On the bright side, it had a better year than Ocwen.

That might be the kindest thing that can be said these days about Nationstar Mortgage Holdings, the once high-flying Dallas servicer that hit a rough patch in 2015. Unlike Ocwen, its credit rating hasn't been downgraded and auditors haven't questioned its long-term viability, but Nationstar has had its share of missteps, resulting in a plummeting stock price and customer-satisfaction scores that are among the industry's worst.

There are no easy fixes to what ails the struggling firm, but Chief Executive Jay Bray says the turnaround starts with a commitment to customer service.

"We would love to have someone go to a cocktail party and say they just had the best experience ever with their servicer, Nationstar," Bray said in a recent interview. "We want to treat customers in the best way possible. If we can transform the customer's experience, we can conquer the world in this space."

It's an ambitious goal for a firm that, according to J.D. Power, had the third-worst customer service rankings among 20 major servicers in 2015, just a notch above Ocwen.

Customers have complained that Nationstar has been too quick to deny requests for loan modifications and fails to uphold loan mods when servicing is transferred.

State regulators and the Consumer Financial Protection Bureau have been looking into these complaints and some analysts think that Nationstar will face stiff penalties that could include a hefty fine.

Bray declined to discuss Nationstar's relationship with regulators, but he acknowledged that the firm needs to be more responsive.

He said the firm takes a fresh look at each of its operational processes across servicing and originations. Nationstar will look at its call-center strategy to make sure it is aligned with its focus on customers, and it has implemented a new system to reduce wait times and speed up callbacks.

Still, righting Nationstar's ship goes well beyond improving its level of service. Bray must find a way to win back the trust of investors who have been fleeing the stock in droves, partly due to an ill-timed capital raise that diluted investors' shares but mostly due to overall concern about regulators' crackdown on nonbank servicers. As of Nov. 30, Nationstar's shares were down roughly 54% for the year.

Bray joined Nationstar, the former Centex Home Equity, in 2000. He served as CFO for a dozen years before being named CEO in 2012. In the coming year, in addition to the challenges listed above, he will also have to overcome market skepticism about Nationstar's effort to create an entirely digital process whereby the consumer does everything — from searching for a home and real estate agent to applying for and closing a loan — online. That effort was dealt a blow in late November when the head of its digital subsidiary, Xome, abruptly resigned.

Some of Nationstar's problems have been unavoidable. For example, persistently low interest rates have led to a wave of prepayments, upending the profitability of all mortgage servicers.

But other problems have been self-inflicted. Its decision in March to raise $500 million through a secondary stock sale outraged investors and analysts and looked even worse a few weeks later when Nationstar reported a $48 million loss in the first quarter. The firm has also come under heavy criticism for what some see as excessive spending, particularly on Xome.

TOP EXECUTIVES DEPART
Xome CEO Kal Raman, a former Groupon executive, had been with Nationstar for just a year at the time of his departure. But he had a big impact by bringing the culture of Silicon Valley to Dallas. Raman had a penchant for wearing jeans, so employees at Xome dressed casually. Its offices were remodeled, painted orange and white, and included relaxation areas with Foosball tables and couches.

Xome was created as a portal to help borrowers find real estate agents and transact home buying online. It is largely seen as Nationstar's growth vehicle with the potential for a spin-off down the road.

Xome employees were told that Raman's departure was due to excessive spending, at a rate of roughly $10 million a month, one executive said. Analysts have consistently questioned Bray about Xome's strategy and its valuation, which he said is around $1 billion based on talks with potential minority investors. Xome is profitable largely by selling settlement services such as title insurance. Roughly 35% of Xome's revenue comes from selling its services to other financial firms.

Nationstar had mulled selling a stake in Xome to a minority investor, but Bray said in early December that nothing is imminent.

"We have been looking at that and we continue to talk about that but our focus is on execution and driving customers to the site," Bray said. "The minority investment is not needed. At what time in Xome's life does it make sense to bring in a minority investor with a great technology background?"

Apart from Raman, Nationstar lost several other executives earlier this year. They include David Hisey, an executive VP, chief strategy and external affairs officer; Caitlin DeYoung, an executive VP and chief administrative officer; and Harold Lewis, the former president and chief operating officer.

Bray took the added title of president in June when Lewis retired.

A COMMITMENT TO SERVICE
Most of Nationstar's recent troubles can be traced to continued complaints from borrowers, and the ensuing regulatory scrutiny.

"It's a tremendous headwind," said Matthew Howlett, a director at UBS Equity Research. "Investors don't want to buy this stock if they think [there' going to be] a $100 million plus settlement."

In the third quarter, Nationstar agreed to pay $16 million in borrower restitution related specifically to what are called "in-flight" loan modifications — when a borrower gets a modification from one servicer even as the loan is being transferred to another — that occurred between 2012 and early 2015. On a third-quarter conference call Bray called the payment, "a one-time event," and put the blame for lax servicing transfers directly on other servicers.

Analysts expect that the investigation by the CFPB and state regulators will result in a multi-state settlement and a CFPB enforcement action. Some observers have speculated that fines could top $100 million but Howlett said he thinks they will be in the $50 million range.

Once those are behind Nationstar, he expects the company's outlook to improve. "The rules of the road will be established," he said.

One potential benefit is that the market for mortgage-servicing transfers could open up, said Roelof Slump, a managing Director at Fitch Ratings. Regulators have put the kibosh on transfers as they scrutinize servicers for compliance.

"The level of large servicing packages trading has been reduced, and there's much more scrutiny being paid by the parties involved to make sure things are less error-prone than what we'd seen earlier," Slump said.

Bray acknowledges Nationstar's shortcomings in dealing with distressed borrowers and talked repeatedly about doing better.

"How do we deliver the best customer experience in the industry? We know we're not there today," said Bray, a former director of accounting and finance at the old Barnett Bank in Florida. "But we are truly trying to differentiate ourselves via a better customer experience. It's not something that happens overnight. You don't go from average to great overnight. But our culture is embracing that and we want to be champions for our customers."

Borrower complaints filed with the CFPB dipped 1.4%, to 3,711, through Nov. 30, compared with the same period a year ago, according to a search filed under the name Nationstar.

Nationstar found that the average complaint rate fell 34% this year from a year ago, based on complaints from all channels including the CFPB, state regulators and those made directly to the company.

"Complaints have come down dramatically," he said. "When you look at our portfolio, it's amazing how much improvement we've seen there."

TAKING MARKET SHARE
Though its pace of growth slowed as regulatory scrutiny increased, Nationstar is one of a handful of top 10 servicers, including Quicken Loans and Walter Investment's Ditech, to gain market share over the past year. Nationstar's servicing portfolio, measured by the unpaid principal balance of loans serviced, hit $408 billion at the end of the third quarter, up 8% from the same period a year earlier. It has grown 50% since the third quarter of 2012.

"In this competitive low-rate environment, the company has grown its servicing portfolio and has not seen a net loss," Slump said.

In some ways, recently regulatory actions against bank and nonbank servicers have benefitted Nationstar.

For example in January, New York regulators ousted William Erbey, Ocwen's founder, from the Atlanta servicer and from four other affiliated companies as part of a $150 million settlement.

Ocwen also was barred from purchasing mortgage servicing rights and now is trying to win back approval to do so.

In June, the Office of the Comptroller of the Currency also prohibited two large banks, Wells Fargo, the largest U.S. home lender, and HSBC Holdings, Europe's largest bank, from acquiring mortgage servicing rights. They also can't enter into new servicing contracts or offshoring servicing activity until they comply with consent orders.

Those regulatory actions have left Nationstar as virtually "the only game in town," for so-called private-label servicing transfers, Howlett said. Nationstar picked up a $50 billion subservicing contract in the third quarter. The company has absorbed $68 billion in loans that have been transferred this year alone.

"Nobody in the free world has done that," Bray said.

Still, he said, "We're not perfect. We're very focused on making sure the [mortgage servicing] transfer process is good for the customer. What the regulatory community wants is what we want: zero customer complaints and a great customer experience."

WHEN RATES RISE
Bray still sees plenty of opportunities for growth even if interest rates remain low. He is particularly focused on refinancing borrowers with loans backed by the Federal Housing Administration.

"There's still a ton of borrowers that can benefit from a refinance today given where rates are at," he said. "If you look at 2016 and beyond, we've had less focus on FHA/Ginnie Mae [borrowers]. We are going to continue to invest there. That will grow. It will be mostly refi. Even if interest rates go up 50 to 75 basis points that will be the refi focus."

Conversely, Nationstar is expected to benefit in the future from two key drivers: rising interest rates and lower defaults.

The value of mortgage servicing rights increases when rates rise, largely because fewer borrowers refinance and prepay their mortgage. That dynamic is expected to fuel profitability in the coming years.

On the technology front, Nationstar is expected to unveil a new mobile and desk top web site by the second quarter of 2016, built with the same technology as Xome. Bray said the site "is going to have an awesome look and a very, very different consumer experience than the industry has today.

"At the end of the day, we would love for our 2.5 million customers to be customers 10 years from now," he continued. "A lot of people beat their head against the wall trying to get new customers. My view is…why not make my existing customer the happiest people in the world? Every time they want a real estate transaction, they come to Nationstar. A servicer touches a person's life every month."

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