FBR: Nationstar will capitalize on special servicing
Over the next several years, Nationstar Mortgage Holdings (NSM) will continue to generate sustainable long-term returns with significant earnings growth as a result of the company’s servicing business and mortgage origination platform, analysts with FBR Capital Markets said Tuesday.
As a result, FBR Capital noted in its report that it’s reiterating its 'outperform' rating of the company as management provided a clearer path to reaching its 2013 and 2014 earnings per share guidance expectations.
"The special servicing market is poised to experience substantial growth over the next two years as many of the private-label litigation actions between investors and the big banks still need to be resolved, and special servicers will likely be able to capitalize on the new business," the FBR analysts stated.
Nationstar continues to improve the profitability of its servicing portfolio including failing delinquencies and lower funding costs, the report noted.
With a targeted 8 basis point improvement in servicing costs on what should ultimately be a $500 billion portfolio of mortgage servicing rights in 2014, each basis point improvement will add $0.30 cents to EPS, FBR said.
As a result, FBR expects this expense improvement will lead to 10 basis points of profitability on Nationstar’s servicing portfolio in 2014, up from 5 basis points, implying a pretax net income of $500 million in the servicing segment.
Additionally, mortgage origination levels are expected to remain 'conservative' as the Home Affordable Refinancing Program continues to provide a material tailwind to earnings. Thus, origination volumes will likely post a significant uptick, according to FBR Capital.
Nationstar generates 50% of its existing revenue base and 90% of bottom-line profitability from its origination platform, the report said.
Currently, Nationstar estimates originations of $16 billion in 2013 and $20 billion in 2014, respectively, based on FBR's analysis.
"The ultimate growth of the company’s servicing portfolio is the key, in our view, to garnering a multiple above that of a traditional mortgage bank," FBR analysts concluded.
For the first time, Nationstar disclosed revenue estimates for its Solutionstar business, which provides services for 16,000 real estate-owned properties.
The company expects this sector to generate $200 million in revenues in 2013, with 15% of the revenue coming from third-party customers.