Nationstar switching to more mortgage servicing

Exits some lending channels, misses 3Q estimates

Nationstar Mortgage Holdings' (NSM) servicing portfolio, as measured by unpaid principal balance, ended the third quarter at $375 billion, rising 90% from $198 billion for the same period a year prior.

"We continue to grow the size and profitability of the sector," said CEO Jay Bray.

Executives at the company says that's reason enough to expand the servicing operations from 45% of the company this year to 70% in 2014, according to a conference call on the third-quarter results. It's exit from lending is already beginning.

Stonegate Mortgage (SGM), another non-bank mortgage company focused on originating, financing and servicing residential loans, announced Thursday that it has entered into a binding letter of intent to acquire the wholesale lending channel and certain distributed retail assets of Nationstar.

NSM said it would retain its direct-to-consumer lending line as the best way to originate mortgages for servicing, but conceded that significant lending personnel, facilities and equipment would be transferred to Stonegate.

Reductions not only in personnel, but a 35% rise in productivity at the firm is expect to help keep costs lower going forward. The company announced it also intend to issue more servicer advance receivable securitizations, but did not comment further.

Bray extolled at length the operations of subsidiary and asset manager, Solutionstar,  which recently acquired settlement services from Equifax. "We really excited about this high-margin business," he said. The firm plans to liquidate 20,000 properties next year, he added, to become a "preeminent provider of REOs."

Some analysts are critical, not just of Nationstar, but of most mortgage servicing companies that missed third quarter estimates, despite originations being in line with expectations. Investments adviser Sterne Agee sent a note to clients, after this morning's earnings blast, saying everybody missed, except Redwood Trust, because of lower gain on sale margins. But Nationstar's results stand out.

"Most notable this quarter was Nationstar which reported a large earnings per share miss (core EPS=$0.24 vs. our estimate of $1.28)," said Henry Coffey, analyst for Sterne Agee. "In addition, NSM lowered its 2014 guidance from a previous range of $6.45 to 7.50 to $4.50 to $6.00 per share."

"We think it will take two to five days for investors to readjust to the quarter's disappointing news and then investors will need to take a more realistic, long-term view," he added.

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