Mike Nierenberg CEO of New Residential Investment Discusses Strategies - Part 2: Recent Acquisitions
Part 2: Recent Acquisitions
This is the second in a series focusing on investment strategies used by New Residential Investment Corp. Part one featured an overview of active asset management.
Shellpoint Mortgage Servicing — Integrated Mortgage Platform
Because mortgage servicing rights (MSRs) play such an instrumental role in the investment activities of New Residential, the company began a lengthy and exhaustive search for alternative assets that would support and complement MSR investment opportunities. A major step in this direction was finalized during 2018 — by acquiring Shellpoint Mortgage Servicing (SMS).
Shellpoint is the 15th-largest non-bank mortgage servicing company in the United States. The SMS acquisition enabled New Residential to add in-house servicing as well as new revenue streams and capabilities to recapture assets. Shellpoint provides servicing to third-party clients that include hedge funds, government-sponsored enterprises (GSEs) such as federal agencies and banks. The third-party servicing activities by SMS increased by 33 percent during 2018. Shellpoint has offices in Houston, Texas and Greenville, South Carolina.
NewRez — Mortgage Origination
The desire to add mortgage origination capabilities contributed to the acquisition of NewRez as part of the Shellpoint Partners transaction. This company was formerly known as NewPenn Financial and was rebranded to reflect the acquisition by New Residential. To further enhance NewRez capabilities, the size of this team was increased by 300 percent during 2018. NewRez is headquartered in Plymouth Meeting, Pennsylvania (near Philadelphia) and is licensed to lend in 49 states plus the District of Columbia. Among the specialized capabilities offered by NewRez are non-QM (qualified mortgage) origination services.
It should be noted that Shellpoint Partners added much more than mortgage origination and servicing to New Residential’s operations. Among ancillary businesses that provide new revenue sources are real estate owned (REO) management, appraisal services and title insurance.
Vertical Integration and Scaled Platforms — A Key Goal of New Residential Acquisitions
With acquisitions like those noted above, New Residential is now focusing on capturing the entire mortgage pipeline — a “whole pie” strategy. This enables the company to incorporate competitive advantages such as scaled platforms and vertical integration.
Vertically Integrating the Mortgage Business — Vertical integration is the process of performing multiple production stages within one company rather than within separate enterprises. For example, mortgage origination, title insurance and mortgage servicing are often performed by three separately owned companies. By integrating the ownership role within New Residential, the company obtains more control over activities that directly relate to the investment portfolio — assets such as excess MSRs and non-Agency residential mortgage-backed securities (RMBS).
Benefits of vertical integration often include lowering costs, creating economies of scale and reducing reliance on third-party providers. In addition to these major advantages, vertical integration aids New Residential in coping with the multiple and complex challenges due to the rapidly changing nature of the mortgage servicing business. For example, bank-owned servicing companies frequently emphasize sale of assets and foreclosures rather than workout strategies and collections. For mortgage investors like New Residential, foreclosure avoidance is a key component in a winning mortgage investment strategy.
Scaling the Mortgage Platform — A business platform is a model creating value by facilitation of communication between groups such as consumers and service providers. With the mortgage business, the key groups usually include mortgage borrowers, lenders and servicers. Scaling refers to changing the size of the team responsible for business functions such as originating and servicing loans — “scaling up” is a business effort to increase activities (and revenues) rapidly and efficiently.
However, scaling up is much more difficult when a company like New Residential is forced to deal with external and independent companies rather than internal and wholly owned businesses such as Shellpoint Mortgage Servicing and NewRez. Equally important, owning the “whole pie” enables New Residential to expand the businesses at a comfortable pace that is practical and cost-effective.
A reminder — This series will continue with “Part 3: Finding Undervalued Residential Assets.”
New Residential Investment Corp. is a residential real estate investment trust (REIT) that is well-positioned to invest in mortgages and servicing-related assets that include mortgage servicing rights and excess MSRs. The company’s recent stock market valuation was $6.7 billion ($16.60 per share February 28, 2019).