Nationstar expected to see highest earnings among special servicers

Special servicer Nationstar ($41.89 -0.44%) is expected to be the outperformer among top special servicers when fourth quarter 2012 fiscal year earnings are released later this month, according to a report from analysts with Compass Point Research & Trading.

As of right now, the company’s stock is the cheapest when compared to competitors Ocwen ($41.15 0.14%) and Walter Investment Management Corp. ($37.36 -0.73%), trading 6.3 times above earlier levels, Compass Point pointed out in a new research note.

Compass Point expects Nationstar to see increased profitability from its servicing segment since its MSRs will likely mark up for the first time since its initial public offering.

Delinquency levels since the boarding of Aurora’s portfolio are down about 250-basis points at Nationstar, according to Compass Point.

"This quarter will be important for the special servicers because it will be the first glimpse of financial results investors have seen since early November," Kevin Barker with Compass Point wrote.

"Although we are likely to see little financial impact from the recent string of acquisitions, setting expectations for run rate operating margins will be important to whether servicers meet long-term forecasts. We are likely to see origination and flow programs start to make a material impact to financial results. Ramping up these platforms will be key to offsetting portfolio run-off over the long-term."

The company expects Ocwen to report earnings per share of 46 cents, up from 37 cents in the third quarter of 2012 and down from estimates of 50 cents.

"Interest expense should show a considerable increase following the Home Loan Servicing Solutions servicing deals completed in late September. The company also should show some expense ramp for the Homeward and ResCap acquisitions," Compass Point wrote.

The firm expects Walter Investment Management to report earnings of 70 cents a share, compared to 75 cents in the third quarter of 2012 and above estimates of 68 cents a share.

"This will be the first quarter we see mortgage originations and reverse mortgage operations in the financial results," said Compass Point. "We believe investors should focus on WAC's ability to ramp up origination volumes and run rate expense levels for interest and depreciation expense."

Looking at both Ocwen and WAC, Compass Point says this will be the first period in which both firms report operating results from mortgage originations, and Compass Point forecasts both firms will achieve gain on sale margins of 2.1% to 2.2%, while originations will remain minimal.

"Ocwen initiated its delinquency flow program in 3Q12 and we will see the first delinquency flows from NSM and WAC this quarter," Compass Point said. "We estimate $2.5 billion of flows for OCN, $2.2 billion for WAC and $500 million for NSM."