Rationale

S&P Global Ratings' ranking on Newrez LLC (Newrez) is AVERAGE as a residential mortgage loan master servicer. On Aug. 28, 2024, we assigned the ranking (please see "Newrez LLC AVERAGE Residential Mortgage Loan Master Servicer Ranking Assigned; Ranking Outlook Stable," published Aug. 28, 2024). As part of the ranking action, we assigned our management and organization subranking as AVERAGE and our loan administration subranking as AVERAGE. The ranking outlook is stable.

Our ranking reflects Newrez's:

• Experienced leadership team, with considerable master servicing experience and industry knowledge;
• Seasoned technology, internal audit, and human resource services provided by Rithm Capital Corp. (Rithm) and Newrez;
• Reporting structure (i.e., master servicing reports to the head of Newrez's primary servicing), which could be viewed as a potential conflict of interest;
• Sufficient, but not fully leveraged, servicing systems supporting its master servicing operations, resulting in manual processes;
• Well-designed information technology infrastructure, applications, and controls surrounding business continuity and cyber security;
• Lack of compliance reviews or quality control testing by an independent unit;
• Limited seasoning of its loan administration functions due to the recent creation of the organization; and
• Untested default management and servicer oversight policies and procedures.

Newrez is a wholly owned subsidiary of Rithm, formerly known as New Residential Investment Corp., a publicly traded investment platform in the real estate and financial services industries. Newrez is the mortgage loan originating and servicing company under Rithm. Additionally, New Residential Mortgage LLC is a subsidiary of Rithm, whose sole business activity is holding mortgage loan servicing rights for first- and subordinate-lien residential loans and engaging subservicers to perform the day-to-day servicing activities for its government-sponsored entity mortgage loan portfolio.

The ranking outlook is stable. Newrez's master operations has the technology, processes, and staff to perform the duties required of a master servicer; however, there has been limited seasoning and testing of its processes, which will be required to prove effectiveness. A material change in the size or composition of its servicing portfolio may affect our current ranking or ranking outlook, and we will take ranking actions as we deem appropriate.

In addition to conducting an onsite meeting with servicing management, our review includes current and historical Servicer Evaluation Analytical Methodology data through June 30, 2024, as well as other supporting documentation provided by the company.

Profile

Rithm, an asset management company, was founded in 2013 under Fortress Investment Group focusing on real estate-related assets. In 2018, Rithm acquired Shellpoint Partners LLC and all of its subsidiaries, including Newrez LLC. Newrez is a non-bank lender and a servicer of loans that it originates, as well as servicing performing, re-performing, and nonperforming loans for its third-party servicing clients. The Newrez master servicing division (Newrez master), headquartered in Greenwood Village, Colo., was established in July 2023 and boarded its first portfolio in October 2023. It's strategy is to increase its portfolio of whole loans and expand into securitizations.

Newrez master provides master servicing oversight of six servicers, with Newrez servicing the bulk of the portfolio. It also provides interim master servicing for Rithm, as well as shadow servicing that includes European Union reporting requirements.

In addition to the master servicing portfolio initially boarded in October 2023 (see table 1), Newrez master shadow services a portfolio of just over 20,000 units with an unpaid principal balance of approximately $3.6 million.

Table 1

Management And Organization

The management and organization subranking is AVERAGE.

Organizational structure, staff, and turnover

The senior vice president (SVP) of master servicing reports to the head of Newrez servicing. While master servicing operates independently, we note this reporting line could lessen its independence to oversee Newrez as a primary servicer and could be viewed as a potential conflict of interest.

Newrez hired the SVP of master servicing in July 2023 to build out the master servicing group. She has solid industry experience and previous experience in master servicing Rithm mortgage loans. Reporting to her are the VP of systems administration, principal of default oversight, collateral management coordinator, and two senior portfolio specialists, all of whom have good industry experience. Newrez master is sufficiently staffed for its current portfolio.

Newrez master relies on shared services provided by Rithm and Newrez for corporate functions including IT, internal audit, human resources, and vendor management, among others.

Training

The Newrez master training program is managed at both a corporate level and at the business unit level. It's staff are required to take annual training, which mirrors that required by Newrez. The required training is comprehensive and includes compliance, IT, and human resource topics. Due to the master servicing business unit's small size, the SVP has provided on-the-job training to the team members. Other training components and metrics we considered in our analysis include the following:

• A learning management system tracks training course completion.
• There are three days of instructor-led training, as well as an additional 70 hours of online training that is required of all new hires.
• New hires are required to pass a knowledge assessment demonstrating proficiency before training is considered completed.

Systems and technology

Newrez master has adequate technology systems to support its master servicing operations. The system's security, disaster recovery, and business resumption plans are managed through Rithm's corporate IT. Although there is shared IT support and applications, Newrez master's data is segregated from primary servicing data, and primary servicing does not have access to master servicing data or systems.

Servicing system applications 

Newrez's key systems and applications used in the master servicing operations include the following:

• SBO.NET (SBO) is the main master servicing platform, which captures all relevant data necessary for loan-level reporting for securitizations.
• SBO is connected to the treasury application for the movement of funds.
• SQL server is used for business intelligence reporting.
• FTP is used for secure file uploads to receive and transmit data to and from servicers and investors.

Business continuity and disaster recovery 

The following are features of the Newrez business continuity and disaster recovery plans:

• Data replication is used between the primary and backup data centers, which are located in different states.
• Newrez moved to immutable and air gapped data backups stored in the cloud from tape backups stored offsite in 2024, with backups performed at least daily.
• Its recovery time and recovery point objectives are satisfactory.
• Failover and backup testing is performed monthly, while full disaster recovery tests are performed annually. While the most recent test in October 2023 did not identify any material issues, it was performed on the Newrez servicing platform and did not include recovery tests for Newrez master.
• User access reviews are completed quarterly.

Cyber security 

Newrez maintains systems and protocols along with an incident response plan to monitor, assess, and address threats. Key factors we considered include:

• A centralized security operations team monitors and addresses threats.
• A security information and event management application is used to identify, triage, and manage threats.
• Intrusion detection mechanisms monitor network traffic.
• Newrez uses firewalls, web filters, and anti-malware software.
• Annual external network penetration testing are performed by a third party.
• Annual information security training must be completed by all employees.
• Phishing email simulation exercises are performed on a quarterly basis, which is less often than those performed by peers.
• Software patching protocols are based on criticality.
• Data protection and loss prevention systems are in place.
• Tabletop testing is facilitated by a third party annually.

Despite the servicers expenditure on cyber security staff and systems to support their programs, these preventative measures are only effective if the program is successfully implemented and maintained. Notwithstanding, even the best preventative measures will be continuously challenged by the ever-increasing sophistication of attacks.

Internal controls

Newrez master is in the process of formalizing its internal control environment, which is expected to be under the enterprise risk model by the end of 2024. In the interim, it performs manual quality checks for it processes including policies and procedures (P&P) maintenance, remittance and reconciliation reviews, and boarding audits.

Policies and procedures 

The master servicer maintains a procedures manual that is accessible through a network directory available to master servicing staff. While these are required to be reviewed annually and are version controlled, they are not included in the enterprise change control framework. The manual is focused on step-by-step processes, which management says was intentional to ensure consistency across all team members.

Quality assurance 

Newrez master uses systemic and manual reviews as part of its quality control that include:

• Monthly remittance files that are reviewed by the master servicing SVP or VP core operations.
• The completion of daily cash reconciliation.
• SBO prevents transactions from posting if there are errors.

Compliance and quality control 

There are no compliance reviews or quality control testing performed for Newrez master's servicing function.

Internal and external audits 

The Newrez internal audit department reports to the board of directors and performs traditional internal audits of the servicing operation. The audit team is satisfactorily credentialed, with many auditors attaining industry-recognized audit certifications.

Additional internal audit components that we factored into our analysis include:

• The audit team performs annual independent risk assessments that drive its audit plan.
• A risk assessment of auditable entities is performed each year.
• High-risk areas are audited annually, moderate risk areas are audited every two years, and low risk areas are audited every three years.
• An audit management software is used to manage the audit lifecycle including issue tracking.
• Audit findings are classified by severity, and ultimately determine the overall audit score.
• Audit issues are tracked in the companywide change-management tracking file.
• Audit results are reported to senior executives and then presented to the board quarterly.
• The audit team performs validation testing for sustainability of corrective actions.

The Newrez master team has yet to be audited but are on the schedule for the first quarter of 2025. Newrez master management did work with the internal audit team when building out its processes with a goal to align with corporate policies.

Corporate insurance and legal proceedings

Newrez has represented that its directors and officers, as well as its errors and omissions insurance coverage is in line with the requirements of its portfolio size. As of the date of this report, there were no material servicing-related pending litigation items.

Loan Administration–Master Servicing

The loan administration subranking is AVERAGE.

Portfolio specialists within master servicing act as relationship managers with their assigned investors and perform administrative functions and oversight of functions throughout the servicing process including pipeline management, monthly portfolio reconciliation, investor reporting, and servicer oversight.

While Newrez master oversees six primary servicers, approximately 62% of its portfolio (by loan count) is serviced by Newrez (see table 4). The portfolio is fairly diverse, consisting of Alt-A legacy loans, manufactured housing, non-QM, FHA, closed-end second mortgages, and impaired loans.

Table 2

New-loan boarding

Newrez master portfolio specialists compile data from servicer reports and reports developed during the diligence process to create the loan boarding tape. Loans are first boarded to a staging module within SBO before they are moved into production. Additional controls and other features include the following:

• A diligence tracker is used to manage the deals through final boarding.
• Logic testing is performed manually using tests stored within an Excel spreadsheet for loans in the staging module.
• Loans board from the staging system to production using programmed boarding templates within SBO.
• Key parameters and requirements for the master and primary servicers are stored in SBO.
• 100% of new loans are boarded electronically taking an average of two business days to board.

Subservicer accounting, reporting, and cash management

We believe Newrez has adequate controls of its cash investor accounting, reporting, and cash management functions given the makeup and size of the current portfolio, although it is less robust and automated than peers. While it does not have a tested practice of accounting and reporting for RMBS transactions management does have prior experience managing these deals.

Notable reporting and loan-accounting processes and controls that we considered include:

• Monitoring of daily reports to detect abnormal cash activity;
• Daily reconciliation of clearing accounts to ensure timely processing and sufficient funds using system generated reports;
• A system calculation of expected servicer remittances is used to compare against servicer's data;
• A quality control review is performed on each reconciliation report;
• Another quality control check is performed by the VP of administration prior to completing the posting process;
• The portfolio specialist assigned to the pool works with the servicer to clear any exceptions;
• Reporting and remitting to investors and trustees is 100% electronic;
• There were no open reconciling items aged over 60 days reported;
• All wire requests are submitted to the Newrez treasury department for fulfillment; and
• Bond administration will be managed by a third party.

Loan level changes for adjustable interest rate loans, Servicemembers Civil Relief Act data, and the terms and parameters of loan modifications are tracked. Newrez master works with the servicer to obtain the appropriate documentation to update the loans.

Default management

Table 3

Table 4

The default administration principal is responsible for the oversight of the primary servicer's default reporting and handling of default-related activities such as loss mitigation, foreclosure, bankruptcy, and real estate-owned properties. Newrez master is not currently required to perform default oversight but is doing some shadow oversight to develop its processes and procedures.

Though untested, Newrez master has developed a practice to monitor default loan activity and mitigate loss. It plans to utilize SBO to monitor and analyze loan-level default data that the primary servicers provide either daily or monthly. Manual reviews of servicer reports will be conducted prior to formatting and uploading the files to the system. Based on the loss mitigation action reported by the servicer, the associated default tracking events update within SBO.

Characteristics of default management include the following:

• Monthly calls with servicers to review performance and trends are currently conducted by Rithm and attended by Newrez master, with a plan to transition the calls to Newrez.
• Some of its servicers have provided Newrez master with read only access to their servicing systems to view and monitor loans.
• Defaulted loans not progressing to resolution as excepted will be added to a watchlist.
• Loss mitigation approval and delegated authority requirements are set up in SBO used for monitoring adherence to investor requirements.
• Foreclosure tasks and associated timelines were built in SBO for tracking, including loans in litigation.
• Loan modifications will be reviewed to ensure that the terms are consistent with the investor requirements.
• A review of liquidations will be completed to ensure the servicers' analysis of the completed option was the appropriate one to mitigate investor losses.
• Charge-off actions and recovery efforts will be monitored for compliance with investor guidelines and approval requirements.

Servicer oversight 

Servicers are required to submit financial, insurance, and audit documents to Newrez master for an annual financial review. The portfolio specialists uses a checklist to review the submitted documents, which then is reviewed by a senior manager for signoff.

Newrez master plans to complete its first annual servicer reviews, which are broader in scope than the financial reviews, in the last quarter of 2024. The selection of which servicers to review is not outlined in its policy but its initial review includes two of its larger servicers. Areas included in the annual servicer review that we considered in our analysis include risk management, technology, advances, reporting and accounting, staffing, customer contact, and default.:

To identify potential risks with a servicer, the oversight also includes continuous monitoring of its performance against peers, rating actions, industry news, financial health, changes in advancing and recovery strategies, and regulatory actions against the servicer. If there are issues or concerns resulting from this monitoring, Newrez would engage with the servicer to remediate the issues through additional oversight and guidance, a full site review, or termination.

Financial Position

The financial position is SUFFICIENT.

Related Research

• Newrez LLC AVERAGE Residential Mortgage Loan Master Servicer Ranking Assigned; Ranking Outlook Stable, Aug. 28, 2024
• The Importance Of Cyber Security For U.S. And Canadian Servicers In A Challenging Environment, Aug. 12, 2024
• Select Servicer List, May 17, 2024
• Rithm Capital Corp., Oct. 5, 2023
• Servicer Evaluation: Newrez LLC, Oct. 2, 2023
• Servicer Category Descriptions Expanded and Revised, Feb. 28, 2022
• Analytical Approach: Global Servicer Evaluations Rankings, Jan. 7, 2019