The State of Real Estate Credit | Rithm Capital's Satish Mansukhani on Mortgage Servicing, Commercial Real Estate, and Rithm's Asset Manager Acquisition Strategy
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode of Monetary Matters, host Jack Farley sits down with Satish Mansukhani, Managing Director of Investment Strategy at Rithm Capital, for an in-depth exploration of real estate investing, credit quality, and private credit markets. (00:47) The conversation delves into Rithm Capital's owner-operator model and their control over assets throughout the entire lifecycle - from origination through servicing and final delivery of results. (01:24) Satish provides unique insights from managing over $850 billion in mortgage servicing rights and serving 4 million consumers, offering a granular view into mortgage delinquencies, housing market dynamics, and the evolving landscape of asset-based finance. (04:03) The discussion also covers Rithm's strategic acquisitions, including their announced purchase of Paramount Real Estate Group for $1.6 billion, positioning them in the office sector recovery.
• **Main Theme:** The importance of control versus visibility in asset management, demonstrated through Rithm Capital's vertically integrated platform spanning mortgage origination, servicing, home builder lending, and single-family rentals.Speakers
Satish Mansukhani
Managing Director of Investment Strategy at Rithm Capital, a mortgage real estate investment trust and diversified asset manager with over $80 billion in total investable assets. Satish brings extensive experience in real estate finance and credit markets, with deep expertise in mortgage servicing, asset-based finance, and commercial real estate. He has authored several articles on real estate topics including "Life in Office—It's Not All Bad" and "Control Over Access: The Structural Edge in Asset-Backed Finance."
Jack Farley
Host of Monetary Matters podcast, specializing in macro finance and capital markets analysis. Jack regularly interviews leading figures in finance, real estate, and investment management, providing listeners with insights into complex financial topics and market trends.
Key Takeaways
Control Trumps Visibility in Asset Management
Satish emphasizes the critical distinction between having visibility into assets versus actually controlling them. (01:15) Through Rithm's owner-operator model, they maintain direct control over assets from origination through servicing and special servicing if needed. This includes verified liens, monitoring trust accounts, third-party custodians reconciling cash flows daily, and triangulating borrower reports with public and private data. Recent high-profile bankruptcies in credit markets demonstrate how quickly layers of control can erode in waterfall structures, even when visibility exists. This control advantage allows Rithm to attach accretive data points and develop better predictive power on loan performance compared to partnerships that only provide limited visibility.
Mortgage Delinquencies Show Normalization, Not Crisis
Current mortgage delinquency trends represent a normalization from pandemic-era lows rather than a concerning rise. (05:02) Delinquencies that rose 50% went from fractionally small numbers to still fractionally larger numbers, now approaching pre-pandemic levels. The increases are concentrated among "stretched borrowers" - those who bought homes at 6.5-7.5% mortgage rates with the expectation that rates would fall, but then faced rising property taxes and insurance costs. Credit scores had artificially inflated by 40 points during the pandemic due to excess cash, meaning a 720 credit score became 740. These borrowers are now experiencing stress as their debt-to-income ratios have been challenged by marginal increases in outlays.
Housing Market Driven by Fundamental Scarcity, Not Credit Bubble
The current housing market strength stems from organic demand and supply constraints rather than loose lending standards. (56:19) The U.S. faces a 2 million home undersupply nationally, while simultaneously reaching peak home buying years as millennials and Gen Z enter their prime purchasing age. Current months of supply sits at four months compared to the balanced market benchmark of six months, indicating continued undersupply even with recent increases in listings. Unlike the mid-2000s credit bubble, lending standards remained tight during the pandemic price surge. The price increases were driven by genuine increases in home value - working from home, remote schooling, and social distancing made larger homes more valuable to consumers.
Asset-Based Finance Addresses Massive Institutional Demand
Asset-based finance has emerged as a distinct sector due to the scale of institutional demand that cannot be satisfied through traditional asset-backed securities markets. (45:51) Insurance companies and aging demographics (baby boomers retiring en masse) need income, liquidity, and safety - driving massive demand for collateralized cash flows. Traditional ABS markets create tranched structures where 90% might be AAA-rated and only 10% higher-yielding subordinated, but institutions need access to the entire risk profile at scale. Asset-based finance allows investors to take that entire exposure in loan form rather than competing for limited subordinated tranches. This addresses the fundamental shift from zero interest rate environments where allocations went to illiquid investments like private equity and venture capital.
Office Sector Recovery Driven by Scarcity and AI Demand
The office sector is experiencing a recovery driven by supply scarcity and unexpected AI-related demand. (30:15) Years of doom and gloom led to minimal new office construction and conversions to residential use, creating artificial scarcity in prime locations. New York leads the nation in return-to-office trends with 3-4 days per week becoming standard. Contrary to initial expectations that AI would reduce office demand, companies developing AI applications need teams working together at unprecedented speed, actually increasing their office space requirements. Rithm's $1.6 billion acquisition of Paramount Real Estate Group reflects conviction in Class A buildings in New York and San Francisco, purchased at 40% discounts to pre-pandemic levels and 25-30% of replacement value.
Statistics & Facts
- Rithm Capital manages over $850 billion in mortgage servicing rights (MSR) serving 4 million consumers, making them the third largest mortgage servicer in the country. (04:03)
- Credit scores increased by 40 points during the pandemic due to excess cash and stimulus, with borrowers going from 720 to 740 credit scores on average. (05:45)
- Current homebuyers need to pay about 40% of their income to afford a home at current mortgage rates and prices, compared to 30% in early 2022. (56:58)
