One person's trash is another's treasure. And so it goes in
the world of residential mortgages.
Boatloads of distressed home loans from big banks that don't
want to work them anymore are being turned over to independent
specialists that do.
One of the biggest specialty mortgage servicers,Nationstar
Mortgage Holdings (
), has been growing in giant steps as banks offload servicing
It'll soon start boarding $215 billion in loan servicing
rights fromBank of America (
), representing 1.3 million home loans.
The deal brings its customer base to more than 2.5 million and
its servicing portfolio to $425 billion.
"It's a gigantic growth company with a lot of moving parts,"
said FBR Capital Markets analyst Paul Miller. "Two years ago, it
had (servicing rights on) $120 billion in unpaid principal
One moving part that makes Nationstar stand out from rivals
such asOcwen Financial (
) andWalter Investment Management (
) is its mature mortgage origination platform.
After it makes a loan, typically a refinancing these days, it
sells it into the secondary market, recording a gain on the sale.
But it keeps the servicing rights. And with interest rates low,
those rights are seen staying on the books for some time.
Nationstar is active in government-promoted HARP loan
modifications, where gain-on-sale margins are especially strong
as it sells the newly modified loans back toFannie Mae (
) andFreddie Mac (FMCC), Miller says.
"What people like about Nationstar is all the profits that are
coming from originations," he said.
Sterne Agee analyst Henry Coffey estimates that mortgage
origination operations will make up 30% of Nationstar's per-share
earnings next year.
Nationstar also has a growing mortgage origination business
with homebuilderKB Home (KBH). It's been KB's preferred lender
since last March and will be part of a new home-loan company KB
Home is forming later this year, to be called Home Community
Nationstar execs say they expect to originate at least $16
billion in loans this year, more than double the annualized run
rate through the third quarter of 2012.
"As the economy improves there will be more opportunities to
originate home loans," said CEO Jay Bray in a recent
As banks pulled back from making new loans, 20% of the
capacity in the origination market has gone away in the last two
years, creating opportunities for Nationstar, a company spokesman
But while origination profits are enticing, profits on
servicing loans is another matter. As Nationstar's servicing
portfolio has soared, so has overhead, Miller says.
"They need to get expenses down," he said.
Even though Nationstar was founded in 1994, it's like a
"brand-new company" because of the new business it's boarded the
last couple of years, Miller says.
Revenue has gone from $79 million in 2009 to what analysts
estimate will come in at $941 million in 2012 and $1.8 billion
Nationstar expects the new Bank of America portfolio to
translate into earnings of 70 to 80 cents per share in this
year's ramp-up phase and $2.30 to $2.70 next year.
It forecasts total per-share earnings of between $3.70 and
$4.35 for this year and sees 2014's at $5.60 to $6.50. That would
be up from 2012's estimated $2.34, according to Thomson
The company will report results for the fourth quarter and
full year March 7.
Many of the servicing portfolios Nationstar has picked up from
banks are from the bad old subprime days and are in need of a
helping hand. Costs are higher to service impaired loans, but so
are the fees for doing so.
Nationstar gets good marks for its servicing standards and
"It's a true skill and a core competency," said Bray.
"Financial institutions don't really consider servicing core to
Nationstar lost out in a bankruptcy auction in October to
Ocwen and Walter for $374 billion in mortgage servicing assets of
Residential Capital, a unit of Ally Financial. But as the
"stalking horse" selected to make the first bid, it got a
consolidation breakup fee of $24 million.
And then it went on to win over Bank of America. Of the new
loans coming from Bank of America, 53% are nonconforming, held in
private-label securitizations. The rest are government agency
loans owned, insured or guaranteed by Fannie Mae, Freddie Mac or
With all the new regulatory and capital hurdles big banks
face, servicing loans has become a big headache, giving them more
reason to outsource the work.
Analysts expectWells Fargo (WFC), Bank of America,JPMorgan
Chase (JPM) and Ally Financial to sell servicing rights in coming
Bray says Nationstar is pursuing a $300 billion to $400
billion pipeline over the next year. Management also expects to
keep working the "flow" it gets loan-by-loan from banks that
don't want to service the loans they originate. Flow could amount
to $25 billion to $50 billion this year, execs have said.
Nationstar was once the lending division of national
homebuilder Centex (acquired byPulte (PHM) in 2009). In 2006,
Fortress Investment Group acquired the business and named it
Nationstar. Last March, Fortress took it public, retaining a 76%
Fortress and its REIT partnerNewcastle Investment (NCT) were
co-investors in the $1.3 billion Bank of America deal. They mean
to invest with Nationstar in other servicing assets.
Nationstar contends the collaboration is a "capital-light" way
to grow its business.
Since the IPO, Nationstar shares have soared as much as 200%,
reaching a high of 42 on Feb. 15.
Lately, Nationstar has been touting a "third business," its
Solutionstar division, which provides services such as appraisals
and property management.
On Feb. 6, Nationstar acquired Equifax Settlement Services for
an undisclosed sum. The well-known appraisal, title insurance and
settlement services firm will become part of the growing