Rithm Capital (RITM) risk factors, FY2024 10-K

Risks Related to Our Business

1. 01We may not be able to successfully operate our business strategy or generate sufficient revenue to make or sustain distributions to our stockholders
2. 02The value of our investments, including the valuation methodologies used for certain assets in our funds, is based on various assumptions that could prove to be incorrect and could have a negative impact on our financial results
3. 03Prepayment and Delinquency Exposure
4. 04Recapture Agreement Limitations
5. 05Illiquid Asset Valuation Uncertainties
6. 06Certain subsidiaries of Rithm Capital perform various mortgage and real estate related services and have origination and servicing operations, which entail borrower-facing activities and employing personnel. Additionally, Rithm Capital engages various Servicing Partners, which are subject to many of the same risks
7. 07Any of the foregoing risks, among others, could have a material adverse effect on our business, financial condition, results of operations and liquidity
8. 08Failure to successfully modify, resell or refinance early buyout loans or defaults of early buyout loans beyond expected levels may adversely affect our business, financial condition, liquidity and results of operations
9. 09Our ability to acquire and/or transfer MSRs may be subject to the approval of various third parties, and such approvals may not be provided on a timely basis or at all, or may be subject to conditions, representations and warranties and indemnities
10. 10Moreover, we are party to repurchase agreements with a limited number of counterparties. If any of our counterparties elected not to renew our repurchase agreements, we may not be able to find a replacement counterparty, which would have a material adverse effect on our financial condition
11. 11A sale of MSRs or interests in MSRs and servicer advances or other assets, including loans, could be re-characterized as a pledge of such assets in a bankruptcy proceeding
12. 12If such a recharacterization occurs, the validity or priority of our security interest in the MSRs or interests in MSRs and servicer advances or other assets could be challenged in a bankruptcy proceeding of such servicer
13. 13Payments made by a servicer to us could be voided by a court under federal or state preference laws
14. 14Payments made to us by such servicer, or obligations incurred by it, could be voided by a court under federal or state fraudulent conveyance laws
15. 15Our asset management business, including Sculptor and its funds, involves certain risks, which could adversely affect our business, financial condition and results of operations
16. 16Our funds and fund investments may be subject to numerous additional risks, which we may not be able to foresee or anticipate. Many of these factors are outside of our control and any one of them could result in a material adverse effect on our financial position, results of operations and cash flows
17. 17Competitive pressures in the asset management business could materially adversely affect our business, financial condition or results of operations
18. 18We have, through our subsidiary Sculptor, experienced and may again experience periods of rapid growth and significant declines in AUM, which place significant demands on our legal, compliance, accounting, risk management, administrative and operational resources
19. 19Addressing the matters described above may require us to incur significant additional expenses and to commit additional senior management and operational resources, even if we are experiencing declines in AUM
20. 20Our failure to appropriately manage or address conflicts of interest could damage our reputation and adversely affect our business, financial condition and results of operations
21. 21Servicer advances may not be recoverable or may take longer to recover than we expect, which could cause us to fail to achieve our targeted return on our servicer advance investments or MSRs
22. 22We may not be able to successfully execute on our strategy, and any acquisitions or dispositions of assets or financing or other transactions that we pursue may not be successfully consummated or consummated on favorable terms
23. 23Increased focus on environmental, social and governance (ESG) issues, including climate change and related regulations, may adversely affect our business and financial results and damage our reputation
24. 24A failure to maintain minimum servicer ratings could have an adverse effect on our business, financing activities, financial condition or results of operations
25. 25We do not have legal title to the MSRs underlying our Excess MSRs or certain of our servicer advance investments
26. 26Many of our investments may be illiquid, and this lack of liquidity could significantly impede our ability to vary our portfolio in response to changes in economic and other conditions or to realize the value at which such investments are carried if we are required to dispose of them
27. 27The geographic distribution of the loans underlying, and collateral securing, certain of our investments subjects us to geographic real estate market risks, which could adversely affect the performance of our investments, our results of operations and financial condition
28. 28The value of our interests in MSRs, servicer advances, residential mortgage loans, business purpose loans, and RMBS may be adversely affected by deficiencies in servicing and foreclosure practices, as well as related delays in the foreclosure process
29. 29increase our need for capital to fund servicer advances (which do not bear interest), which would increase our interest expense, reduce the value of our investment and potentially reduce the cash that we have available to pay our operating expenses or to pay dividends
30. 30A failure by any or all of the members of Advance Purchaser LLC to make capital contributions for amounts required to fund servicer advances could result in an event of default under our advance facilities and a complete loss of our investment
31. 31The residential mortgage loans underlying the securities we invest in and the loans we directly invest in are subject to delinquency, foreclosure and loss, which could result in losses to us
32. 32Our investments in real estate and other securities are subject to changes in credit spreads as well as available market liquidity, which could adversely affect our ability to realize gains on the sale of such investments
33. 33Prepayment rates on our residential mortgage loans and those underlying our real estate and other securities may adversely affect our profitability
34. 34Our determination of how much leverage to apply to our investments may adversely affect our return on our investments and may reduce cash available for distribution
35. 35A significant portion of our investments are not match funded, which may increase the risks associated with these investments
36. 36Any hedging transactions that we enter into may limit our gains or result in losses
37. 37Market conditions could negatively impact our business, results of operations, cash flows and financial condition
38. 38Additionally, these factors could result in a decline in our AUM, lowering management fees and incentive income, an increase in the cost of financial instruments or executing transactions, lower or negative investment returns, reduced demand for assets held by our funds and increased investor redemptions
39. 39We are subject to risks related to securitization of any loans originated and/or serviced by our subsidiaries
40. 40Certain vendors have operations in India that could be adversely affected by changes in political or economic stability or by government policies
41. 41The development and use of AI technology could lead to legal or regulatory actions, harm our reputation, or have a significant negative impact on our business
42. 42There are certain risks associated with our Genesis business
43. 43There may be difficulties with integrating the loans underlying MSR acquisitions involving servicing transfers into the successor servicer’s servicing platform, which could have a material adverse effect on our results of operations, financial condition and liquidity
44. 44Certain of our Servicing Partners have in the past and may in the future trigger termination events or events of default under some PSAs underlying the MSRs with respect to which we are entitled to the base fee component or Excess MSRs
45. 45Our ability to exercise our cleanup call rights may be limited or delayed if a third party contests our ability to exercise our cleanup call rights, if the related securitization trustee refuses to permit the exercise of such rights, or if a related party is subject to bankruptcy proceedings
46. 46The exercise of cleanup calls could negatively impact our interests in MSRs
47. 47We may become subject to fines or other penalties based on the conduct of mortgage loan originators and brokers that originate residential mortgage loans related to MSRs that we acquire, and the third-party servicers we may engage to subservice the loans underlying MSRs we acquire
48. 48Our consumer loan portfolio generally has a higher degree of risk of default than other loans
49. 49We face significant competition in the leasing market for quality residents, which may limit our ability to lease our SFR homes on favorable terms
50. 50We face risks associated with the operation of mixed-use commercial properties, which may impact our operating results
51. 51Joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on co-venturers' financial condition, and disputes between us and our co-venturers and could expose us to potential liabilities and losses
52. 52A significant portion of our SFR costs and expenses are fixed, and we may not be able to adapt our cost structure to offset declines in our revenue

Risks Related to the Financial Markets and Our Regulatory Environment

1. 53Interest rate fluctuations and shifts in the yield curve may cause losses
2. 54A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations
3. 55Maintenance of our 1940 Act exclusion imposes limits on our operations
4. 56the assets we and our subsidiaries may originate or acquire are limited by the provisions of the 1940 Act and the rules and regulations promulgated under the 1940 Act, which may adversely affect our business
5. 57Rapid changes in the values of our assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion from the 1940 Act
6. 58Certain of our subsidiaries are registered as investment advisers under the Advisers Act, which could impose limits on our operations. Additionally, our investment advisory business is subject to additional significant regulatory oversight, which could impose limits on our operations
7. 59Any of these outcomes could materially and adversely affect our reputation, business, financial condition, prospects, liquidity and/or results of operations
8. 60Certain of our subsidiaries and Servicing Partners have been and are subject to federal and state regulatory matters and other litigation, which may adversely impact us
9. 61Mortgage servicing is heavily regulated at the U.S. federal, state and local levels, and each transfer of MSRs to our subservicer of such MSRs may not be approved by the requisite regulators
10. 62Certain jurisdictions require licenses to purchase, hold, enforce or sell residential mortgage loans and/or MSRs, and we may not be able to obtain and/or maintain such licenses
11. 63Regulatory scrutiny regarding foreclosure processes could lengthen foreclosure timelines, which could increase advances and materially and adversely affect our business, financial condition, results of operations and liquidity
12. 64The Dodd-Frank Act affects almost every aspect of the U.S. financial services industry, including certain aspects of the markets in which we operate and imposes regulations on us and how we conduct our business
13. 65Even requirements that are not directly applicable to us may still increase our costs of entering into transactions with the parties to whom the requirements are directly applicable
14. 66The federal conservatorship of Fannie Mae and Freddie Mac and related efforts, along with any changes in laws and regulations affecting the relationship between these agencies and the U.S. government, may adversely affect our business
15. 67Rithm Capital’s subsidiaries, NRM, Newrez and Genesis, are or may become subject to significant state and federal regulations
16. 68Failure of Rithm Capital’s subsidiaries, NRM and Newrez, to obtain or maintain certain licenses and approvals required for NRM and Newrez to purchase and own MSRs could prevent us from purchasing or owning MSRs, which could limit our potential business activities
17. 69Legislation that permits modifications to the terms of outstanding loans may negatively affect our business, financial condition, liquidity and results of operations
18. 70Risk retention regulations could adversely affect our business
19. 71Regulatory changes in jurisdictions outside the U.S. could adversely affect our business
20. 72Private litigation could result in significant legal and other liabilities and reputational harm, which could materially adversely affect our business, financial condition or results of operations

Risks Related to Our Financing Arrangements

1. 73The agreements governing our indebtedness place restrictions on us and our subsidiaries, reducing operational flexibility and creating default risks
2. 74The lenders under our financing agreements may elect not to extend financing to us, which could quickly and seriously impair our liquidity
3. 75The financing sources under our servicer advance financing facilities may elect not to extend financing to us or may have or take positions adverse to us, which could quickly and seriously impair our liquidity
4. 76We may not be able to finance our investments on attractive terms or at all, and financing for interests in MSRs or servicer advance receivables may be particularly difficult to obtain
5. 77The non-recourse long-term financing structures we use expose us to risks, which could result in losses to us
6. 78Our ability to borrow may be adversely affected by the suspension or delay of the rating of the notes issued under certain of our financing facilities by the credit agency providing the ratings
7. 79Representations and warranties made by us in our collateralized borrowings, including our CLOs, and loan sale agreements may subject us to liability

Risks Related to Our Taxation as a REIT

1. 80Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code
2. 81Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders
3. 82Our failure to qualify as a REIT would cause our stock to be delisted from the NYSE
4. 83The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability to qualify as a REIT
5. 84The failure of our Excess MSRs to qualify as real estate assets or the income from our Excess MSRs to qualify as mortgage interest could adversely affect our ability to qualify as a REIT
6. 85Dividends payable by REITs do not qualify for the reduced tax rates available for some “qualified dividends.”
7. 86REIT distribution requirements could adversely affect our liquidity and our ability to execute our business plan
8. 87We may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them
9. 88Other debt instruments that we may acquire, including consumer loans, may be issued with, or treated as issued with, original issue discount. Those instruments would be subject to the original issue discount accrual and income computations that are described above with regard to Excess MSRs
10. 89We may be unable to generate sufficient cash from operations to pay our operating expenses and to pay distributions to our stockholders
11. 90The stock ownership limit imposed by the Internal Revenue Code for REITs and our certificate of incorporation may inhibit market activity in our stock and restrict our business combination opportunities
12. 91Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow
13. 92Complying with the REIT requirements may negatively impact our investment returns or cause us to forgo otherwise attractive opportunities, liquidate assets or contribute assets to a TRS
14. 93Complying with the REIT requirements may limit our ability to hedge effectively
15. 94from our provision of services and from other non-qualifying sources, to less than 5% of our annual gross income (determined without regard to gross income from qualified hedging transactions)
16. 95Distributions to tax-exempt investors may be classified as unrelated business taxable income
17. 96The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur and may limit the manner in which we effect future securitizations
18. 97Uncertainty exists with respect to the treatment of TBAs for purposes of the REIT asset and income tests, and the failure of TBAs to be qualifying assets or of income/gains from TBAs to be qualifying income could adversely affect our ability to qualify as a REIT
19. 98The tax on prohibited transactions will limit our ability to engage in transactions that would be treated as prohibited transactions for U.S. federal income tax purposes
20. 99Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us
21. 100Changes to tax laws could materially and adversely affect us and our stockholders

Risks Related to Our Stock

1. 101There can be no assurance that the market for our stock will provide you with adequate liquidity
2. 102Sales or issuances of shares of our common stock could adversely affect the market price of our common stock
3. 103Your percentage ownership in us may be diluted in the future
4. 104We may incur or issue debt or issue equity, which may negatively affect the market price of our common stock
5. 105We have not established a minimum distribution payment level for our common stock, and we cannot assure you of our ability to pay distributions in the future
6. 106REIT taxable income, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, our operating expenses and other factors our directors deem relevant
7. 107We may in the future choose to make distributions in our own stock, in which case you could be required to pay income taxes in excess of any cash distributions you receive
8. 108An increase in market interest rates may have an adverse effect on the market price of our common stock
9. 109Provisions in our certificate of incorporation and bylaws and of Delaware law may prevent or delay an acquisition of our company, which could decrease the market price of our common stock
10. 110ERISA may restrict investments by plans in our common stock

General Risks

1. 111Unfavorable global economic and political conditions could adversely affect our business, financial condition or results of operations
2. 112Cybersecurity incidents and technology disruptions or failures could damage our business operations and reputation, increase our costs and subject us to potential liability
3. 113We depend on counterparties and vendors to provide certain services, which subjects us to various risks
4. 114We have engaged and may in the future engage in a number of acquisitions and we may be unable to successfully integrate the acquired assets and assumed liabilities in connection with such acquisitions
5. 115We are subject to significant competition, and we may not compete successfully
6. 116Our business could suffer if we fail to attract and retain management and other highly skilled personnel