Nationstar Mortgage Holdings (NSM) reported quarterly net income of $75 million, or $0.69 per share, for the second quarter, compared to net loss of ($48) million, or ($0.53) per share, in the first quarter 2015.
Adjusted earnings for the second quarter were $35 million or $0.32 per share, up 59% compared to the prior quarter.
The second quarter results include $52 million or $0.47 per share of after tax benefits resulting from the net increase in value associated with mortgage servicing rights and related liabilities accounted for at fair value and $10 million of after tax expense or $0.10 per share principally related to streamlining operations, including severance. Notably, adjusted pretax income for the servicing segment increased $16 million sequentially as a result of increased incentive fees due to continued strong operational performance and higher base servicing fees given the larger servicing portfolio.
“We remain resolute in our strategy of creating long-term sustainable growth by capitalizing on market opportunities, increasing the profitability of our servicing segment, building the first fully integrated digital platform for buying or selling a home through Xome and taking advantage of the recovering economy and rising rate environment, all of which we believe will create additional value for our shareholders,” said Jay Bray, Chief Executive Officer. “Our servicing segment continues to operate as the top ranked servicer in its FNMA STAR peer group and had a significantly improved operational quarter, even with elevated levels of amortization.”
Originations delivered another strong quarter of adjusted pretax income of $59 million driven by the favorable rate environment and focused execution. Xome achieved continual top line growth of $14 million sequentially, driven principally by an increase in property sales.
Adjusted revenues increased $24 million sequentially principally as a result of $15 million in higher base servicing fees due to higher average UPB balance and $5 million of increased incentive fees. The servicing portfolio, as measured by UPB, ended the second quarter at $404 billion, an increase of 4% from the first quarter as the Company successfully closed on $29 billion of servicing acquisitions during the quarter and has outstanding commitments of $28 billion. This represents the first time ending UPB was greater than $400 billion as of the end of a quarter in the Company's history.
Adjusted pretax income, was up $16 million quarter-over-quarter driven by higher revenues and increased interest income on reverse mortgage interests, partially offset by higher claims and a $12 million quarter over quarter increase in amortization. Although interest rates increased over the course of the second quarter, typically a lag exists between rising rates and the slowing of prepayments. In addition, amortization was driven higher due to the significant amount of UPB acquired in the first half of the year.
Measured in basis points, adjusted pretax income for the quarter was 2.3 basis points, an increase of 229% compared to the first quarter, driven principally by an improvement in operations as amortization remained elevated. Macroeconomic fundamentals, including a rising rate environment, are tail winds for increased profitability and cash flows and Nationstar remains committed to achieving its servicing profitability targets of approximately 3.5 basis points in the third quarter and at least 5.0 basis points for the fourth quarter.
Nationstar’s 60-plus day delinquency rate decreased to 7.4% in the quarter as a result of completing 16,831 workouts and the boarding of lower delinquency portfolios during the quarter. The servicing portfolio CPR increased to 16.9%, reflective of the rate environment and increased origination activity that resulted in higher prepayments during the quarter.
Revenues increased sequentially despite interest rates increasing by approximately 35 basis points during the quarter. The Company continues to be able to capitalize on refinance and purchase origination opportunities within its servicing portfolio which drove volume increases during the quarter.
Adjusted pretax income was flat quarter-over-quarter despite increased expenses incurred associated with the 14% increase in funded volumes. Nationstar’s recapture rate improved slightly to 25% in the quarter creating approximately $2.7 billion of new servicing assets and $14 million of cash.
Nationstar funded $4.8 billion of volume during the quarter with 63% of the volume from the consumer direct channel. Excluding the value of servicing, loans originated from the consumer direct channel were cash flow positive during the quarter, proving it to be the most cost effective way to acquire servicing assets.
The originations business continues to benefit from recapture opportunities from Nationstar's servicing portfolio. A 50 basis point referral fee on recaptured loans would have resulted in an increase of 1.4 basis points in servicing profitability during the second quarter.
The third quarter has started off strong for our originations segment as homeowners prepare for a potentially rising rate environment. The company continues to believe that significant refinance and purchase opportunities exist within our servicing portfolio.
In addition, the recent launch of the Xome ecosystem should, the company says, over time, drive leads to the originations platform.
Xome’s revenues increased by $14 million sequentially, primarily driven by increased property sales of approximately 650 units quarter over quarter. From a third-party perspective, although down on a percentage basis due to the increase in property sales, Xome continued to make progress in signing up third party clients during the quarter.
Adjusting for investments in technology and expenses related to the launch of Xome.com, Xome earnings were slightly up for thequarter. Duringthequarter,Xomesold6,131properties,reflectiveofthestrongsellingseasonforREOpropertiesduringthe spring and summer months. The REO pipeline remains strong and Xome ended the quarter with approximately 8,300 properties in inventory. During the quarter, Xome sold 126 third-party properties through HomeSearch, a 163% increase quarter over quarter.
In June, Nationstar launched the Xome.com website and Xome mobile application. Xome consists of a next generation residential real estate digital experience connecting every major touch point in the transaction process from finding a home to closing the deal. The launch was a significant milestone in the transformation of the Xome segment from a provider of refinance and default related residential mortgage services to a provider of technology and data enhanced solutions to homebuyers, home sellers, real estate professionals and companies engaged in the origination and / or servicing of mortgage loans. Through Xome, we intend to enhance the home buying and selling experience through innovative, customer focused technology, making the home purchase experience simpler, more transparent and more accessible for all market participants.