NFI claims they aren't affected by rising interest rates like tradional REITS...and her is why..
There is much confusion in the marketplace over the impact of refinance activity on NFI’s business. The company has stated in its conference calls that the sub-prime and alt-a segment is not nearly as rate sensitive as the conforming and Jumbo-AAA segment. Folks with 720 FICO scores will refinance every ¼ to ½ point drop in interest rates, as they are the cream of the borrowing crop and can command the very best rates at any time. Great for them, but that’s not who NFI lends to. And that’s not the type of loans NFI makes, for the most part. NFI specializes in making mortgage loans for sub-prime and alt-a borrowers, wherein the refinance is typically either a cash out or a debt consolidation — moving higher interest rate debt to lower rate mortgage debt, and securing a tax deduction in the process (mortgage interest is deductible, whereas credit card debt, etc. isn’t.) These types of borrowers are not historically as interest rate sensitive as conforming and high FICO borrowers. If they can move 14% credit card debt to a 7% mortgage loan, they have won big already. And because NFI has pre-pay penalties on many of their loans, there is a financial disincentive to frequent refinancing. According to my last interaction with IR, refinance activity impacts less than 5% of NFI’s business. The prepays mitigate even that, so the actual impact of a decline in refinance activity that you hear about in the media is negligible for NFI. That’s just not their business.
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