--Nonbank servicers have been acquiring portfolios from big
banks exiting the business
--Analyst: $300 billion to $500 billion of servicing portfolios
remain in the pipeline
--Nonbank servicers will be challenged after refinancing
activity dies down
(Adds details about Walter's portfolio in the 20th paragraph and
Walter executive comments in paragraphs 29-30.)
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 likely
will emerge "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 potentially would 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 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 closed Monday up 16.9% at $38.83 after
earlier reaching $39.40, the highest point since its March initial
public offering. Walter's shares closed up 8.2% at $47.68.
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 closed up 5.4% at $36.77.
Nationstar is up 173% since its March IPO while in the last 12
months Walter has gained 137% and Ocwen has advanced 154%. 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.
Walter gained a $50 billion servicing portfolio from the ResCap
transaction, which combined with the Bank of America deal, will
expand its servicing portfolio to $225 billion, the company said
Monday.
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 asset 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 increase 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 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 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."
Denmar Dixon, executive vice president for Walter, said the
company is focusing on how to best use the servicing and
origination infrastructure it gained with the ResCap deal to
support growth once HARP-related activity dies downs.
Mr. Dixon said: "It will really pave the way for the transition
once HARP starts to tail off."
Write to Andrew R. Johnson at andrew.r.johnson@dowjones.com
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