Rithm Capital reports profit as focus expands beyond mortgage

Rithm Capital returned to profitability thanks to its mortgage servicing unit in the third quarter, but it's seeking and found a better opportunity for growth outside of home lending amid the current market slowdown. 

The New York-based real estate investment trust and parent company to NewRez and Caliber Home Loans, reported third-quarter net income of $124.5 million, with its servicing segment doing most of the heavy lifting as originations remain well off 2021 levels. In the second quarter, Rithm reported a $3.3 million loss, largely due to one-time expenses after separating from its previous management company. Year-over-year, profits were down 27% from the third quarter of 2021, when the company posted net income of $170.7 million. 

Rithm's servicing segment accounted for $216 million of the quarterly total, but those profits were offset by losses in other divisions including one of $43.4 million in the mortgage originations business, which included several one-time fees. Three months earlier, servicing raked in $427.2 million, while originations posted a smaller loss of $19.8 million.

As the mortgage market faces headwinds that experts aren't expecting to abate until well into 2023 at the earliest, the mortgage REIT sees the next several months as a time to batten down the hatches. Rithm President and CEO Michael Nierenberg made it clear he expects a bumpy ride for lenders.

"We have to make sure we don't bleed too much as the road goes forward," Nierenberg said in the company's earnings call, but at the same time, he noted that Rithm is planning for the eventual turnaround. 

"We think the origination businesses could be pretty robust, particularly if home prices come off another 10% or so,"  he added. "We want to maintain a presence with all of our customers."

Total revenue across all of Rithm's mortgage and securities segments came out to $912.8 million, compared to $1.32 billion in the second quarter and $960.4 million a year ago.

New mortgage production fell 28% to $13.8 billion in the third quarter, down from $19.1 billion in the second, as surging mortgage rates kept borrowers away. The third-quarter number was 60% below the $34.5 billion generated during the same three months last year. Purchase transactions made up 83% of funded volume, with refinances coming in at 17%.

Gain-on-sale margins for originations also dropped by 24 basis points to 1.71% from 1.95% in the second quarter. But the margin came in higher than the 1.6% reported 12 months ago. 

Meanwhile, Rithm's mortgage servicing rights portfolio decreased to $615 billion in unpaid balance from $623 billion the previous quarter. Newly originated MSRs during the third quarter had an average interest rate of 5.33%.

Nierenberg has previously remarked he wished to see the company diversify further beyond home lending, one of the reasons behind its rebranding strategy earlier this year. In the earnings call, he made announcements regarding two new units within the company previously known as New Residential Investment Corp., including the creation of a third-party management fund business. Nierenberg also revealed Rithm had acquired a 50% stake in Senlac Ridge Partners, an investment management firm focused on commercial real estate. 

"As we go forward.you're going to see a shift as we morph more into what I would call an alt asset manager," Nierenberg said. 

The current turmoil in the mortgage industry won't preclude potential acquisitions of other lenders either. 

"We're going to look for opportunities to acquire platforms that we think could be accretive to our company," Nierenberg said, noting that many smaller private companies are likely to be opportunistic buys.

But, as elsewhere in the industry, the steep drops in mortgage production has led to a dramatic reduction in staffing levels at Rithm. Since completing its acquisition of Caliber in the third quarter last year, Rithm has reduced company headcount by more than half, from approximately 13,500 to its current level of 6,000, Nierenberg said.

Rithm's earnings available for distribution came in at 32 cents per diluted share, beating consensus estimates, but the news did little to move its stock price. After closing at $8.52 the previous day, the stock opened at $8.58 on Wednesday.