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Mortgage servicer Nationstar Mortgage Holdings ($42.54 -0.58%) is braced to expand its mortgage servicing platform in 2013 as mega banks like Bank of America ($13.19 -0.08%) continue to unwind their legacy mortgage exposures, analysts claim.
Some of the optimism surrounding the North Texas-based servicing giant is generally attributed to the fact that Bank of America is only halfway through selling and running off its legacy mortgage-servicing portfolio of six million loans. This leaves more room for Nationstar to nab additional MSRs, researchers with Compass Point claim.
"This implies there could be an additional 2 to 3 million loans Bank of America (BAC) could be offloading from their servicing platform," the research firm wrote. Right now, Compass Point believes Nationstar has the capacity to service $70 billion to $100 billion in loans and may be close to making additional servicing purchases.
As BofA looks to offload more mortgage servicing, Nationstar still has room to expand, Compass Point added. The analyst believe that, after conversations with Nationstar senior management, the company may revamp their model where mortgage originations drive profit.
"There have also been several reports of large servicing portfolios currently being marketed and NSM has confirmed they will book at least $30 billion in 4Q12 and another $30 billion in 1Q13," Compass Point explained. With BofA looking to potentially offload more assets, Nationstar will essentially have the opportunity to build a bigger block of new servicing assets.
Still, Compass Point warns that "with (its) servicing segment struggling to earn significant profits … NSM will need to guide to significant earnings accretion in order for new servicing wins to be a major catalyst for shares at this point."
Compass Point still has the major servicer listed as a "buy", but lowered its target price from $38 a share to $36 on its expectation of lower fourth-quarter earnings per share given the company's strong reliance on origination margins for profit.
"During the past quarter, NSM reported reduced, pretax earnings on the servicing segment primarily due to a markdown in the MSR and material upfront expenses associated with boarding the Aurora servicing portfolio," Compass Point said. Still, the research firm said it generally takes a year from the time a new servicing portfolio is merged into a company for the new earnings power to reach full potential.
"If the company can successfully win the bidding several new portfolios, at the right price, there should be material earnings growth, especially if the company can successfully recapture refinances in the new portfolios," Compass Point said.
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