Investors are beginning to notice the expectation that Nationstar Mortgage Holdings will post a significant improvement in servicing profitability over the next 12 to 18 months. The firm's mortgage originations platform isn't doing too bad, either.
Such servicing profitability will coincide with robust revenues from the company’s platform and there is an upside to guidance given the size of future opportunities, FBR Capital Markets noted in its latest report.
"Further, the company should benefit in a gradually rising rate environment as it extends the duration of its servicing book and improves its core earnings power while having a more muted impact on the origination platform," said analysts for FBR Capital.
The Nationstar (NSM) pipeline is largely comprised of $10 billion to $20 billion slugs with multiple counterparties.
While additional major bulk transfers are possible from the bigger banks, these are not necessary for the company to achieve guidance or to maintain and improve its servicing profitability on a go forward basis.
"Additionally, management remains confident it can continue to grow its core earnings power even absent bulk transfers given flow servicing arrangements and small transactions along with a significant recapture rate of 50% on its current book through the company’ origination platform," FBR analysts explained.
Nationstar recently won the rights to collect payments on a separate $215 billion mortgage portfolio, and Fannie Mae and Freddie Mac worry it would have trouble digesting another big deal.
Rising rates will benefit the servicing platform while having a small impact on near-term origination capabilities.
Nationstar management commented that they believe its total Home Affordable Refinance Program opportunity stands at $30 billion on its existing book — not including people who may become eligible down the road either through a revised HARP program or a housing recovery driving improved loan-to-value ratios on existing loans.
For instance, the average coupon on Nationstar’s portfolio is 5.5%, 150 basis points above the existing mortgage rate, the report noted.
"Management estimated that every 50 basis point move up in rates eliminates 15% of its HARP origination opportunities but would significantly extend the duration and value of the company's servicing portfolio, providing a net positive benefit to earnings over time," according to FBR analysts.
Nationstar estimates a net profitability of 200 basis points on $23 billion of originations in 2013.
However, FBR Capital expects gain on sale to trend down given that the company is somewhat isolation given its HARP-rich portfolio and potential expense efficiencies.
Last week, Nationstar priced a $2 billion advance securitization with 175 basis points of cost saves.
"This is a major driver of the improving servicing profitability at the company, with a management targeted servicing profitability of five basis points in 2013 and 10 basis points in 2014 seemingly increasing conservative," FBR analysts explained.
Overall, the special servicing market is poised to experience substantial growth over the next two years as many of the private-label litigation actions between investors and big banks still need to be resolved.
Additionally, special servicers will likely be able to capitalize on the new business.