Can Rithm's consumer loan buy help with mortgage lending?

While Rithm Capital's purchase of $1.4 billion of consumer loans from Goldman Sachs will assist with its diversification efforts, it can also help its mortgage lending business, a BTIG report said.

The price paid was not disclosed. The portfolio consists of loans originated by Goldman Sachs' Marcus unit, and held on the parent company's balance sheet.

"To a degree we think the acquisition of Marcus loans could pair nicely with its origination efforts on the mortgage financing side of the business, especially if there's some first-time homebuyers in the mix," the BTIG report, authored by Eric Hagen and Jake Katsikas said. "However, we think the deeper objective is to flex its capabilities as a diversified investor and lender, including the ability to toggle between putting assets on its own balance sheet and generating fees from managing and servicing on behalf of third parties."

These are fixed-rate closed-end installment loans, with about 95% of the pool originated between the fourth quarter of 2021 and the same period in 2022. BTIG provides "cursory details" on the portfolio, namely an average credit score of 735 and a projected loss range of between 8% and 10%.

Goldman Sachs is in the process of reorganizing Marcus. Furthermore, in the second quarter, Goldman Sachs recorded a $1.15 billion hit to its earnings because of commercial real estate issues.

At the end of the first quarter, Goldman Sachs had $2.9 billion of Marcus loans on its books, net of a $470 million write-off. During the period it sold a $1 billion portfolio to Varde Partners and provided $830 million of seller financing, BTIG and Bloomberg said.

"This purchase is extremely attractive to us building off our past and current expertise in consumer finance," said Michael Nierenberg, chairman, CEO and president of Rithm, in a press release. "Consistent with our investment approach, we continue to look for opportunities to grow shareholder value and believe this transaction will be an excellent addition."

Rithm could move into direct consumer lending given the changing landscape in the banking business, a Keefe, Bruyette & Woods flash note on the deal said, citing Nierenberg's comments in a Bloomberg article.

"We view the transaction positively, as Rithm has a history of making opportunistic investments that generate attractive returns," Bose George, an analyst at KBW said in a flash note.

This deal compliments a prior Rithm investment in what BTIG termed the SpringCastle portfolio, a small, but high-yielding package of lower credit score unsecured consumer loans originated and serviced by OneMain.

"The acquisition also aligns with Rithm's objective of widening its stance to incorporate a comprehensive list of target credit investments, along with developing third party asset management capabilities," BTIG said.

Rithm wants to flex its capabilities as a diversified investor and lender, with the ability to toggle between putting assets on its balance sheet and generating fees from managing and servicing them on the behalf of third parties, the report continued.

BTIG's bottom line on this transaction is it continues to see Rithm's diversification of capital as a source of value for investors, "especially if the objective is to eventually spin off the [mortgage] origination and servicing segments of the business, as it could help certain tangential strategies with strong returns become more visible earnings drivers."