New Residential Corporation CEO Mike Nierenberg says that many investors have to think outside the box. While thinking outside the box normally means using unconventional methods, investors can think outside the box by developing a new mindset about investment opportunities as banks continue to evolve.
Investors have taken note of the different changes in the banking industry over the last decade. Nierenberg points out that the repeal of the Glass-Steagall Act allowed banking institutions to change how they do business. Nierenberg also notes that the resulting change in how banks operate has had a major impact on the industry.
Mike Nierenberg, previously at Bear Sterns, notes that residential mortgage market share has declined significantly over the last few years. Despite that, the residential mortgage market in the United States remains large. More than 60 percent of homeowners currently have a mortgage. Nierenberg helped create a strategy centered around lucrative investment opportunities involving residential mortgages. Nierenberg believes that the residential mortgage industry is evolving. There are potentially several lucrative investment opportunities in the current mortgage market.
Nierenberg notes that mortgages have become more complex over the last couple of years. Residential mortgages are securitized. That’s why Nierenberg and New Residential Investment Corporation have created a new package that includes residential mortgage securities. New Residential has also added mortgage servicing rights that assist investors in deciding whether to buy or sell. Nierenberg says that the company has overhauled their approach to issues such as mortgage servicing, loan origination, and appraisals.
Mike Nierenberg points out that the changes in the mortgage servicing industry have impacted non-bank ownership. Risk management is often a concern for business owners. Many banks have dealt with mortgage issues, including Bank of America, PNC Bank, and Wells Fargo. Profit margins are tighter. Mortgage servicing is reliant on cash flow producing profits that everyone is comfortable with. However, thanks to the rise in foreclosures, profits have started to decline. In the aftermath, New Residential is excited about the potential investment opportunities that lie ahead.
Nierenberg points out that many banks are processing fewer mortgage loans due to the responsibilities of a loan originator changing. Due to assets such as residential mortgage backed securities having more influence, there are fewer servicers and investors who have the financial resources to adapt to the times. That’s why New Residential is excited for the future. The company hopes to fulfill a need in an area that is missing something.
Nierenberg says that the stats show that there are multiple variables at play concerning the decline of the residential mortgage market share. In general, people are searching for better options. Bank mortgage originators prefer loans that are outlined by federal housing agencies. Non-traditional originators offer more flexible lending options.
Nierenberg also notes that banks are starting to offer higher rates of return compared to residential mortgages. In the aftermath of the economic collapse, banks were forced to improve their capital reserves. Banks were forced to sell off their assets, damaging their balance sheets. The increase in bank troubles lead to consolidation, as many failing banks were taken over by their peers. There are many originators who are still struggling to reduce their expenses and adapt to the times. Without those upgrades, many lenders will continue to trend in the wrong direction. New Residential is aware of this, which is why they make acquisitions that they are confident about.