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Servicing

FBR Capital: Walter Investment still at ‘outperform’

Asset manager and mortgage portfolio operator Walter Investment Management Corp. stands to potentially gain from a $300 billion pipeline of additional servicing opportunities, Paul Miller, managing director for FBR Capital Markets said in the wake of WAC earnings this week. 

Miller released a report saying, "we reiterate our outperform rating (for WAC) and are adjusting our price target to $48 from $55 following 4Q12 results to reflect a near-term increase in amortization expense."

The report says of the $300 billion in servicing opportunities, Walter is already in exclusive negotiations to obtain about $40 billion of the business on the table. 

"We believe that this pipeline is promising and that any incremental acquisitions will further support earnings going forward," FBR Capital’s team reiterated.

Furthermore, with FHFA Acting Director Ed DeMarco suggesting a campaign to promote the Home Affordable Refinance Program is in the works, FBR Capital believes this will lead to a "boost in HARP-related refis, which should help out originators with a large amount of possible refis in their portfolios, like WAC."

FBR also pointed out that despite reporting a narrowed net loss for 2012, the company’s guidance on its 2013 adjusted EBITDA rose to a range of $650 million to $725 million, compared to fiscal year 2012 EBITDA of $241.7 million.

Despite maintaining confidence in WAC (WAC), FBR Capital did not refrain from noting how market volatility is impacting the servicing giant.

"Earnings volatility is almost inevitable in a fast-growing business, and this quarter proved that WAC is no exception," Miller wrote.

"Management guided to a higher rate of MSR amortization, leading some to believe that the company's earnings will decline. We disagree. We argue that a smaller servicing asset does not mean diminished profitability over the life of the servicing contract with Fannie and Freddie; instead, the company is well positioned to recognize increased profitability as expenses related to the portfolio fall and incentive fees rise, translating into a higher cash flow despite a smaller portfolio."

As the company fully integrates with the Residential Capital platform, FBR expects to see more earnings from WAC's origination business.

kpanchuk@housingwire.com

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