Coronavirus takes bite out of New Residential's first-quarter results

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The spread of coronavirus had varying impacts on the first-quarter results of three companies representing different segments of the mortgage business.

New Residential's earnings

New Residential, a publicly traded mortgage REIT, lost $1.6 billion in the first quarter, as the company moved to deleverage its balance sheet once mortgage-backed securities values tanked following the launch of the Federal Reserve's purchase program.

"The world changed swiftly following our investor update on March 13," Michael Nierenberg, chairman, CEO and president, said in a press release. "Subsequent to that update, asset values in the mortgage market went into free fall as liquidity left the system. In response, we sold down approximately $27.9 billion in assets and significantly deleveraged our balance sheet.

"Our investment portfolio as of April 30, 2020 is 61% smaller than it was on Dec. 31, 2019, which we believe puts us in a strong position to navigate the current and forward environment."

In the fourth quarter, New Residential earned $211.8 million, while in the first quarter of 2019, it earned $145.6 million.

New Residential's mortgage originations and servicing lines were both profitable during the first quarter of this year. The originations unit had net profits of $47 million, while the servicing business earned $24.4 million.

Its mortgage production of $11.4 billion was up 8% quarter-over-quarter and 418% year-over-year. The big reason for the gain over the 2019 first quarter was the purchase of Ditech's forward mortgage origination business (along with the servicing portfolio) last Oct. 2.

But the mortgage servicing rights and servicer advances line lost $440.3 million during the quarter.

Its residential securities and call rights portfolio had a net loss of $941 million and its residential loan portfolio lost $196.7 million.

New Residential entered originations and servicing in the third quarter of 2018 through the purchase of Shellpoint Partners and its New Penn subsidiary, now called NewRez. Going forward, that will be its main business.

"Our primary focus will be on our operating business, which includes our mortgage origination, servicing and ancillary service business lines," Nierenberg said. "We believe that in today's low interest rate environment, these businesses are particularly well-positioned to contribute to our profitability."

Black Knight's earnings

At Black Knight, first-quarter net earnings were up 93% on a year-over-year basis to $50.1 million from $26 million. The change included a gain of $5.6 million to net earnings from its indirect investment in Dun & Bradstreet. This is comparison to one year ago, when there was a reduction in Black Knight's earnings of $13.3 million because of the D&B investment.

Its software solutions business includes the most-used mortgage servicing platform in the industry, along with its less popular loan origination system. Its operating income was $109.1 million, down slightly from $110.8 million in the first quarter of 2019.

Operating income for the data and analytics segment grew to $10.6 million from $6.1 million one year prior.

"While our first-quarter results exceeded our expectations, the extraordinary effects of the broad-based response to the COVID-19 outbreak have delayed the timing of certain revenues, which is reflected in our revised outlook for full-year 2020," CEO Anthony Jabbour said in a press release. "Specifically, we have seen lower foreclosure-related volumes in our Specialty Servicing software business due to the foreclosure moratorium and expect this to continue with forbearance plans offered as part of the CARES Act."

Black Knight now expects full-year revenue to be in the range of $1.16 billion to $1.18 billion, down from the previous guidance of $1.19 billion to $1.21 billion.

Arch Capital Group's earnings

Arch Capital Group's mortgage segment has yet to see a significant effect from the coronavirus, but that is likely to change in the current quarter.

The department had a 19% decline in year-over-year underwriting income to $197.6 million from $244.1 million. It includes the U.S. primary mortgage insurance business as well as the mortgage reinsurance operations in that total.

The U.S. MI unit did $16.8 billion in new insurance written, down from $24.1 billion in the fourth quarter (the most among the six operating mortgage insurance underwriters for the period) but up from $11.2 billion in the first quarter last year.

The segment's loss ratio grew to 19.6% from 3.5% in the first quarter of 2019; the change included 12 points of losses from financial stress due to the COVID-19. These incurred losses are largely a result of reserving being set at the higher end of the range of indications across the mortgage segment as of March 31.

But for GAAP purposes, incurred losses are based on reported delinquencies at quarter-end. Arch's first-lien book of business had a 1.42% delinquency rate, down from 1.54% at the end of the fourth quarter; the company did not have any coronavirus-related notice of delinquencies at the end of the first quarter.

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Earnings Stocks Coronavirus MSR PMI Originations Mortgage technology New Residential Investment Corp. Black Knight Arch Mortgage Insurance Co.