Former Bear Stearns Leader Mike Nierenberg is Thinking outside the Bank

Photo of author

( — December 17, 2019) — 

True or False, Part 1: Thinking Outside the Bank

This is the initial segment in a series using true or false statements to illustrate key issues in the residential mortgage business. This part begins the series with questions about thinking outside of the bank.

True or False? — T/F: Think Outside of the Bank

Here are six examples that examine knowledge about the importance of thinking outside of the bank with residential mortgages and real estate (answers and explanations are provided after all of the true or false questions are listed):

  • 1 — In the United States, the concept of “Zombie Banks” first appeared during the 2007-2009 financial crisis. — T or F
  • 2 — “Thinking outside of the bank” is a financial variation of “thinking beyond the box” or “thinking outside of the box.” — T or F
  • 3 — Approximately 50 banks failed during 2008-2017. — T or F
  • 4 — Prior to the 2007 crisis, there were less than 50 banks on the Problem Bank List maintained by the FDIC (Federal Deposit Insurance Corporation). — T or F
  • 5 — Many well-qualified borrowers are disapproved for mortgages by banks and other traditional lenders due to strict financial guidelines imposed by federal agencies. — T or F
  • 6 — For both investors and borrowers, thinking outside of the bank and the increased presence of non-bank lenders have turned out to be major improvements in the residential mortgage process during the past decade. — T or F

Answers and Explanations: Thinking Outside of the Bank

1 — False. The “Zombie Banks” terminology was initially used during the 1986-1995 S&L (savings and loan) crisis when about 1040 S&Ls failed. A Zombie Bank is a financial institution with liabilities that exceed assets and is effectively bankrupt. This ongoing problem is international in scope and occurs in many countries in addition to the U.S. For example, the most recent Zombie Bank challenge in Japan persisted for about two decades.

2 — True. The “thinking outside of the box” concept refers to using unconventional thinking to solve a problem. As the traditional role of banks evolves due to dramatic banking industry changes during the past 20 years, “thinking outside of the bank” emphasizes unconventional solutions for recurring challenges. For example, the unconventional financial strategies of New Residential Investment Corp. (NYSE: NRZ) illustrate thinking beyond the bank with a series of opportunistic business acquisitions and investments.

3 — False. During a 10-year period starting in 2008, about 525 banks failed.

4 — True. However, the number grew swiftly to almost 900 banks in the latter part of 2010.

5 — True. Alternative lenders such as NewRez (a subsidiary of New Residential) offer non-qualified mortgages (non-QM) that are not subject to federal housing agency underwriting requirements. This enables NewRez and other non-bank lenders to help borrowers that are often turned down for a qualified mortgage (QM). Key examples of individuals that frequently cannot obtain QM financing are self-employed borrowers, those with a recent foreclosure or bankruptcy, foreign nationals and wealthy borrowers who are not employed.

6 — True. The residential mortgage market share for banking institutions has recently fallen to under 50 percent and is still trending downward — 10 years ago, more than 90 percent of these mortgages were originated by banks. For banking institutions, the rationale for reducing residential mortgage origination services included redirecting financial resources to higher-profit lending areas such as leveraged commercial loans and reducing legal exposure. Meanwhile, New Residential has emphasized thinking outside of the bank with a non-bank ownership strategy throughout NRZ’s residential mortgage business. This approach includes a specialized portfolio of non-Agency residential mortgage-backed securities (RMBS) and mortgage servicing rights (MSRs). New Residential’s acquisitions during the past two years include field services, mortgage origination, technology-related services, REO (real estate owned) management, title/appraisal services and mortgage servicing. NRZ’s management team has also enhanced investor and consumer satisfaction with stronger cash flow opportunities, more flexible customer-centric policies and improved coordination between subsidiaries.

A reminder — The True or False series will continue with “Part 2: Residential Real Estate in California.”

Connect with Micheal Nierenberg on

True or False, Part 2: Residential Real Estate in California

This is the second part in a three-part series that features true or false questions to explore the residential mortgage industry. The initial article covered thinking outside of the bank, and part two will take a closer look at residential property and mortgages in California.

True or False? — T/F: Residential Mortgages and Property in California

Here are seven questions that cover residential property in California (answers are shown after all of the true/false questions):

  • 1 — As reported in Forbes recently (September 2019), if an individual invested in a San Francisco residential property one year ago, the investor would have ended up with zero profits if sold after 12 months. — T or F
  • 2 — Based on August 2019 data, California median home prices reached a new all-time high. — T or F
  • 3 — The economy of California currently ranks tenth among the largest economies in the world. — T or F
  • 4 — An “entry level” home in California currently costs about $500,000. — T or F
  • 5 — About 33 percent of the nation’s highest priced real estate markets are currently located in California. — T or F
  • 6 — At the end of 2018, about 5 percent of California’s homeowners were underwater (negative equity) on their mortgage. — T or F
  • 7 — Among all U.S. states, California has the highest percentage of “equity rich” properties (43 percent). — T or F

Answers and Explanations: California — Residential Real Estate

1 — True. Ingo Winzer made this observation in Forbes on September 12, 2019: “If you had invested in a property in San Francisco five years ago and cashed out in 2019, you would have made a 50% profit, never mind the rental income. But if you had bought a year ago and sold today you would have made exactly zero.” This finding reveals the importance of approaching residential real estate in any location as a long-term investment rather than investing for short-term results.

2 — True. August 2019 home prices in California attained a median level of $611,000. This compares to about $245,000 a decade ago.

3 — False. With rising wages and almost 19 million Californians currently employed, California now ranks at least fifth (and fourth according to one analysis) among all economies. In the results showing California in fifth position, only the United States (without California), China, Japan and Germany have an economy that is larger than California. As recently as 2012, however, the state’s ranking was 10th.

4 — True. This is true on a statewide basis, but in major California metropolitan areas, the average entry level price is much higher than $500,000.

5 — False. The actual percentage is 76 percent.

6 — False. At the end of the fourth quarter in 2018, 2.4 percent of residential mortgages in California were underwater. This is down from 3 percent at the end of 2017. The underwater rate is even lower in metropolitan areas such as Los Angeles (1.5 percent) and San Francisco (0.7 percent). These rates compare to about 9 percent of all U.S. homeowners who owe more than the value of their home.

7 — True. As defined by ATTOM Data Solutions, an equity rich property is one with a “loan to value ratio of 50 percent or lower, meaning the property owner had at least 50 percent equity.” Based on this standard, after California (43 percent) the next-best states are Hawaii (38 percent), New York (34.2 percent), Washington (33.2 percent) and Vermont (32.8 percent). When analyzing the top five zip codes nationwide with the highest percentage of equity rich properties, the San Jose and San Francisco markets contain all five — ranging from 81 percent to 82.3 percent. In a review of equity rich property percentages in metropolitan statistical areas throughout the United States, California has the top five: San Jose (68.3 percent), San Francisco (58.4 percent), Los Angeles (48.1 percent), Santa Rose (47.6 percent) and San Diego (39.3 percent).

A reminder — The True or False series will continue with “Part 3: Residential Real Estate in Chicago.”

True or False, Part 3: Residential Real Estate in Chicago

This is the final part in a series incorporating a true-or-false format to demonstrate recent residential mortgage trends. The first two articles analyzed residential real estate in California and thinking outside of the bank. This segment will examine residential mortgages and property in Chicago.

True or False? — T/F: Residential Property and Mortgages in Chicago

Here are nine questions that focus on residential property in Chicago (explanations and answers are shown in the next section):

  • 1 — Based on mid-2019 data, the median sales price of Chicago houses is less than $200,000. — T or F
  • 2 — Chicago’s underwater mortgage rate improved from almost 33 percent in the second quarter of 2012 to 10 percent at the end of 2017 (compared to a national rate of 4.9 percent). — T or F
  • 3 — The overall cost of living in Chicago is about 60 less than in Los Angeles. — T or F
  • 4 — During 2010, Chicago was included in the top 10 cities or metro areas in terms of foreclosures. — T or F
  • 5 — The median starter home value in Illinois is $125,000. — T or F
  • 6 — Chicago and Illinois homeowners have the highest overall tax rate in the United States. — T or F
  • 7 — The Chicago metro area was one of the fastest growing in the nation during 2017-2018. — T or F
  • 8 — Chicago’s metropolitan statistical area (MSA) includes parts of Indiana and Wisconsin. — T or F
  • 9 — Chicago is the third largest city in the country. — T or F

Answers and

Explanations: Chicago — Residential Real Estate

1 — False. Recent median sales prices in Chicago were $285,000.

2 — True. Despite this improvement, the Chicago metropolitan area had more underwater mortgages than any other metro area in the United States at the end of 2017. Chicago’s housing recovery after the Great Recession has been slower than national trends. In 2017, Chicago home prices were almost 20 percent below pre-crash levels. Based on 2017 data, Chicago had more than 130,000 homeowners with properties that were worth less than the mortgage balance. In comparison, a larger metropolitan area (Los Angeles) had about 26,000 underwater mortgages. New York was in second place with more than 85,000.

3 — True. The overall cost of living index for Los Angeles is 62 percent higher than for Chicago. Looking only at homeowner costs, the housing index in Los Angeles is about 200 percent more than in Chicago.

4 — False. The top 10 list of foreclosures in 2010 consisted of metropolitan areas restricted to four states: Nevada (Las Vegas/Paradise was number one), Florida (three cities), California (five cities) and Arizona.

5 — False. The median “entry level” home in Illinois is about $80,000. For all Illinois houses, the median is approximately $181,000.

6 — True. Property taxes in Illinois are the second highest in the country and the largest income tax increase in state history was recently levied throughout Illinois.

7 — False. The Chicago metro area had a bigger population decrease than any other U.S. area during the 2017-2018 period. Los Angeles and New York also shrank. This represented the fourth straight year that Chicago’s population decreased. In comparison, the Dallas-Fort Worth-Arlington area gained the most people during the same time frame.

8 — True. Based on recent data, the Chicago SMA includes about 9.5 million people.

9 — True. The City of Chicago has about 2.7 million residents living in 100 neighborhoods and 50 wards. The city has eight major league sports teams (including two Major League Baseball teams) and is the headquarters for 10 Fortune 500 companies. Chicago is a “biking city” and has the second-highest percentage of commuters that ride bikes to work. The city was recognized as “America’s Best Bike City” in 2016. Chicago is home to more than 200 professional dance companies, 250 live music venues, more than 40 film festivals, 250 theater companies, 8300 acres of green spaces and 580 parks.

FYI — Mike Nierenberg and NRZ: Residential Mortgage Solutions

Mike Nierenberg has served as President and CEO of  New Residential Investment Corp. (NYSE: NRZ) since 2013 and as Board Chairman since 2016. NRZ has paid out more than $3 billion in total shareholder dividends since the company was founded in 2013. New Residential is headquartered in New York City.