To say that the complexity of America’s residential mortgage loan market has increased over the past several decades would be a considerable understatement. Estimated at roughly $21 trillion the U.S. residential housing market is believed by some to be primed with noteworthy investment opportunities. Take the aftermath of the American financial crisis for example, the residential mortgage industry changed the way it conducted business as usual including the manner in which mortgages were originated, owned and serviced. But where some see innovation and change as something to fear, we at New Residential Investment Corps see such changes as investment opportunities.
One type of investment opportunity that has been around since 1960 is the Real-Estate Investment Trust or REIT’s. Signed into law by the Cigar Excise Tax Extension of 1960, REIT were created to give investors the chance to invest in large diversified portfolios. Think mutual funds but for real-estate. Today there are two primary type of REITs, eREITs, or equity REITs and mREITs or mortgage REITs. The most common type of REIT is the equity REITs which own and/or operate income-generating real estate, like apartment buildings, offices or shopping centers.
Most eREITs, try and focus on one type of real estate asset like single-family residences, apartment buildings, or commercial properties.
The Hyper-Vigilance of New Residential Investment Corp.
One publicly traded real estate investment trust that is building momentum is New Residential Investment Corp. Primarily focusing on investing and actively managing residential real estate investments, New Residential Investment Corp is making waves throughout the industry. Specifically, their primary focus is to bring about robust risk-adjusted returns through their investments of: Excess Mortgage Servicing Rights (“MSRs”); Servicer Advances; non-Agency residential mortgage backed securities (“RMBS”) and associated call rights. Mortgage servicing rights are New Residential Investment Corp.’s biggest asset type, representing approximately 50 percent of all of their investments. But more on this below.
Excess Mortgage Servicing Rights
From New Residential Investment Corp’s perspective, the roughly $10 trillion mortgage servicing market presents an array of interesting investment opportunities. In case you are not familiar with this type of investment vehicle, a mortgage servicing right, or MSR provides a mortgage servicer with the right to service a collection of mortgage loans in exchange for a fee. New Residential Investment Property commented on these types of rights on their website:
Approximately 74% of MSRs are currently owned by banks. We expect this number will continue to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment. As banks continue to sell MSRs, there is an opportunity for entities such as New Residential to participate through co-investment in the corresponding Excess MSRs.
A basic fee and an Excess MSR are the two parts that make up an MSR. The amount that is received for compensation for the performance of servicing duties is known as the basic fee, whereas any amount that exceeds the basic amount is rightfully known as the excess fee. When mREITs own this excess MSR, they collect this excess amount on a monthly basis from the MSR without assuming any advance obligations, servicing duties, or other liabilities associated with the portfolios underlying their investments. Now it is important to note in this strong but unstable economy, collecting excess MSR is dependent on people paying their mortgages. With the Fed Interest rate on the rise many are watching the curve yield closely. Historically, the yield curve has been viewed as an indicator of market health. The yield being the return on government issued bonds. According to Investopedia:
An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession.
So, as we all watch the state of this strong American economy closely let us be reminded that no investment is a, “sure thing”. When it comes to eREITs or mREITs, you want to find a firm that has experience in the field with a proven investment portfolio to show for it.
New Residential Investment Corp’s objective when it comes to investing is to leverage their knowledge and expertise to deliver attractive returns that can help bring about growing dividends for their investors. Targeting real-estate assets that produce, “stable long-term cash flows and employ conservative capital structures to generate returns throughout different interest rate environments” is what the company is all about.
Originally formed as a wholly owned subsidiary of Newcastle Investment Corp, New Residential Investment Corp spun off as a separate publicly-traded entity in 2013. AS of late they are externally managed and advised by an affiliate of Fortress Investment Group LLC.
If you would like to learn more about New Residential, please visit their website at https://www.newresi.com/
Looking into the 2019 residential market with New Residential Investment Corp. Their CEO Mike Nierenberg thinks there is a great potential for growth.