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While 2020 was a banner year for the mortgage industry, 2021 is proving to be much more competitive. We have seen profit margins shrink as more and more lenders compete for business. During this time, New residential investment (NYSE: NRZ) acquired smaller lenders and built its presence in the mortgage industry. This move will help protect the company from an imminent change in Federal Reserve monetary policy.
Mortgage REITs are different from most REITs
New Residential has always been viewed as a Mortgage Real Estate Investment Trust (REIT). These REITs are a little different from a typical REIT that develops properties. Mortgage REITs invest in real estate debt (in other words, mortgages) and earn interest instead of rent. New Residential also issues mortgages, and he built that part of his business.
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New Residential recently strengthened its mortgage origination offerings and recently completed the acquisition of Caliber Home Loans. This acquisition places New Residential in the top tier of non-bank mortgage originators. However, New Residential has not completed its construction efforts; he recently announced that he was buying Genesis LLC, which issues and manages loans for business purposes.
New Residential is interested in professional real estate investors
Genesis focuses on lending to professional real estate developers. Many of these loans fall outside the traditional mortgage financing ecosystem, which is primarily made up of longer-term mortgages that can be guaranteed by the U.S. government. These loans have a much shorter term and come with higher rates than typical loans. Fannie Mae Where Freddie mac mortgage.
This company helps insulate the Fed’s new residential
For New Residential, these loans are attractive because they involve little interest rate risk. This is simply because shorter term loans are less sensitive to daily fluctuations in interest rates. As a general rule, the longer the term of the loan, the higher the interest rate risk. This is important because the overwhelming consensus is that the Fed is going to raise rates next year. If you look at the Fed Funds Futures chart for December 2022, the market thinks there is more than a 90% chance of a rise next year.
New Residential bears credit risk with these loans, which is an attractive risk in this environment. Here’s why: Home price appreciation is increasing at a high percentage rate. These loans are “good for the money” since the value of the property is much, much higher than the loan amount. If for some reason the borrower defaults, New Residential will easily cover the loan by foreclosing and selling the property.
Genesis is expected to generate around $ 2 billion in loans this year, which is small compared to New Residential’s normal origination. Having said that, with increasing competition in the regular mortgage industry, the profitability of these loans is expected to be much higher.
New Residential has always been an interesting sum of parts story. The stock is trading around its book value per share of $ 11.27. Since mortgage banks typically trade on earnings, not book value, you could argue that the stock is undervalued.
That said, mortgage originators are generally out of favor at the moment due to fears of higher interest rates in the future. The key to unlocking value in New Residential may depend on a change in investor attitudes towards the sector in general. New Residential has a dividend yield of 8.8%, which means investors are paid quite well to wait for a reassessment of the sector.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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