Rithm Capital sees future growth from servicing opportunities

Profits narrowed, but Rithm Capital ended up in the black for a second straight quarter, as it focused on mortgage-servicing rights and consolidation of recent acquisitions. 

In its earnings calls, the real estate investment trust and parent company of Newrez made a point of touting servicing platform growth and its potential benefit across the entire company.

"We continue to gain market share, not only on bringing new clients, but also gaining wallet share on our existing customer base," said Newrez President Baron Silverstein. "Our view overall is we can continue to grow our business both organically and inorganically." 

Mortgage lending and servicing operations from Newrez contributed $207.8 million, which included changes to fair value of MSRs, to Rithm's bottom line. The number was down by one-third from $311.9 million three months earlier. 

Overall net income for the entire New York-based company, including asset management and investment portfolio segments, came in at $213.2 million, or 43 cents per share, 18.5% below the first quarter's profit of $261.6 million. The latest numbers also shrank by 40.5% on a year-over-year basis from $357.4 million. 

Over the past year, Rithm's business pivots made headlines with multiple acquisitions, including a purchase of Specialized Loan Servicing, which closed during the quarter. The deal added unpaid balance of $56 billion in MSRs and $98 billion of third-party servicing to the Newrez platform. 

Servicing will serve as a lucrative source for future business in what is expected to be a subdued environment for originations compared to a few years ago.

"Retaining the customer and keeping that MSR, so you have cash flow is important," said Rithm Capital CEO Michael Nierenberg. "If we break it down and think about one unit of somebody that took out a 7% mortgage, and mortgage rates go to 6% and you want to refi that person, you're competing against every other mortgage banker out there. Think about the real origination gain you're going to see."

At the end of the second quarter, the Newrez unit held a total of $741.6 billion in unpaid mortgage balance on its books, up 28.5% from $577.5 billion at the end of March. Secondary market activity is also likely on the table in the near term.

"We'll hit the capital markets with more securitizations around our MSR business," Nierenberg noted.

Recent Newrez moves, though, have brought with them a series of layoffs across the country. In its other parts of its business, Rithm announced a merger with hedge fund Sculptor Capital Management and purchased a portfolio of loans from Goldman Sachs in the past 12 months, as it sought to diversify operations. 

Further MSR acquisitions might be in the offing as Rithm eyes further growth, but Nierenberg made clear that it was not a "race."

"The business will grow if we think the opportunity set creates a great return," he said. "If not, we have plenty of other places we could deploy capital."

Within its mortgage originations business, Newrez funded $14.6 billion worth of loans in the second quarter, with a majority of $11 billion coming through its correspondent channel. 

"We look at the markets, and we take advantage of where we feel like we have the best return for the company overall. Correspondent today has been the best place for us, basically, to have the best overall return," Silverstein said. He added that Newrez managed to also grow its share in wholesale.

Total origination production grew 35.2% from $10.8 billion in the first quarter. Compared to the $9.9 billion in second quarter 2023, the most recent volumes came in 47.5% higher. Gain on sale margins decreased, though, to 105 basis points compared to 129 three months earlier and 125 a year ago. 

The option of separating Newrez from Rithm Capital as a separate publicly traded entity still remains on the table, more than one year after the idea was put forward, company leaders also said in the earnings call. 

What would need to happen before any such move, though, is recognition of the value held in both businesses, Nierenberg emphasized.

"We want to illustrate the power of the franchise, and I think you see that in our numbers. And when you look at the mortgage company compared to others, obviously it's extremely undervalued, or the overall franchise is undervalued." he said.

"We're working very closely internally, as well as with some of our external advisors, some of our banking friends on maximizing our capital structure, so we get properly valued."