Michael Nierenberg Shares the Challenges Bank and Non-Bank Mortgage Lenders Have Had Since The Great Recession

Since 1999, the residential mortgage industry has been greatly affected by two events. The first of these was the repeal of the Glass-Steagall Act. This act was passed in 1933 and separated the commercial banking and investment sides of banks.

The second event was the Great Recession, which started in 2007. This second event forced banks to change their practices, often whether they liked it or not.

One of the results of these two events is that traditional banks don’t have as many mortgages as they once died. Traditional banks used to have a 90% share of the residential mortgage market. Since 2009 that has declined to around 50%. Lending standards are much stricter and so people that don’t qualify need to get their mortgages elsewhere.

Despite the changes in the residential mortgage market, New Residential Investment Corp. (NRV) has thrived. This is a REIT (Real Estate Investment Trust) that specializes in residential mortgages. It is led by chairman of the board and chief executive officer Michael Nierenberg Bear Sterns. He has developed innovative investment strategies that have done very well despite changes in the industry he works in.

He says that borrowers need flexible choices when it comes to getting a mortgage. Traditional banks mainly just issue qualified mortgages. The borrowers for these have been able to meet stringent requirements. Non-bank mortgages can offer these types of mortgages or non-qualified mortgages. These latter types of mortgages are for people who have some credit challenges but can still borrow money to buy a home.

Another change in the banking industry is that banks are moving more of their capital into areas other than residential mortgages. This is in part because they can get a higher rate of return elsewhere. Commercial leveraged loans are popular because they feature higher interest rates than residential mortgages, although they do present a higher risk to investors.

Since the 2007 financial crisis, banks have had new capital reserve requirements mandated by the federal government. To comply, banks had to sell assets such as mortgage serving rights. Some banks have become what is known as “Zombie Banks.”

These banks have more liabilities than assets in their books. They can’t issue mortgages “normally” until they get their books cleaned up. Since 2007, the FDIC has had between 125 and 900 banks on their Problem Bank List. Before 2007 it was usually less than 50 at any given time.

The residential mortgage industry has also seen considerable consolidation since 2007. 525 banks failed between 2008 and 2017. When these banks failed, they were acquired by larger ones. Both bank and non-bank mortgage originators have failed to keep up with new technology that would have cut their expenses.

As they are using old business models and infrastructure, many of them are expected to lose market share and get bought by other financial institutions. Companies like NRZ that have capital can make selective acquisitions of these companies and then introduce technology to improve their bottom lines.

New Residential Investment Corp. has been one of the country’s leaders in the “beyond the bank” trend. Michael Nierenberg has had his company acquire multiple other companies in the residential mortgage industry. This includes Shellpoint, which was purchased in 2018. This is a non-bank mortgage platform. He also acquired NewRez, a non-traditional mortgage originator. This company operates in 49 states and Washington, DC and offers qualified and non-qualified loans.