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.