This is the first in a three-part series analyzing improvements within the mortgage servicing industry. The initial article will evaluate the elimination of legacy business practices.
Traditional industries like banking and mortgage servicing are often cited as examples of legacy processes still in active use — employing old industry practices in a rapidly changing digital world. The recurring challenge with this old-fashioned approach to doing business was recognized by Jeanne Bliss in this critique: “Customer experiences are delivered year after year in many industries without challenging or changing process, policy or approach in what they do. And when questioned the answer is ‘this how we always do this.’ And then they wonder why they don’t stand out in the marketplace.”
New Residential Investment Corp. (NYSE: NRZ) has proven to be a visible exception and continues to aggressively shed legacy procedures within all mortgage business areas. NRZ is a mortgage real estate investment trust (REIT) with a diverse portfolio of mortgage-related assets that include a non-bank mortgage servicing company (Shellpoint), a non-bank mortgage loan originator (NewRez), residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs).
Transforming Residential Mortgage Servicing from the Old to the New
New Residential has been a leader in transforming the ways that residential mortgages are originated, serviced and owned. NRZ’s commitment to replacing legacy mortgage practices has proven to be a winning strategy for borrowers, investors and other stakeholders. Legacy replacement has involved the following for New Residential’s mortgage servicing business:
• Non-Bank Ownership — Many of the legacy business processes tied to the mortgage servicing industry are a function of bank ownership that has prevailed for many years. The legacy mindset is changing as more mortgage servicing companies have non-bank owners. During 2018, NRZ acquired Shellpoint Mortgage Servicing, the 15th-largest non-bank servicer in the United States.
• Improved Technology — References to legacy technology are common in many industries, and any business using “old” technology and software is likely to lose customers and market share. As part of an ongoing commitment to improving technology in the mortgage servicing and origination sectors, New Residential recently announced a strategic investment in Covius Holdings Inc., an emerging leader in development of new technology-related services for the financial industry.
• Improved Third-Party Servicing — Many key clients for mortgage servicing are third-parties such as government-sponsored enterprises (GSEs). During 2018, the third-party mortgage servicing volume for Shellpoint increased by 33 percent (please see part two for more information).
• Improved Coordination Between Servicing and Securitization — The prevailing practice of securitizing mortgages (pools of loans that trade as securities such as RMBS) impacts both originators and servicers since about 80 percent of residential mortgages are now securitized. New variations of loans such as non-qualified mortgages (non-QM) can be even more complicated because they involve non-Agency mortgages. Specialized mortgage investors like New Residential are better prepared to handle the mortgage servicing complexities that are common with securitization of both Agency and non-Agency mortgages.
• Different Loan Modification Strategies — One of the most important responsibilities for a mortgage servicing company is to determine how mortgage delinquencies are handled. The “legacy approach” for most bank-owned servicers is to emphasize asset sales and foreclosures while non-bank mortgage servicing companies like Shellpoint prefer improved collections and workout strategies. This critical distinction will be reviewed more thoroughly in part three of this series.
The Influence of MSRs — As banks were forced to sell assets like mortgage servicing rights in order to improve capital reserves in recent years, ownership of MSRs shifted dramatically from banks to other investors like New Residential (additional details in part two of the series). NRZ became qualified for full MSR ownership in all 50 states starting in 2016 and is currently one of the nation’s largest non-bank purchasers of mortgage servicing rights — current MSR positions represent about 3 million mortgage customers
This is the second in a series examining how some mortgage servicing companies have improved in recent years. Part one described the replacement of legacy business practices. This article will review the role played by marketing and business development.
Developing new business can be a struggle for companies of all sizes regardless of what they produce as services or products. But the unique structure of the mortgage servicing industry creates an especially challenging scenario for effective marketing and business development. First, individual mortgage servicing accounts are always initially connected to a loan originated by a lender. Second, the common practice of mortgage securitization means that servicing for pools of securitized loans is routinely contracted as a “package deal” for all underlying mortgages — and loans arranged in pools currently account for about 80 percent of all residential mortgages.
These are monumental business development challenges to overcome — but New Residential Investment Corp. (trading as NRZ on the New York Stock Exchange) and NRZ’s executive management team headed by Michael (Mike) Nierenberg have succeeded. The following section summarizes how they did it.
NRZ and Mortgage Servicing — Business Development and Marketing Success
The mortgage servicing industry has consolidated and changed during the last decade. While new financial and legal guidelines explain the dramatic transformation in part, the growing importance of improved business development is also a leading cause. Here are five of the major marketing and management improvements instituted by New Residential:
• Acquisition of Mortgage Servicing Rights (MSRs) — NRZ chose to focus on specialized mortgage-related assets from the very beginning (established as an independent company in 2013). After an extensive due diligence review, MSRs were selected as a leading investment candidate when banks began selling about $3 trillion of mortgage servicing rights over a 10-year period. This facilitated new business relationships with federal housing agencies and borrowers covered by the underlying mortgages. These unique assets would be extremely hard to replicate by potential competitors.
• Servicing Government-Sponsored Enterprises (GSEs) and Other Third Parties — GSEs and other major investors with mortgage pools have very high standards and expectations for high-quality (but also cost-effective) mortgage servicing. In most cases, the guidelines for working with these clients were upgraded after the 2007 credit crisis unfolded and mortgage servicing problems were revealed. NRZ is currently approved to operate as a servicer for Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) and as a lender for FHA (Federal Housing Administration). As a further testament to business development success in this area, Shellpoint Mortgage Servicing (a New Residential subsidiary) has become an industry-leading third-party servicer.
• Establishing a “Whole Pie” Mortgage Strategy — While profit margins continue to be thin in many separate sectors of the mortgage business, more lucrative business opportunities are created by New Residential’s unified ownership and control of different pieces. These multiple business channels also create new marketing and business development opportunities. For example, NRZ’s acquisition of non-traditional lender NewRez provides a new source of mortgage servicing business from loans originated by NewRez (approved to lend in 49 states and the District of Columbia).
• Reducing Dependence on Federal Housing Agency Mortgage Portfolios — A new and popular version of residential real estate loans known as non-qualified mortgages (non-QM) was created in 2015. This non-traditional loan enables NewRez borrowers to obtain flexible mortgages that do not require meeting the rigid lending guidelines imposed by federal housing agencies. When these mortgages are securitized, the process also does not involve federal agencies — and NRZ has already completed securitization for non-QM assets in excess of $600 million in recent months.
• Customer-Centric Management and Marketing — NRZ’s customers reflect a diverse audience that includes investors, individual borrowers and third parties such as GSEs. While these customers have widely varying needs, New Residential’s overall marketing strategy emphasizes a customer-centric approach — the customer is at the center of NRZ’s management and business development processes.
This is the third in a series describing improvements by mortgage servicing businesses. Parts one and two discussed eliminating legacy business practices and incorporating improved business development and marketing strategies. This article will assess how the handling of residential mortgage delinquencies can be improved.
Defaults and delinquencies are not simply late payments. Delinquencies represent not making a payment for extended periods such as 30, 60, 90 and 120 days. A legal default on a mortgage is usually triggered by failure to make a payment for 90 days or more. Based on 2018 mortgage market data, about 3 percent of current residential mortgages have a delinquency of at least 30 days. In comparison, that figure reached 11.5 percent in 2010. The recent foreclosure rate has dropped to 0.5 percent compared to 4 percent a decade ago.
Mortgage servicing is a cash-flow business that depends heavily on proper timing for inflows and outflows. The outflow part of the business distributes payments to parties such as lenders, insurance companies and local property tax departments. The primary inflow is represented by mortgage payments from borrowers — and a mortgage default interrupts the entire process.
Improving the Handling of Defaults
A leading proponent of making needed improvements to the mortgage servicing business is New Residential Investment Corp. (NRZ), a publicly traded real estate investment trust with mortgage-related assets that include mortgage servicing rights (MSRs), residential mortgage-backed securities (RMBS), a non-traditional mortgage lender (NewRez) and a mortgage servicer (Shellpoint Mortgage Servicing). As discussed in parts one and two of this series, NRZ’s advances in the servicing industry include replacing outdated management practices and improving the business development process. New Residential has similarly improved how mortgage delinquencies and defaults are viewed and resolved — here are four examples:
• Avoiding Foreclosures — While mortgage servicing companies ultimately handle the default process, specific policies are usually dictated by the underlying lender or investor for each specific mortgage (or pool of mortgages when loans are securitized). Foreclosures are expensive, lengthy and complicated for all parties. According to the Joint Economic Committee of Congress, foreclosure avoidance costs are about $3300. On the other hand, the same committee reported that the average foreclosure costs lenders about $50,000. During the financial crisis that emerged in 2007, Henry Paulson (Treasury Secretary at the time) cited estimates that foreclosures end up costing investors 40–50 percent of the original investment. At the same time, foreclosures can eventually force homeowners to lose a cherished asset that is often their biggest investment. To improve delinquency outcomes for all concerned, New Residential and NRZ subsidiaries have intentionally chosen to avoid the foreclosure process whenever possible (please refer to the next paragraph for practical foreclosure alternatives).
• Emphasizing Mortgage Workout Strategies — Mortgage servicing companies handle the default process in different ways. While foreclosures and short sales are pursued as quickly as possible by some servicers, others emphasize loan modifications and collections. NRZ and Shellpoint (a specialty non-bank mortgage servicing company owned by New Residential) actively pursue loan workout opportunities that facilitate a resumption of payments and continued homeownership by borrowers.
• Investing in Re-Performing Portfolios — When borrowers are delinquent on their mortgage, the loan is considered to be non-performing. When the borrower resumes making payments, the mortgage is now referred to as re-performing. NRZ has periodically purchased re-performing loans (holdings of about $2 billion at the end of 2018).
• Helping Borrowers Qualify for Post-Foreclosure Mortgages — Borrowers who experience negative real estate events such as short sales and foreclosures are often prevented from obtaining a qualified mortgage (QM) to buy a home for several years. NewRez (lending in 49 states and the District of Columbia) provides the opportunity for impacted borrowers to reduce waiting periods to one year (instead of 2–3 years or more) when securing a non-qualified mortgage (non-QM) option known as SmartTrac.
New Residential — “NRZ” on the New York Stock Exchange
As reported in a May 2019 business profile, “While recognizing that cost control is always important, NRZ continues to grow rather than shrink after making acquisitions. For example, after acquiring NewRez in 2018, New Residential expanded the team by 300 percent.” Here is additional information about New Residential and Michael Nierenberg:
New Residential Investment Corp. — NRZ has paid out more than $2.4 billion in total dividends to shareholders since inception (May 2013).
Michael Nierenberg — President, CEO and Board Chairman of New Residential.