Walter’s Shares Soar 36% Beating Rival U.S. Servicers
(Bloomberg) -- Walter Investment Management Corp. has emerged as the favorite of investors following a year of investigations of the top three nonbank mortgage servicers.
Walter, the third-biggest, expanded its servicing business last year while the operations of Ocwen Financial Corp. and Nationstar Mortgage Holdings Inc. shrunk. Walter also was one of only two U.S. mortgage lenders among the top 12 to increase originations in 2014.
The three companies, which collect loan payments and handle modifications and foreclosures, announced last year that they were under investigation by regulators following complaints from customers. While their shares were hammered last year, Walter’s strategy of purchasing mortgages made by other companies is paying off. Shares of the Tampa, Florida-based company have surged 36 percent this year, outpacing its two closest rivals.
“Walter grew slower and more thoughtfully than competitors and stuck with the product which they knew well,” said Vadim Perelman, whose hedge fund Baker Street Capital Management owns 15 percent of Walter’s shares. “The extremely negative sentiment in the sector has, in our view, made Walter shares deeply undervalued.”
Shares of Walter closed at $22.50 after rising from a low of $14.68 on Jan. 23. Nationstar, the second-biggest servicer which agreed on Monday to buy mortgage servicing rights from No. 1 Ocwen, has increased 12 percent to $31.55 this year. Ocwen, which settled a probe by New York’s top financial regulator in December, declined 35 percent to $9.78 in the same period.
Buying Ditech
Walter, led by Chief Executive Officer Mark O’Brien, began in 1946 as Walter Construction Co., a provider of shells of homes to veterans returning from World War II. The company, which had a small lending and mortgage servicing unit, escaped damage from the housing collapse in 2008. A year later the firm changed its focus to coal mining and spun off its mortgage and finance unit as Walter Investment.
Three years later, Walter Investment bought the Ditech Mortgage Corp. brand and technology from bankrupt lender Residential Capital as part of a deal for its servicing rights. In May, Walter began doing all of its lending through Ditech, which was one of the biggest subprime lenders last decade.
Ditech abandoned the risky loans and now concentrates on making and buying mortgages backed by Fannie Mae and Freddie Mac. To expand lending, Ditech is avoiding the use of overlays, or extra safeguards such as higher credit scores requirements, that banks use to reduce risk, said Rich Smith, Ditech’s chief marketing officer.
’Very Competitive’
“We’ve done a lot to reduce or eliminate overlays so we can be very competitive,” said Smith. “We’re doing everything we can to not add criteria on top of agency requirements.”
Walter, the 11th-largest lender, originated $18.5 billion of mortgages last year, according to data from Inside Mortgage Finance, a trade publication. Its originations jumped almost 17 percent in 2014, accounting for 1.5 percent of U.S. lending, almost doubling its market share from the prior year. About 50 percent of the lending came through so-called correspondent deals in which loans are bought from other companies, according to Douglas Harter, an analyst at Credit Suisse AG.
“Their volume is up because they’ve changed their mix to focus on the correspondent channel,” said Harter. “It’s a very attractive way for them to acquire servicing. That’s the strategy behind it.”
Federal Probe
Green Tree Servicing, the Walter unit that collects loan payments, posted an 11 percent increase in its business to $224 billion in the fourth quarter, the publication’s data show.
A year ago, Walter disclosed in a filing that the Federal Trade Commission and the Consumer Financial Protection Bureau informed it of a possible enforcement action. The details have not been made public.
In April, Walter began discussions with the two agencies about a possible settlement that could include monetary penalties, the company said in a November filing. Whitney Finch, Walter’s vice president of investor relations, declined to comment.
Joseph Smith, who oversees a $25 billion mortgage settlement between state and federal agencies and five banks, said in May that Green Tree didn’t use proper procedures in servicing loans it bought last year from Residential Capital, a company covered by the agreement. The former ResCap loans make up about 14 percent of Walter’s portfolio.
Top Performer
Compass Point Research & Trading in December ranked Walter as the top performer among all loan servicers, based on customer-complaint data from the CFPB. Walter had a 2.5 percent complaint ratio when measured against the amount of delinquent loans in its portfolio, followed by Nationstar at 3.6 percent and Ocwen at 5 percent. The average rate for servicers, most of them banks, was 10.4 percent.
“We still see the need to go to specialty servicers on high touch mortgages,” said Rastislav Berlansky, a portfolio manager at Brandywine Global Investment Management LLC, which owns more than 720,000 shares of Walter. “These guys can do it more effectively and with better results than the banks.”
Walter outperforms its competitors in collecting payments because of its frequent contact with borrowers by its workforce, which is entirely based in the U.S., according to an April report by Moody’s Investors Service. Ocwen’s staff is primarily outside of the U.S., and Nationstar has about 35 percent of employees offshore.
Rigorous Compliance
“A culture of rigorous compliance which we think is going to be a big factor in a servicer’s ability to grow over time” makes Walter a long-term winner, said Perelman of Baker Street Capital. It owns 5.8 million Walter shares, according to data compiled by Bloomberg.
Lewisville, Texas-based Nationstar, which said in November that it’s cooperating with New York regulators, is expanding by purchasing servicing rights. Nationstar bought $16 billion of rights in the third quarter before announcing its $9.8 billion deal with Ocwen this week. The company reports fourth quarter results on Feb. 26.
“We remain extremely bullish about our servicing capabilities and numerous growth prospects,” Nationstar Chief Executive Officer Jay Bray said in November. “We are seeing a pickup in transfer activity and plan to be an active participant in servicing acquisitions.”
Ocwen Shrinking
Nationstar shares have outperformed Walter over the past 12 months, gaining 5.9 percent compared with Walter’s 21 percent decline.
After years of explosive growth, Atlanta-based Ocwen is shrinking. As part of its agreement with the New York Department of Financial Services, Ocwen agreed to sell part of its business to simplify and improve operations.
Ocwen’s struggles made Brandywine’s Berlansky dump Ocwen shares in the fourth quarter.
“Walter stock is still very cheap and could potentially benefit from Ocwen’s issues,” said Berlansky. “Walter is a cleaner story.”
To contact the reporters on this story: Alexis Leondis in Washington at aleondis@bloomberg.net; Kathleen M. Howley in Boston at kmhowley@bloomberg.net
To contact the editors responsible for this story: Vincent Bielski at vbielski@bloomberg.net Rob Urban
