The federal government provides needed funding, programs and legislative support for many industries and businesses — especially within the mortgage industry. Several critical real estate programs have their origins in the Great Depression era. A prime example is the Federal Housing Administration (FHA) that was created by the National Housing Act of 1934. More recent examples include the Government National Mortgage Association (1968, also known as Ginnie Mae) and the Federal Home Loan Mortgage Corporation (1970, commonly referred to as Freddie Mac).
However, housing and mortgages entail numerous challenges that are too complex to always be resolved in a timely and cost-effective fashion by the federal government — especially when Agency processes involve rigid guidelines that prevent many borrowers from getting a mortgage and restrict investors from using common financial techniques like securitization. With residential mortgages, a leading source of solutions since 2013 is New Residential Investment Corp. (NRZ on the New York Stock Exchange) and NRZ’s management team led by Michael (Mike) Nierenberg. The following section demonstrates how New Residential has resolved some of the most pressing challenges associated with government agency requirements.
NRZ — Non-Traditional Solutions for Agency-Related Challenges
Different variations of residential mortgages have been around for several generations, and the format has gradually changed over the years. But events during the past 10 years led to a watershed transition involving investors and borrowers. New Residential has been at the forefront of these changes and has helped to transform the mortgage industry with non-traditional resolutions in the following areas directly impacted by federal agency guidelines:
• New Mortgage-Related Assets — In the aftermath of financial challenges that heavily effected banks and other financial institutions starting about 12 years ago, the Federal Reserve and new federal legislation produced strict requirements regarding capital reserves for banks. Banks were routinely forced to sell some assets to meet the new guidelines, and liquidating mortgage servicing rights (MSRs) became a popular solution for banking institutions to raise cash. NRZ became an opportunistic buyer of these specialized assets that had previously been held almost exclusively by banks. By 2016 New Residential was qualified in all 50 states for ownership of MSRs. After becoming a major investor in mortgage servicing rights, NRZ was well-positioned to take a more active role in loan originating and mortgage servicing — two key areas that are effected by federal agency guidelines.
• More Flexible Residential Mortgages — Qualified mortgages (QM) are loans that comply with strict underwriting standards imposed by federal housing agencies. A large number of potential homebuyers either cannot meet the rigid guidelines or want mortgages with more flexible terms than those allowed by the QM process. Non-qualified mortgages (non-QM) were created in 2015 and became a practical solution to the challenge of federal lending guidelines that did not work for many worthy borrowers. However, these non-traditional loans were not an overnight success due to a steep learning curve for both borrowers and investors. But New Residential realized the business and investment potential of non-traditional mortgage servicing and loan originating and acquired non-bank companies in both areas: Shellpoint Mortgage Servicing and NewRez (formerly known as New Penn Financial). NewRez has a nationwide lending reach with a capability to lend in 49 states and the District of Columbia.
• Securitizing Non-Agency Mortgage Pools — Securitization (pools of mortgages converted into liquid securities) has become a prevailing business practice covering about 80 percent of all residential mortgages. When lenders securitize existing mortgages, the process creates additional capital resources that serve as the basis for making additional mortgages (and other investments). This has become a standard financial technique, but federal agency requirements come into play as Agency mortgages and Agency securitization guidelines encompass only QM loans (referred to in the previous bullet point). By current federal agency standards, non-QM loans are left out in the cold without an obvious solution for securitizing what has become a very popular new mortgage for residential borrowers. What is the solution? NRZ has chosen to securitize the non-QM loans underwritten by NewRez — representing about $600 million of mortgages within the past eight months. While this does involve some complexities, specialized stakeholders like New Residential are ideally situated to successfully execute this cost-effective solution.
Publicly Traded REIT: NRZ on NYSE — New Residential Investment
As noted in a recent business profile, “New Residential is one of the largest owners of MSRs in the United States and controls about one-third of the non-Agency market.” Here is additional information about NRZ and Mike Nierenberg:
New Residential — NRZ’s 2018 return on equity was 20 percent for the whole loan portfolio.
Mike Nierenberg — Board Chairman of NRZ since May 2016 and President/CEO since 2013.