Navigating the World of Refinancing and Smart Financial Moves

Refinancing a house can be a smart financial move, especially when timed well. Like many homeowners, I can recall the last time my wife and I refinanced our house four years ago, even though it feels like just yesterday. The memory of that transaction remains vivid, and I give full credit to my wife for her persistence in understanding the right time to refinance. Her diligence paid off, as she convinced me to act before interest rates began to rise significantly. At the time, Federal Reserve Chair Jay Powell was increasing the money supply, and long-term interest rates, including mortgage rates, were starting to rise from historically low levels. This period turned out to be a critical moment for making such a financial decision.

How Refinancing Impacts the Housing Market and Elite Investments

When refinancing activity slows down, it can have a positive impact on certain investments, particularly those with high yields. One such investment is Rithm Capital (RITM), a company that specializes in mortgage servicing rights (MSRs). RITM has been a favorite in the Contrarian Income Report, and for good reason. The company has strategically purchased a large portfolio of MSRs, which increase in value when interest rates are stable or rising. This makes RITM an attractive investment, especially in a low-refinancing environment.

Understanding Mortgage Servicing Rights (MSRs)

MSRs are contracts that give the holder the right to collect payments from borrowers. While they don’t represent ownership of the loans themselves, they provide the rights to service these loans. This distinction is subtle but important. When my wife and I refinanced our house in 2021, we disrupted the servicing rights held by Caliber Home Loans, which had been collecting a small percentage of our monthly payments for processing. This "gravy train" for companies like Caliber comes to an end when refinancing activity increases, as borrowers switch to new loans with different servicers.

Rithm Capital’s Strategic Moves and Dividend Growth

RITM’s founder, Michael Nierenberg, saw the potential for MSRs early on. In April 2021, he announced plans to buy Caliber Home Loans, positioning RITM as the largest owner of MSRs in the world. This strategic move came at a time when refinancing activity was slowing down due to rising interest rates. We bought RITM for the Contrarian Income Report shortly after our refinancing, in July 2021. At the time, the stock offered a 7.6% yield, which increased to 9.5% after a 25% dividend raise. Over the 3.5 years we held the stock, we enjoyed a 48% total return, with much of that coming from cash dividends. While the current yield has trended lower due to increased buyer demand, contrarian investors like us benefited handsomely from this investment.

The Current State of the Housing Market and RITM’s Outlook

Today, the housing market remains sluggish, with mortgage rates stubbornly high above 6%. This has led to a drop in refinancing activity and a general slowdown in the mortgage market. While this might seem like a negative trend, it’s actually beneficial for companies like RITM. The company recently reported earnings of $0.60 per share, more than enough to cover its generous $0.25 dividend payout. Wall Street analysts, who had expected only $0.44 in earnings, seem to be lagging behind the curve when it comes to RITM’s performance.

RITM’s Recent Acquisitions and Growing Appeal to Hedge Funds

In addition to its strong earnings, RITM has made strategic acquisitions to further diversify its revenue streams. The company recently acquired Sculptor Asset Management, which brought in $34 billion in assets under management. This move not only expands RITM’s fee income but also reinforces its position as a leader in the MSR space. Hedge funds have taken notice of RITM’s attractive dividend and strong fundamentals, with institutional investors adding 2 million shares in the most recent quarter. These "stronger hands" are likely to provide a floor for the stock price, making RITM an even more compelling investment for income-focused investors.

Conclusion: A Smart Investment for Income-Seekers

In summary, RITM has proven to be a smart investment for those looking for high dividend yields and strong returns. With its strategic acquisitions, solid earnings, and growing appeal to institutional investors, the company is well-positioned to continue delivering value to its shareholders. As the housing market remains comatose due to high mortgage rates, RITM stands to benefit from the continued slowdown in refinancing activity. For income-seeking investors, RITM remains a compelling choice, offering a generous dividend and the potential for further growth.

Disclosure: The author has no positions in any of the mentioned securities. This article is for informational purposes only and should not be considered as investment advice. Always do your own research or consult a financial advisor before making any investment decisions.