By Andrew R. Johnson
Big banks' mortgage pains are continuing to provide healthy gains for a group of emerging firms targeting the business of collecting payments and reworking loans for homeowners.
Shares of Nationstar Mortgage Holdings Inc. (NSM) and Walter Investment Management Corp. (WAC)--two of the fastest-growing players in the so-called mortgage-servicing business--soared Monday after announcing deals to acquire the rights to service more than $300 billion of home loans from Bank of America Corp. (BAC).
Bank of America has been shedding such assets as it limits its exposure to litigation and other problems that have dogged the lender since its 2008 acquisition of Countrywide Financial. Other banks also have been scaling back as regulatory actions stemming from alleged foreclosure abuses have stung lenders, and pending global capital requirements stand to make servicing a more costly business for banks.
The moves have been a boon for nonbank servicers like Nationstar, Walter and Ocwen Financial Corp. (OCN), which have taken advantage of the banks' exodus from the market by scooping up their portfolios.
"Banks are licking their wounds from the mortgage market ... and are creating great opportunities for nonbanks to step in and pick up the pieces," said Guy Cecala, publisher and chief executive officer of Inside Mortgage Finance, which tracks the mortgage industry. "Special servicers have always been out there, but they certainly got a new lease on life as a result of the subprime meltdown."
Investors have flooded into the stocks of Nationstar and Ocwen, especially, during the last year amid expectations that mainstream lenders will continue to sell their servicing portfolios.
While Bank of America's deal puts a sizeable dent in the pipeline of mortgage-servicing rights being eyed by such players, analysts say that investment thesis remains strong.
Paul Miller, an analyst with FBR Capital Markets, estimates about $300 billion to $500 billion of mortgage-servicing rights, as based on outstanding loan balances, are likely to trade hands in the future.
The Bank of America portfolio sale--long anticipated in the industry--was likely the "last big slug," though other deals will likely come out "in dribs and drabs," Mr. Miller said.
Nationstar, majority owned by Fortress Investment Group LLC (FIG), said it was buying the rights to service $215 billion of mortgages for $1.3 billion from Bank of America, with the majority of the purchases expected to close in the first quarter. Separately, Nationstar said it also closed on a $13 billion servicing portfolio acquired from Bank of America in the fourth quarter.
Including Monday's deal, Nationstar's portfolio will total $425 billion, representing a customer base of about 2.5 million borrowers. The transaction would potentially make it the country's fifth-largest mortgage servicer based on outstanding balances. According to Inside Mortgage Finance, Nationstar was the sixth-largest servicer as of the third quarter based on outstanding loan balances.
Walter said it was acquiring the rights to service $93 billion in loans from Bank of America for $519 million and also buying servicing infrastructure from MetLife Bank, the banking subsidiary of insurer MetLife Inc. (MET), which has been working to exit the banking business.
MetLife in November said it was selling its $70 billion servicing portfolio, which consisted primarily of high-quality loans, to J.P. Morgan Chase & Co. (JPM), so no servicing rights were included in its transaction with Walter.
Nationstar's shares were up 17% at $38.81 in recent trading after earlier reaching $39.40, the highest point since its March initial public offering. Walter's shares were up 9.5% at $48.23.
Ocwen, which has expanded through recent deals with Residential Capital and investor Wilbur Ross, also bid on parts of the Bank of America portfolio, a person familiar with the matter said. Paul Koches, general counsel for Ocwen, declined to comment Monday.
Its shares were up 5.0% at $36.63 in recent trading.
Nationstar is up 176% since its March IPO while in the last 12 months Walter has gained 140% and Ocwen has advanced 153%. By comparison, the S&P 500 index is up 14% over the past 12 months.
Ocwen won a major victory in October, when it outbid Nationstar in a bankruptcy auction for the servicing portfolio and platform of ResCap, the mortgage unit of government-owned auto lender Ally Financial Inc.
Ocwen, partnering with Walter, won the assets with a $3 billion bid. Under the deal approved by a bankruptcy court in November, Ocwen specifically is gaining servicing rights and related contracts to $204 billion in mortgages.
While the companies' plates are expected to remain full this year as they bring the new loans on to their servicing platforms, analysts say they also face potential growth challenges long-term.
The concern is how such emerging players maintain their loan pipelines after traditional banks have finished their assets sales and refinancing activity, which has helped increase loan volume for the entire industry, slows.
For example, a government initiative called the Home Affordable Refinance Program, or HARP, has been a major driver of mortgage activity for bank and nonbank servicers alike, allowing borrowers who owe more than their homes are worth to refinance into lower-cost mortgages.
"The debate or argument with these guys is can they produce a mortgage bank that doesn't feed off HARP?" Mr. Miller said. "They're going to be able to generate a lot of internal capital by refinancing" through HARP "but what is the next trick?"
Mr. Cecala expects specialty servicers, which have been adding loan-origination capabilities in recent deals, to grow their lending capabilities to "replenish" their servicing portfolios as borrowers pay down existing loans.
The ability to beef up its origination capabilities was a factor in Ocwen's decision last year to acquire Homeward Residential Holdings, a mortgage lender and servicer from Mr. Ross's from WL Ross & Co.
Nationstar, which also has origination capabilities, expects its deal with Bank of America to help in that regard, Chief Executive Officer Jay Bray said during a conference call on Monday.
Mr. Bray said, "We will have twice as large a portfolio versus today for recapture origination opportunities, and we will be laser focused on portfolio retention and we will be laser focused on the significant HARP opportunity in this portfolio."
Write to Andrew R. Johnson at email@example.com
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