Ocwen Financial (OCN) and Nationstar Mortgage Holdings (NSM) could develop mortgage lending platforms in 2013-2014, a Bank of America Merrill Lynch (BAC) analyst predicted in a conference call on Wednesday.
While Ocwen and Nationstar are known for servicing, BoAML senior financial services analyst Ken Bruce predicts mortgage originations will become a “much bigger component of the earnings story for both.” ()
Atlanta-based suprime servicer Ocwen entered the lending sphere in October when it bought Homeward Residential Holdings for $750 million from private equity firm WL Ross & Co.
“We focused on the new entrant aggregators where there are opportunities to grow volume both in the context of the agency business, which is by and large the market today, and then I think over time, the nonagency market will begin to reemerge in future years,” Bruce said.
Leading issuers of private label RMBS exited the mortgage market when the economy crashed.
Many big bank companies such as JPMorgan Chase (JPM), Citigroup (C) and Wells Fargo (WFC) retrenched their wholesale lending activities in the mortgage finance sector, creating an opportunity for real estate investment trusts and firms with traditional roles outside of the mortgage bond space to focus on servicing the needs of the wholesale market.
“Below those big five or 10 banks you have a fairly fragmented market and with the banks having stepped backed, its created a vacuum for what has been traditionally known as a correspondent or broker segment,” Bruce said.
PennyMac originated about $8 billion in its third quarter, and a result, could drive significant earnings and dividend growth throughout the next few years.
Redwood Trust also has the potential to post significant volume growth as government subsidies begin to reverse.
“It’s already become apparent that with the spread compression that has occurred in the capital markets and low interest rates, the economics in terms of non-agency and agency securitization and execution for lenders has become not imparity, but are getting much closer together,” Bruce said.