Nationstar Mortgage captured headlines in 2012 as a large-box mortgage servicer with enough buying power and panache to scoop up billions of mortgage servicing rights within a relatively short period of time.
But by Nationstar’s (NSM) own admission in its 10-K filing with the Securities and Exchange Commission, today’s servicing business cycle comes with a few risks.
It also comes with benefits.
Analysts with FBR Capital Markets believe the North Texas-based servicer could post significant gains in servicing profitability over the next 12-18 months, according to a recent report. FBR's projection of rising rates also is a boon for servicers in Nationstar's position, the analysts noted.
And Nationstar is big, fleshing out its servicing platform with major deals on MSRs struck in 2012 and 2013.
In its latest 10-K, Nationstar admits it grew its primary servicing portfolio to $134.5 billion in unpaid principal balance by the end of 2012. That's exponential growth from 2007 when the company's unpaid principal balance reached a mere $12.7 billion.
And they show no signs of slowing down.
"We plan to continue growing our primary servicing portfolio principally by acquiring MSRs from banks and other financial institutions under pressure to exit or reduce their exposure to the mortgage servicing business," the company writes in its 10-K.
"As the servicing industry paradigm continues to shift from bank to non-bank servicers, we have capitalized on this significant opportunity and increased our market share of the servicing business."
But inherent risks linger in the servicing space, and Nationstar is brutally honest about what those risks are in its annual filing.
The company says it was never a party to the $25 billion mortgage servicing settlement or the recent $9.3 billion independent foreclosure review deal — both of which involved some of the nation's largest servicers.
Still, Nationstar says it could become subject to some of the terms of those deals if it "subservices loans for the mortgage servicers that are parties to the enforcement consent orders and settlements" or the agencies enforcing these orders begin to look downstream at Nationstar’s arrangements with these servicers.
Furthermore, Nationstar says mortgage servicers using Nationstar as a subservicer could potentially ask the firm to comply with certain provisions laid out by regulators and outlined in various settlements.
So where is Nationstar in terms of adjusting to this new reality?
The firm writes, "While we have made and continue to make changes to our operating policies and procedures in light of the consent orders and settlements, further changes could be required and changes to our servicing practices will increase compliance costs for our servicing business, which could materially and adversely affect our financial condition or results of operations."
It’s common for corporations to outline their risks in 10-K annual filings, and all of these risks are speculative. Still, they show where servicers — who stand to benefit from rising rates and an improving housing market — face potential tail risk.
As for Nationstar, it continues to grow even after reaching a servicing portfolio of 1.1 million loans with an aggregate unpaid principal balance of $207.8 billion in late 2012.