to Nierenberg. In August 2021, NRIC acquired Caliber for $1.675 billion. Since the acquisition, the company has laid off 386 employees.
The company has struggled to increase the share of channels with higher margins in their originations. Volumes in wholesale, retail and direct-to-consumer represented 57.2% of the total originations in the first quarter, compared to 59% in the fourth quarter 2021. The balance of origination volume, 43%, was from the correspondent channel, up from 41% in the previous quarter.
Purchase loans were 54% of NRIC’s originations in the first quarter of 2021, and the firm restructured its retail leadership by redistributing territories.
Nierenberg said the real estate investment trust will launch non-QM, jumbo and HELOC products. During the call, he highlighted the acquisition of Genesis Capital LLC, a fix-and-flip lender, from Goldman Sachs. He said the acquisition will help Newrez expand to more markets across the U.S.
The executive said NRIC will be patient as it looks for opportunistic investments across the financial services sector, as the company is “not about size, but profitability.”
But in terms of profitability, Nierenberg said he sees “very little” in originations for the time being, unless the Treasury market returns to lower yields. The pressure could lead to more mergers and acquisitions, the executive said, although he did not provide details on upcoming transactions.
“This will put enormous pressure on the mortgage banking community as a whole, this will lead to more M&A,” said Nierenberg. “And we believe this will lead to more inventory sales as mortgage bankers will need to sell MSRs in order to fund their businesses.”