New Residential: Something Different for a REIT

06/30/2015 9:00 am EST

Focus: REITS

Harry Domash

Publisher, DividendDetective and Winning Investing

Mortgage servicing includes tasks such as collecting mortgage payments, paying insurance and property taxes, etc., explains income expert Harry Domash, editor of Dividend Detective.

When a homeowner gets a mortgage, the lender often assigns the mortgage servicing rights (MSRs) to an unrelated third party.

In return, the MSR holder is entitled to a percentage (e.g. 0.35% annually) of the mortgage value for performing the servicing tasks.

However, the MSR holder is frequently able to subcontract out the servicing tasks for less than contracted rate, e.g. 0.25%.

The 0.1% difference is termed “excess MSRs.” MSR holders often sell those excess MSRs, which generate income for the remaining life of the respective mortgages. That is, until the mortgages are refinanced, paid off, or foreclosed.

New Residential Investment (NRZ) buys excess MSR portfolios. Unlike the value of the underlying mortgages, the MSR values should increase in a rising interest rate environment.

Why? Homeowners will be less likely to refinance and foreclosure rates drop in a strengthening economy. So, mortgages will stay on the books longer, extending the MSR income stream.

Besides excess MSRs, New Residential also invests in both current and delinquent residential mortgages and in consumer loans.

New Residential was originally a wholly-owned subsidiary of Newcastle Investment (NCT), but was spun-off as a separate company in May 2013.

In fast growth mode, New Residential reported March quarter earnings of $0.44 per share, $0.03 above analyst forecasts and up 38% vs. the year-ago quarter.

Its excess mortgage services rights portfolio rose 54% vs. year-ago to $526.6 million (fair value).

In April, New Residential acquired substantially all assets and liabilities of competitor Home Loan Servicing Solutions (HLSS) for $1.4 billion. The deal almost doubled the value of NRZ's excess mortgage servicing rights portfolio.

However, at least one HLSS shareholder is trying squash the acquisition, contending that deal was made without HLSS shareholder approval.

Meanwhile, New Residential is paying a 10.6% yield and we're expecting around 10% annual dividend growth.

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