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Investments

FBR runs down the risks facing leading mortgage servicers

Bank and nonbank MSR firms in choppy waters

high risk

FBR Capital Markets & Co. takes a close look at three companies heavy into mortgage servicing that are under close scrutiny by state and federal regulators.

Here is their outlook.

Nationstar (NSM)

Nationstar’s reputation carries risk because it is often criticized for being predatory due to its force-placed insurance, asset resolution, and inherent foreclosure operations, KBR’s report states. While Nationstar is proactive with customers to prevent foreclosure, it is subject to intense scrutiny from regulators and the media.

Rising interest rates have a definite impact on demand for mortgage loans. While interest rates have been favorable for several years, they are slowly rising and will continue to, assuming the Federal Reserve’s taper continues apace.  Should rates rise, the high-risk housing market could dry up due to the expensive cost of debt for borrowers.

On boarding risks, FBR says that if Nationstar is unable to board a block of loans, it may be unable to generate new business even though the capacity exists.

The mortgage servicing industry is highly competitive, as large commercial banks and private equity groups are able to scale up operations with excess funds. The industry is likely to become more competitive over time due to legislative and technological changes.

Finally, because the company uses force-placed insurance on delinquent and foreclosed homes as required by the lenders, and if the insurance companies that Nationstar uses receive regulatory scrutiny, the company could get caught up in the issue.

Walter Investments (WAC)

Walter Investments is in a field that is commonly criticized for being predatory due to its force-placed insurance, asset resolution, and inherent foreclosure operations. Although they are proactive with customers to prevent foreclosure, Walter is subject to intense scrutiny from regulators and the media.

Walter Investments, like Nationstar, faces the same risks should mortgage rates rise too quickly or too much.

FBR notes that Walter’s operating platform may conflict with the potential market for servicing loans for potential clients. If Walter is unable to “board” a block of loans, it may be unable to take on new business, even though the capacity exists.

Walter Investments likewise faces similar risks from a highly competitive market and forced-placed insurance, which can have negative effects when house owners who are force-placed file class action lawsuits.

Wells Fargo(WFC)

Wells Fargo, being a bank mortgage servicer, is sensitive to local market conditions, overall economic conditions, and interest rate movements. The company’s lending operations depend on the strength of the underlying industries.

Banking operations are geographically concentrated in the company's home state of California.

FBR says that a sustained high interest rate environment would tend to expand net interest spreads and help profitability, thus creating risk to achieving our price target.

Stabilization of further credit deterioration could help earnings at Wells Fargo, especially given the large exposure to consumer loans.

Changes in market sentiment toward financials, whether positive or negative, may pose a risk to the  price target.

And finally, Wells Fargo is dealing with its own forced-placed insurance issues.

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