Like its peers, New York-based asset manager Rithm Capital, the owner of multichannel lender Newrez, has invested in building an extensive servicing portfolio over the past few years. This has occurred both organically and through acquisitions as Rithm aims to retain customers when mortgage rates decline from current levels.
But Michael Nierenberg, the company’s chairman, CEO and president, said he’s not in a rush to achieve the nation’s largest mortgage servicing rights (MSR) portfolio. Meanwhile, he’s “less bullish” than his competitors for the origination landscape despite expectations of a rate cut at the Federal Reserve‘s meeting in September.
“One of the most important things I want to get out there is that there is no race for us as far as size in how we think about assets in the MSR world,” Nierenberg said in an earnings call with analysts on Wednesday morning.
According to Nierenberg, the company will acquire MSRs if they create a return for shareholders, but if not, there are “plenty of other places we could deploy capital.” The comments come after rival Mr. Cooper Group acquired a third-party origination platform and $356 billion in MSRs, advances and subservicing contracts from Flagstar Bank, with its servicing portfolio set to exceed $1.5 trillion.
Servicing has been the bright spot in Rithm’s earnings. The company announced a $213.2 million in GAAP net income in the second quarter of 2024, compared to $261.6 million in the prior quarter, per filings with the Securities and Exchange Commission (SEC).
Rithm’s servicing business was responsible for total pretax income of $247.7 million from April through June, compared to a figure of $408.1 million in the previous quarter. This resulted from $645 billion in unpaid principal balance (UPB), which grew from $587 billion in the previous quarter.
The acquisition of Computershare Mortgage Services, which brought Specialized Loan Servicing (SLS) into the mix, added $154 billion in UPB after the deal closed in May.
Rithm estimates that 96% of its portfolio is out of the money to refinance. That’s because its weighted average coupon is about 4%, significantly below the current production level. Meanwhile, its prepayment rate is 6.2%.
The company’s mortgage business corporate expenses were $45.3 million in the second quarter, compared to $48.6 million in the first quarter amid a restructuring of its origination business at the start of 2024.
On the origination side, Rithm notched pretax income of $51.3 million in the second quarter, compared to $42.3 million in the first quarter. The lender originated $14.6 billion in mortgages in Q2 2024, higher than the figures of $10.8 billion in Q1 2024 and $9.9 billion in Q2 2023.
But gain-on-sale margins declined to 1.05% in the second quarter, down from 1.29% in the previous quarter. Margins are still low compared to the 1.61% figure recorded a year ago.
“I’m probably less bullish on origination than others,” Nierenberg told analysts. “The mortgage origination business, when you break it down, is not that profitable. Retaining the customer and keeping the MSR cash flow is important for us. But if we think about somebody that took out a 7% mortgage and rates go to 6%, and you want to refi that person, you are competing with every other mortgage banker out there.”
One alternative is to keep investing in the correspondent channel, meaning that Rithm would buy loans from partners and deliver them to the government-sponsored enterprises while keeping the customers and cash flow from the servicing rights. The company’s origination volume in the correspondent space reached $11 billion in the second quarter. This total dwarfed its volumes in the wholesale ($1.7 billion), retail and joint ventures ($1.2 billion), and direct-to-consumer ($700 million) channels.
Nierenberg said Rithm continues to analyze the possibility of going public with its mortgage business, among other options, to deploy capital. In its earnings, the company mentioned a book value of $2.7 billion for Newrez’s origination and servicing platform.
“We’re working very closely internally, as well as with some of our external advisers, on maximizing our capital structures,” Nierenberg said. “But in general, we are looking at anything and everything as a way to get our equity and our company performing in line with what I would call some of the pure-play mortgages out there.”
Rithm had $1.5 billion of total cash and liquidity at the end of June. The company’s stock traded at $11.48 on Wednesday morning, down 0.44% after the earnings report.
