Newcastle's New Addition to a Lucrative Corner of the Mortgage Market


While new regulations on the financial industry are often derided as adding to the cost of doing business, they also have the effect of goosing the entrepreneurial spirit, resulting in new companies that spring up to take advantage of these new rules. Such is the case with the mortgage servicing industry, which has sprung to life in response to big banks such as Bank of America and Wells Fargoselling off the capital-intensive rights to service mortgages.

An immensely profitable enterprise
With a line-up of willing sellers -- and free of the capital constraints of banks -- mortgage servicers like Nationstar Mortgage , Ocwen Financial , and Walter Investment have seen their stars rise quickly, experiencing stock price surges of at least 100% over the past year.

This turn of events worked in favor of Fortress Investment Group's portfolio, which held the former Centex Corp, the subprime mortgage lending unit of a Texas homebuilder. That company is now Nationstar, which is definitely doing its fair share to add to its parent's bottom line. Also owned by Fortress is Newcastle Investment , the diversified REIT with an involvement in almost anything to do with real estate, whether residential or commercial.

On May 16, Newcastle spun off New Residential, a mortgage REIT to which Newcastle donated most of its residential-focused investments -- including its stable of MSRs -- which leaves Newcastle free to concentrate on its commercial real estate holdings.

New Residential is up and running
Barely a week old, Newcastle's offspring is teaming up with Nationstar to buy into the MSRs of a portfolio containing about $23 billion in unpaid balances. New Residential's $38 million investment will plump the company's total MSR investment to $645 billion. In addition, the deal protects New Residential from prepayment risk in the case of any refinancing of the loans by Nationstar, a detail that should please investors.

With all the MSRs being placed on the auction block, there is no doubt New Residential will be able to bulk up quickly. The most recent bank to consider selling these goodies is Flagstar Bancorp, which is rumored to be on the verge of selling off rights on a mortgage portfolio valued at $70 billion.

Just as Nationstar cut its teeth with $10 billion of Bank of America's MSRs last June, perhaps New Residential will pick up some of Flagstar's offering. It's likely, though, that the newbie will be in competition with both Ocwen and Walter, though the former seems to be concentrating lately on reverse-mortgage servicing, having recently bought a passel from Liberty Home Equity Solutions and Wells Fargo.

Considering the abundance of MSRs constantly coming to market, and its impressive lineage, the future looks bright indeed for New Residential.

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