Reddit reviews The Handbook of Mortgage-Banking: Trends, Opportunities and Strategies (Revised Edition)

The mortgage business is pretty complex (due to both its size and the number of regulatory hurdles), but here's a really rough overview of the business, how mortgage servicing rights (MSRs) fit into the picture, and how NRZ operates in the industry.

1. When a borrower needs a mortgage in the US they usually go to a mortgage broker or banker who will quote a rate when the potential customer applies. That rate will typically be locked in for 45-90 days after application, so there's a fair spread built into the quote to protect the broker. There's a great Canadian podcast called I Love Mortgage Brokering (cringe) if you want to learn more about this.
   
2. Mortgages are then pooled into a special purpose legal entity that can issue shares. These shares can then be sold to investors who will participate in the cash flows from the underlying mortgage loans (hundreds of them). Maintaining the operations of this entity isn't free, so some % of the cash flow is paid out to the entities that allow it to function, those are typically insurers, servicers, trustees, etc. GSEs (FNMA, FHLMC, and GNMA) will guarantee pools of loans that meet their various requirements, effectively subsidizing homebuyers' loans at the expense of taxpayers (hooray for us renters!).
   
3. Servicers make money in the following ways:
   
4. Servicing fees - (weighted ave. coupon - pool's investor yield - GSE guarantee fee) = servicing revenue
   
5. Interest float - Servicers have custody of borrower's payments for a while before they need to remit those payments to investors in the pool they're servicing. They can invest those assets and make money during the ~15 days they have custody of a payment.
   
6. Ancillary income - Essentially fee income. (i.e., late fees, prepayment fees, insurance and other cross-sold products)
   
   The reason people say that MSRs perform well when interest rates are rising is that prepayment rates decline when interest rates rise. Servicers make more money they longer their portfolio stays active, so when refi rates are low MSRs on existing loans are worth more.
   
   New Residential Investment Corp:
   
   
7. Subsidiary of Fortress Investment Group, a large and well capitalized asset management group that Softbank just announced they are purchasing for $3.3 billion. As a very strong performer within FIG, NRZ has next to no risk of being cut and will likely have access to a great deal of new capital.
   
8. They quadrupled notional aum this year and are actively looking for more expansion opportunities. Most recently they purchased $91 billion notional of servicing rights on agency mortgages from citigroup. (There was another recent large purchase too, but I can't remember the details.) Normally that rate of growth would be cause for some concern, as it's fairly difficult to ramp up compliance programs that quickly, but NRZ shouldn't have that issue due to their access to Fortress's back office infrastructure.
   
9. They contract out servicing to companies called sub-servicers that handle the payment processing, record keeping, and call center stuff for them for a flat fee. This means that they are essentially taking a spread that pays out over time, with longer repayment outcomes favoring the MSR holder.
   
10. Basel 3 is in the process of forcing banks out of the servicing industry due the new risk weighting given to the asset. summary slide deck This basically means a reduction in competition and a big opportunity for expanding market share, which they have clearly done aggresively thus far and, given the above, are incredibly well positioned to continue doing.
    
    Now, all that said, the servicing industry is, overall, a complete and utter shit show. While NRZ is definitely the best from a capital adequacy and large-scale strategic perspective, the servicing business is still run as it was in the 90's, and it was poor by anyone's standards even then. Operations are a mess, and compliance failures abound. Very few organizations care very much about their servicing departments, just read a few pages about Ocwen's trouble with the CFPB, NYDFS, and California's state regulators and you'll see what I mean. Hopefully NRZ has done a good job selecting their sub servicers, but even if they've done an average job they should come out on top given their other advantages.
    
    Grain of salt: I've read a fair number of books on the subject as a hobby, but I've never worked in the field. This book in particular has a solid chapter on servicing.
    
    Aside: bitcoin's a better purchase than all this fiat shit.