Part 1: Everything But the Kitchen Sink
Residential Mortgage with Mike Nierenberg Bear Stearns
This is the first in a three-part series reviewing a borrower’s process of shopping for a mortgage. The initial article is inspired by “everything but the kitchen sink” because a typical borrower genuinely wants “everything” when a mortgage search process begins. The phrase itself appears to have been used initially about 100 years ago and usually refers to the inclusion of more than is actually required for a given task. Two other common variations are “everything except the kitchen sink” and “everything including the kitchen sink” — and the idiomatic expression still appears in many contexts.
But here is the primary point of part one in this series — when borrowers begin their quest for a cost-effective residential mortgage, they really do expect a lot. When Ellie Mae compiled a survey of mortgage customers in 2018, this is how the results were summarized in one memorable line — “What do consumers want out of the mortgage process? Everything.”
As reflected by the other titles in this series, many prudent borrowers eventually focus on the critical importance of customer-centric mortgages and a comprehensive due diligence process. Nevertheless, a popular starting point continues to be a modified kitchen-sink search process.
The Initial Residential Mortgage Shopping Process: What Do Consumers Want?
The multiple consumer wants and needs associated with mortgages are remarkably prudent and appropriate given the size of the loan — the largest single purchase decision for many borrowers. Prospective home buyers beginning with an extended list of desirable criteria for a home loan can probably shorten the time and frustrations of the search process by starting with a recent leader in the residential mortgage industry — New Residential Investment Corp. (NYSE: NRZ).
However, regardless of the specific process each consumer follows, it is strongly suggested that borrowers take the time to “shop around” for a home mortgage that makes the most sense for individual circumstances. Unfortunately, the Consumer Financial Protection Bureau has reported that this often does not happen — “Nearly half of mortgage borrowers don’t shop around when they buy a home . . . Failing to shop for a mortgage could cost you.” Here are three examples of questions and issues to explore during the early stages of shopping around:
Banks or Alternative Lenders? — The “old school” approach to getting a mortgage typically consisted of going down to the local bank and applying for a mortgage without even a thought of shopping around. While many borrowers might still do something like that, they will miss out on the many benefits and advantages of working with non-bank alternative lenders such as NewRez, a subsidiary of New Residential. For example, NewRez offers (in 49 states and the District of Columbia) non-qualified mortgages (non-QM) that are routinely not available from traditional lenders such as banks.
Innovative and Flexible Mortgage Services? — For most of the past 50 years, bankers and mortgage providers were not known for their flexibility and innovation in working with customers. As banks have gotten bigger (but not always better), banking institutions have tried to maintain a reputation for “business as usual” as if that was a good thing. Since both consumers and mortgages have changed drastically in recent years, lending “as usual” can transform into a problem instead of a solution for today’s borrowers. As a business established six years ago, NRZ has the distinct advantage of adopting contemporary business practices that reflect a digital financial world and consumers demanding innovation and flexibility. New Residential has chosen to specialize in mortgage-related investments and services, and the company can employ a laser-like focus on flexible and innovative solutions for residential mortgages.
Looking Beyond the Initial Mortgage — While the initial practical goal for a prospective borrower is to finalize a long-term mortgage, prudent borrowers will recognize that the overall mortgage process includes multiple steps (and often numerous different providers of mortgage-related services). Since these separate pieces can contribute to problems such as a lack of coordination, New Residential is actively pursuing a “whole pie” business strategy that currently involves ownership of a non-bank loan originator (NewRez), a non-bank mortgage servicing company (Shellpoint) and several additional mortgage-related businesses. NRZ is also a major investor in specialized mortgage assets such as non-Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs).
Shopping for a Residential Mortgage, Part 2: Customer-Centric Mortgages
This is the second in a series analyzing the home buyer’s process for finding a mortgage. Part one described the borrower’s initial checklist of wants (“everything”). This segment will discuss the search for a customer-centric mortgage.
The concept of customer-centric mortgages requires that lenders provide much more than the “same old same old” choices. First and foremost, customer-centricity means that a mortgage provider is offering what customers want and need. While that might sound like a common-sense approach to doing business, it is far from the prevailing business practice among traditional lenders.
The Residential Mortgage Shopping Process: Is the Customer Always Right?
For many borrowers, shopping for a mortgage might seem like a classic version of “swimming upstream” — frustrating and challenging. To a large extent, customer frustrations with the residential mortgage process are influenced by the recurring practice of service providers treating consumers like they are a captive audience. This old-fashioned attitude has long been an unfortunate trait within the financial services industry dominated by large banking enterprises. As noted by Mark Grainger in early 2019, “Financial services has traditionally been an area where customers were unlikely to move around much, but this has changed.”
To answer the question in the paragraph headline — in order to find an approximation of “always being right” in the mortgage business, customers should be prepared to shop around due to circumstances such as the following:
Customers Might Have to Overcome Old Mortgage Lending Traditions — For several decades, most banks and traditional mortgage lenders adopted what is often referred to as a marketer-centric business strategy: the seller is at the center of the marketing process and rigidly controls information flow to customers. As consumers discovered that buying power could facilitate more control over the entire buying process, many businesses shifted to the other end of the marketing spectrum: customer-centric strategies that place consumers at the center. Unfortunately, the mortgage industry was very slow to adopt the more modern approach to working with prospective customers.
- Finding New (and More Effective) Traditions — A refreshing example of breaking the old-fashioned and ineffective lending traditions in recent years is provided by New Residential Investment Corp. (NYSE: NRZ) and the company’s innovative leader, Michael (Mike) Nierenberg. The company was founded in 2013 and brings modern (and non-bank) perspectives to the residential mortgage industry. NRZ is a mortgage real estate investment trust (REIT) and trades on the New York Stock Exchange.
Customer-Friendly Mortgages Are Where You Find Them — Most traditional lenders use a rigid loan underwriting process that is based on inflexible guidelines developed by federal housing agencies for qualified mortgages (QM). Many worthy borrowers typically find it impossible to qualify for the mortgage that they want and need from a traditional lender.
- Finding Customer-Friendly Mortgage Options — NewRez is a New Residential subsidiary that operates in 49 states and the District of Columbia. NewRez is a non-traditional lender specializing in a customer-centric approach to mortgages. Alternatives include non-QM loans featuring flexible lending guidelines that will be especially helpful for self-employed borrowers, retirees, foreign nationals and individuals with a recent bankruptcy, short sale or foreclosure. For all borrowers, NewRez can often include interest-only terms and longer amortization periods (more than 30 years) that help to keep monthly payments lower.
Customer-Friendly Mortgage Servicing Depends on the Provider — One of the most consequential functions performed by a mortgage servicing company is how to handle circumstances when monthly payments are delinquent. The 2007 (and beyond) financial upheaval vividly demonstrated that mortgage servicing companies typically adopt the mortgage delinquency policies preferred by the controlling owner (the servicing business has been historically dominated by banks). Based on recent events, bank-owned servicers preferred employing foreclosures and short sales.
- Finding Customer-Friendly Servicing — Shellpoint Mortgage Servicing (SMS) is a nationwide New Residential subsidiary that serves both individuals and third-party clients such as government-sponsored enterprises (GSEs) and institutional investors. Reflecting the preferences of NRZ’s executive management team, Shellpoint pursues a customer-friendly strategy of improved collections and loan workouts whenever possible with mortgage delinquencies. This approach mirrors New Residential’s finding that the customer-friendly approach is also preferred by investors because of improved investment results.
Shopping for a Residential Mortgage, Part 3: Due Diligence
This is the final segment in a three-part series about the residential mortgage buying process for a home owner. The first two parts evaluated the customer’s want list and the search for a consumer-friendly mortgage. This segment will examine the importance of a prudent due diligence process when borrowers are considering residential mortgage alternatives.
A due diligence review is a standard activity when buying commercial real estate or a company. However, the basic process also has strong merits for individual borrowers when shopping for a cost-effective residential mortgage. Using this recommended approach, a borrower should “dig deeper” and investigate the mortgage provider’s leadership, financial performance, organizational structure and assets.
While at first glance the suggested parameters (taking a closer look at current assets, capabilities, financial results and the executive management team) might not seem relevant to securing a home mortgage, a modest due diligence examination can avoid unpleasant surprises at a later point. As with the corporate version of due diligence reviews, borrowers conducting the personal mortgage due diligence process will frequently be tempted to skip over one or more elements in the interest of time. But please keep in mind the pertinent advice of a recent Secretary of the Treasury, Henry Paulson: “Buying a home today is a complex process, but that in no way excuses home buyers from their obligation for due diligence.”
The Residential Mortgage Shopping Process: A Due Diligence Review
The following illustrations portray how doing the due diligence regarding New Residential Investment Corp. would reveal key data and insights that could influence a mortgage shopping decision:
Do Your Due Diligence: Organization — New Residential was established in 2013 as a mortgage real estate investment trust (REIT), and the company’s stock trades on the New York Stock Exchange with “NRZ” as the ticker symbol. NRZ’s non-bank ownership facilitates business practices that are not influenced by a banking mentality. As an investment manager, NRZ has focused on specialized mortgage-related assets such as non-Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). NRZ currently controls about 37 percent of the non-Agency universe and is now the fifth largest owner of MSRs in the country. During the past 12 months, New Residential finalized key acquisitions that included a non-bank alternative lender (NewRez) offering mortgage loan services throughout the United States (49 states), a title insurance company, a real estate appraisal business and a nationwide mortgage servicing company (Shellpoint).
Do Your Due Diligence: Executive Leadership — Michael (Mike) Nierenberg has served in a senior leadership capacity since the company was formed. His ongoing management role is the exception rather than the rule in a residential mortgage industry that is often characterized by constant turnover. Over a six-year period, Mike Nierenberg and NRZ have transformed how residential mortgages are originated, financed, owned, securitized, managed and serviced.
Do Your Due Diligence: Assets and Dividends — Based on quarterly results for the period ending March 31 (2019), New Residential’s total assets are approximately $33.4 billion. NRZ’s stock market capitalization is $6.57 billion as of June 21. Book value has grown by about 65 percent since inception in 2013. During the same period, New Residential paid $2.7 billion in dividends to shareholders. Based on the June 21 (2019) price of New Residential ($15.77), the 2018 dividend of $2 per share (paid quarterly) represents a yield of 12.6 percent.
Do Your Due Diligence: Financial Results — As a public company, New Residential’s financial performance can be easily monitored via the stock market, quarterly/annual reports and periodic investor announcements. For example, in a release seven weeks ago (May 1), NRZ reported a strategic investment (in Covius Holdings) that will bolster New Residential’s role in technology-related services for the mortgage and financial services industries. In NRZ’s 2018 annual report, Mike Nierenberg announced financial results for the most recent calendar year: “We delivered a total economic return in 2018 of 19.6%, substantially above the mortgage REIT peer average for the year.”
Michael (Mike) Nierenberg and New Residential
- Continuity of NRZ Leadership — Mike Nierenberg has served as President and Chief Executive Officer of New Residential since the company was founded in 2013 and as Board Chairman since 2016.
- NRZ Book Value Growth — New Residential’s book value has increased every year since inception of the company.
Connect with Michael Nierenberg on Crunchbase