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Why Nationstar Mortgage Holdings Inc. Stock Dropped More Than 20% Today

By Jordan Wathen – May 5, 2015 at 12:11PM

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Shares of Nationstar Mortgage Holdings Inc. plummeted by more than 20% as earnings failed to match Wall Street's expectations.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Nationstar Mortgage Holding (NYSE: NSM) are trading down by more than 22% today after the company reported weaker than expected earnings. The company revealed a first-quarter net loss of $48.3 million, or $0.53 per share. The consensus estimate called for a profit of $0.71 per share.

So what: Much of the loss comes from a $110 million ($0.77 per share) write down on the value of the company's mortgage servicing rights. In addition, the company took a $17 million charge ($0.12 per share) to adjust for faster amortization.

The company's servicing segment was most adversely affected by prepayments as mortgage rates dropped in January. Servicing revenue was off by 49% from the sequential quarter, down to $109 million. Its constant prepayment rate jumped to 13.8%, up from 13.3%, as a result of lower interest rates.

What hurt Nationstar in servicing helped in originations. The origination segment reported a sequential 9% increase in revenue, with origination revenue jumping to $158 million from $145 million in the prior quarter.

Now what: The company noted in its press release that "Much of the interest rate decline has reversed since quarter end, which could have a favorable impact on voluntary prepayment speeds in future quarters. " Thus, additional write downs due to faster prepayments and rate drops are unlikely going forward, provided mortgage rates stay elevated from their January lows.

One thing is certain: Nationstar investors should be rooting for higher interest rates. Given that its servicing business turns just a fraction of unpaid principal balances into pre-tax income (0.004% in the first quarter vs 0.037% in the fourth quarter), any shift in prepayment speeds has a magnified effect on its profitability.  

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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