Nationstar Mortgage Holdings (NSM) earned a $55 million profit in the third quarter, driven by surging mortgage service revenue and the appreciation of mortgage loans in its portfolio.
But on a Tuesday earnings call, the Fortress Investment Group-majority-owned servicers' results took second billing to questions about its growth options. After losing out in a bankruptcy auction of former GMAC's ResCap mortgage servicing assets, the company insisted that there are plenty of other, potentially better portfolio acquisitions waiting in the wings.
"When you think about … the capacity, the capability, the experience to execute on these type trades, there's not many people that can do it, said Jay Bray, Nationstar's chief executive.
Despite the lack of any big acquisitions, Nationstar's servicing portfolio grew slightly, to $198 billion in serviced loans, on the back of increased originations and two GSE portfolio acquisitions.
Though earnings were up 52% from the prior quarter, investors were not impressed; its shares tumbled 9% by early afternoon, to $27.38. Kevin Barker, an analyst for Compass Point, said the market had been hoping Nationstar would have earned a faster return on its prior acquisitions.
"Investors are looking at how quickly Nationstar can achieve significant margins and profitability on these servicing assets," he said. Nationstar is still heading toward achieving those targets, but "it doesn't take much to have a significant sell off with such high expectations," he said. Barker added that the company's stock has already more than doubled over the last year.
Though Nationstar, which focuses primarily on distressed loans, would have liked to acquire ResCap, Bray said, but the company's outstanding relationships with vendors made it less attractive than it would otherwise have been. Instead of spending its time dealing with ResCap's "operational complexity," Bray said Nationstar would focus on the $300 billion and $400 billion of mortgage servicing rights he believes are in play.
"That's our goal, and that is what we are marching down the path to do, Bray said, describing the portfolios as containing high volumes of Fannie, Freddie, and Ginnie Mae loans and running around 25% delinquent on average. "And from a credit profile standpoint, again, it's more in our wheelhouse."
Barker said that the prospect of Nationstar acquiring servicing portfolios of more than $300 billion in relatively short order seemed unlikely, but that he could "easily" see it taking on $100 billion."
Nationstar has benefited has enjoyed tight relationships with Fannie Mae in the past, though direct servicing transfers from the government sponsored enterprise to the company stopped last August, as American Banker reported last month.
A key element of Nationstar's investment thesis has been that banks are shrinking their exposure to the mortgage servicing market, leaving a void that it can fill. Not all banks are playing along, however: last week, JPMorgan Chase (JPM) bought MetLife's $70 servicing portfolio. Bray shrugged off the possibility that banks might provide Nationstar with more competition, however.
"When you really look at it, it's mostly newly-originated product, Fannie and Freddie, very, very clean credit profile," he said of the MetLife portfolio. "And it fits probably better into a bank that has a real customer focus on trying to sell them more products."