A fledgling industry just a year ago, the mortgage servicing business is now red-hot, fueled by big banks shedding mortgage servicing rights in an attempt to stay ahead of new capital rules. Nationstar Mortgage (NYSE:NSM) is one of those servicers that has been growing by leaps and bounds, and it has one of the biggest banks to thank for its success: Bank of America (NYSE:BAC).
A symbiotic relationship
Following the latest purchase of mortgage servicing rights from B of A with partner Newcastle Investment (NYSE:NCT), Nationstar has been flying high. After gobbling up $215 billion of MSRs from the big guy, the servicer jumped right into a deal with KB Home (NYSE:KBH) to deliver mortgage services to prospective home buyers. The very same week, Nationstar priced an asset-backed security worth $900 million. Doubtless, the proceeds will be used to purchase more MSRs -- possibly from Bank of America, which is planning another auction soon.
The relationship between the bank and servicer goes back to June of last year, when the newly minted public company bought $10 billion worth of MSRs from B of A, a definite step in the right direction. In return, the bank has been able to reduce its MSR portfolio, a key ingredient in CEO Brian Moynihan's streamlining process.
The positive effect of this pseudo-alliance is evident in Nationstar's recent investor presentation, where the servicer gave the big bank its due. In an announcement that undoubtedly had investors salivating, the servicer presented guidance for this year of adjusted EBITDA per share of $9.50 to $11.05, and $12.30 to $14.30 for 2014. Of that amount, the recent shopping spree at B of A accounts for $2.20 to $2.55 for 2013, and a whopping $4.65 to $5.40 for next year, once the portfolio is fully integrated. Of the estimated earnings per share for 2014, the B of A acquisition is expected to contribute $2.30 to $2.70 of the $5.60 to $6.50 Nationstar has predicted.
A resurgent industry
Nationstar and Newcastle weren't the only recipients of the big bank's recent largesse. Walter Investment (NYSE:WAC) left the table with $93 billion of MSRs, adding to its recent acquisition of Metlife's mortgage servicing platform.
Although rising star Ocwen Financial (NYSE:OCN) left the recent B of A auction empty-handed, this ambitious servicer is the front-runner in the current race to scoop up Ally Financial's stable of MSRs representing $122 billion in loans, valued at approximately $1 billion. I fully expect them to show up at the next Bank of America MSR sale, as well, so keep your eyes peeled.
There seems to be no shortage of institutions willing to sell off their servicing rights, and, as long as that is the case, these companies will prosper. Nationstar, which is predicting a rise in net income of nearly 50% from 2013 to 2014, is definitely reaping the rewards of the new capital rules for banking institutions -- and is more than willing to give credit where credit is due. Bank of America, take a bow.