Rithm Capital reports first quarterly loss in over a year

Rithm Capital reported its first earnings loss in over a year, taking a hit as falling interest rates led to a writedown of mortgage servicing rights at the end of 2023.  

But the company also saw some optimism in the year ahead for its mortgage business, as it sought to right-size itself to increase profitability while realigning overall strategy. 

In a fourth quarter that saw the real estate investment trust close on its acquisition of Sculptor Capital Management while also reaching an agreement to purchase Specialized Loan Servicing, company officials continued to emphasize its pivot toward becoming an alternative asset manager while maintaining the importance of its home lending segments. 

"To become, I think, a world class asset manager, we need to continue to simplify our story," said Rithm CEO and President Michael Nierenberg in the company's fourth quarter earnings call. 

"We need to raise funds. The REIT's going to be the REIT, and it's no different than some of the larger players in the marketplace," referring to other alternative asset managers, such as Blackstone and Ares.

Volatility in mortgage rates contributed to a net loss of $87.5 million in the fourth quarter across all lines of business at the New York-based real estate investment trust, falling 145% from the prior three-month profit of $193.9 million. The latest number was equivalent to an 18-cent loss per diluted share. 

Compared to the same period in 2022, the bottom line number also came in 207% lower, falling from a profit of $81.8 million.

A $296 million decrease in mark-to-market value of mortgage-servicing rights drove earnings down as rates fell sharply to end the year, but the parent company of Newrez hopes for growth in lending in coming months despite taking "aggressive measures" by downsizing retail operations at the end of January.  

Although he didn't rule out potential further reductions, Nierenberg said he saw the mortgage company sitting in a stronger position after the recent Newrez retail cuts.

"I think now we're pretty happy where we are. We are actively recruiting salespeople because we do think mortgage origination will pick up over time," he said. The company also operates in wholesale and correspondent channels.

But unlike earnings calls throughout most of last year, Nierenberg made no mention of a possible spinoff of the mortgage business into a separate publicly traded company. 

Early 2024 lending activity gave company leaders some cause for optimism, with Newrez President Baron Silverstein expecting originations to improve this year. "We're certainly seeing momentum coming into the months as we get closer to spring," he said.

Rithm's originations and servicing segment posted a net loss of $120.9 million in the final three months of last year. Originations saw a $7.7 million gain in earnings, coming off of new funded production of $8.9 billion. Production was down from $11.1 billion at the end of the third quarter, but up from $7.9 billion a year earlier. 

Gain-on-sale margins inched down to 123 basis points from 124 in the third quarter, but was well off 181 bps year over year. 

Servicing net profit, excluding the markdown, came in at $210.6 million, with unpaid balances in the MSR portfolio sitting at $590 billion. Three months earlier, UPB was $595 billion, while a year ago, it came in at $609 billion. Numbers did not include any of the assets of Specialized Loan Servicing, with the deal expected to close by March. 

Meanwhile, for all of 2023, the company saw $532.8 million in net income, but the bottom line number represented a 38.4% decrease from 2022's $864.8 million, as a subdued mortgage originations market dragged much of the industry down throughout 2023.

Total revenue across all segments of Rithm between October and December totaled $709.5 million, declining 38.3% from $1.15 at the end of the previous quarter and 6.9% from $762.4 million annually. Full year revenue fell to $2.94 billion, off 12% from $3.34 billion in 2022.

Earlier this week, Newrez also announced that it would collaborate with Microsoft to add generative artificial intelligence capabilities to its operations in order to streamline the originations process. Internal AI self-service tools are expected to offer staff quick access to policies and data, freeing their time to service customers. The introduction follows the launch of a similar AI assistant Rocket Mortgage made available to its staff late last year. 

"Our view on AI across the board is it's going to have significant benefits for our platforms," Silverstein said.