While New Residential reported strong first-quarter earnings, the contracting mortgage market has the company seeking new profit-growth avenues.
The mortgage real-estate investment trust’s servicing unit drove profits as originations activity, impacted by quickly rising rates, have slowed industry-wide.
“Despite the volatility in the markets, our company had a very good quarter,” said Michael Nierenberg, CEO and president of New Residential, in the company’s earnings call. “As we have mentioned during prior calls, we have positioned our company for a higher-rate environment.”
In the first three months of 2022, total net income for New York-based New Residential Earnings Corp. increased to $661.9 million from $160.4 million the previous quarter and $277.6 million a year ago. The surge represented growth of 313% and 138%, respectively. Diluted earnings per share equaled $1.37, up from $0.33 in the fourth quarter.
Although threefold profit gains might normally be a cause for celebration, Nierenberg sounded far less optimistic about current market trends, which is leading his company to seek opportunities to diversify its offerings this year.
“We are in a horrible market for mortgage origination, and it’s only going to get worse,” he said. “Gain on sale will only get worse, and I think you’re going to see a lot of folks actually have to really pull back in that business.”
Part of New Residential’s strategy to address the origination slowdown includes a new home-equity product, which the company discussed during the call and expects it to drive recapture of existing clients.
“Since over half of our customer base now has at least 40% equity in their home, we are launching a new HELOC product that will target our servicing customers,” said Baron Silverstein, president of the company’s mortgage-lending subsidiaries Newrez and Caliber Home Loans.
New products are intended to make up for continued industry-wide slowdowns in originations, or what Nierenberg described as “part of the big unwind” after two years of extremely profitable growth.
“I would like to see us become a real full-scale financial-services company, to roll out other types of products to our customers, which I think could offset the decline you’re going to see,” he said.
His comments follow several announcements of mortgage staff layoffs at both banks and nonbanks since the start of the year, which were largely credited to decreased origination volumes. According to the Mortgage Bankers Association, recent origination activity is currently at less than half the pace seen 12 months ago, with new refinances down by more than 70% on a year-over-year basis.
New Residential’s segment earnings numbers added further evidence of how far originations have fallen. The majority of first-quarter profits for the company came through its servicing segment, which reported net income of $600.4 million, increasing from $104 million in the prior three months, a gain of 478%.
In its originations segment, profits decreased 67% to $19 million from $58 million in the previous quarter. Gain-on-sale margins came at 153 basis points off funded production of $26.9 billion in unpaid balance compared with 165 bps and $38.1 billion in the fourth quarter.
Net revenue overall at New Residential, including numbers from origination and servicing as well as investments division, totaled $1.7 billion, up from $1.1 billion in the fourth quarter last year and $1.2 billion 12 months ago, increasing 55% and 42% respectively.
New Residential’s announcement of its HELOC product and potential further diversification is the latest indication that nonbank mortgage lenders are actively pursuing plans to drive customer growth. In March, loanDepot unveiled its new business unit dedicated to mortgage-related and real estate businesses, while Finance of America also made organizational and leadership changes in an effort to find and retain clients.
The addition of HELOCs in New Residential’s product line is also intended to take advantage of the high growth in tappable equity for U.S. homeowners, which increased by over 35% in 2021, according to Black Knight.
Nierenberg also said he was also actively looking to move New Residential into the commercial real estate space, an opportunity he has previously signaled interest in, “once the market settles down.”
New Residential’s quarterly performance generated positive reaction among both analysts and investors. “Shares of NRZ remain our top mREIT idea for investors who expect interest rates to trend higher,” said Bose George, managing director at Keefe, Bruyette & Woods, in a research note.
Trading of New Residential started at $10.95, 4.9% higher than its closing price on Monday of $10.44, and closed at $11.52.