Residential Capital LLC ( fka RDCC)

[Enterprising Investor]

Nationstar Fights Ocwen for Servicer Supremacy: Mortgages (10/23/12)

By David McLaughlin, Dakin Campbell and Kathleen M. Howley - Oct 23, 2012 10:44 PM CT

Nationstar Mortgage Holdings Inc. (NSM) and Ocwen Financial Corp. (OCN), which have seen their share prices more than double this year, are battling to become the largest non-bank home-loan servicers in a consolidating industry.

They’ll resume bidding today in a bankruptcy auction in a midtown Manhattan hotel for Residential Capital LLC’s loan- servicing unit after trading competing offers in a session that lasted into the evening. Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) didn’t participate after losing the lead bidder role to Nationstar, whose stalking horse bid was about $2.3 billion.

The winner will become the fifth-largest U.S. mortgage servicer, a business that becomes more profitable with greater scale, according to Wilbur Ross, who sold his Homeward Residential Holdings Inc. to Ocwen this month for $750 million in cash and convertible preferred stock that gives him a continuing stake in the firm.

“In terms of scale, it will be a huge win,” said Bose George, an analyst at Keefe Bruyette & Woods in New York. “There’s a barrier to entry in this industry, because it is so specialized and there are so many compliance issues -- you need scale to make it work.”

The two bidders are betting they can profit as banks retreat from the $9.6 trillion mortgage servicing industry. Many servicers earn monthly fees equal to 25 cents per $100 in unpaid loan balances to handle the billing and collections for home loans, and also work on foreclosures and loan modifications. New federal regulations are creating a web of compliance issues and the hand-holding of delinquent borrowers has driven up costs.

ResCap Bankruptcy

Ally Financial Inc. (ALLY), a Detroit-based auto lender majority owned by U.S. taxpayers, allowed ResCap to file for bankruptcy in May to distance itself from the mortgage lenders’ losses and help repay its 2008 bailout following the U.S. housing crash and subsequent credit crisis. Ally was previously owned by General Motors Corp.

ResCap, coupled with Ally’s much smaller business, was the fifth-largest mortgage servicer in the U.S. in the second quarter, handling the billing and collections on about $329 billion of mortgages, according to Inside Mortgage Finance, a trade journal. ResCap, once among the largest originators, reduced its assets to $15.7 billion in the first quarter from more than $130 billion in 2006.

Mortgage liabilities at ResCap from faulty home loans made before the housing bubble burst helped derail Ally’s initial public offering. A successful sale of the unit would allow Ally Chief Executive Officer Michael Carpenter to separate the auto lender from its money-losing unit.

Nationstar Acquires

If Nationstar, majority owned by Fortress Investment Group LLC (FIG), wins, it will be the largest non-bank residential loan servicer by the end of 2012, CEO Jay Bray has said. It added servicing on $93.3 billion in loans in the second quarter, including acquisitions from Bank of America Corp. and Aurora Bank FSB, a unit of defunct Lehman Brothers Holdings Inc., which accounted for more than $60 billion. The company’s servicing portfolio stood at $193 billion at the end of June, Nationstar said in an Aug. 14 statement.

Since it sold shares in an initial public offering on March 7 they’ve gained 149 percent, making it the best-performing U.S. IPO this year.

Ocwen has also bolstered its business, including the purchase of WL Ross & Co.’s Homeward, which services about 422,000 mortgages with an unpaid principal balance exceeding $77 billion, according to a statement from Ocwen.

Its shares have gained 25 percent since the announcement of the Homeward acquisition, extending this year’s gain to 150 percent as of yesterday.

Homeward Purchase

The purchase of Homeward gives Ocwen a much more robust origination business, making home loans to consumers, that will provide for a “sustainable source of future growth,” the company’s CEO William Erbey said in the statement announcing the deal. Homeward has been originating loans at a rate of about $10 billion a year, he said.

“Market reaction to the Ocwen deal has been strongly favorable, just as we had hoped, because it repositioned Ocwen” and will immediately add to earnings, Ross said.

Ocwen has teamed up for the ResCap bid with Walter Investment Management Corp. (WAC), according to a person familiar with the matter, who declined to be identified because negotiations are private.

‘Moneymaker Industry’

Ocwen is currently the largest independent servicer with $5.4 billion in assets. Nationstar, based in Lewisville, Texas, has $4.9 billion. Revenue at Ocwen rose to $211 million in the second quarter, about double the year earlier, as it bought servicing rights from JPMorgan Chase & Co. and sub-contracted with other institutions to handle their most troubled loans.

“It’s a moneymaker industry, but what’s really gotten people excited is growth,” said Paul Miller, managing director at FBR Capital Markets Corp. in Arlington, Virginia. “These companies could double and triple in size in the next year.”

Winning the business gives more than just servicing rights. Servicing also provides a pool of potential borrowers for whom it may then “capture the financing needs” when they decide to refinance, Ross said.

“You don’t have to be a servicer to become an originator nor do you have to be an originator to become a servicer,” Ross said. “Origination is the most efficient way to create servicing but buying in bulk is the quickest way to achieve major scale.”

Overcome Objections

Before completing the purchase, the winning bidder must overcome objections from ResCap customers, including its two biggest, Fannie Mae and Freddie Mac. The government-controlled companies have demanded in court filings that the winner take on the legal liability that ResCap currently faces for loans it originated.

Nationstar’s $2.3 billion stalking horse bid for the right to service mortgages owned by Fannie Mae, Freddie Mac and others, was based on not accepting any potential legal liabilities for the loans, according to court documents.

Once the auction is over, New York-based ResCap and the winner will have until Nov. 19 to resolve the dispute with the mortgage owners, which are demanding at least $394 million in payments in addition to the liability guarantees. Should they fail, the fight would be decided by U.S. Bankruptcy Judge Martin Glenn in Manhattan, who is overseeing ResCap’s case.

Buffett Seeks

Berkshire wasn’t represented at yesterday’s auction.

Buffett didn’t respond to a request for comment sent to an assistant. Susan Fitzpatrick, ResCap’s director of communications, declined to comment. Nationstar’s head of investor relations Marshall Murphy and Ronald Faris, CEO of Ocwen, didn’t return calls.

Buffett said in July, a month after his company sought to be the lead bidder for ResCap’s servicing business, that the U.S. housing market was rebounding, even as the overall economy stalled. The billionaire has increased Berkshire’s bet on the real-estate market by investing $5 billion in Bank of America Corp. (BAC) last year and boosting his company’s stake in Wells Fargo & Co. (WFC) Wells Fargo is the largest U.S. mortgage servicer, followed by Bank of America.

Berkshire also owns a real-estate brokerage, a maker of manufactured homes and units that construct roofs and sell bricks and carpet.

The housing market has improved “noticeably in the last few months,” Buffett told Bloomberg Television’s Betty Liu in a July 13 interview. “It was just a question of getting households in balance with housing units.”

Shunned Participating

The competition for ResCap’s servicing assets may have increased the price beyond what the billionaire’s firm was willing to pay, said Jeff Matthews, a Berkshire shareholder and author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett.”

Buffett has shunned participating in auctions when making acquisitions and warns potential sellers against the practice in Berkshire’s annual report.

“Buffett always says if you want to make a killing, be the only buyer,” Matthews said in a phone interview. “If he doesn’t get the right deal, he’s not interested.”

Berkshire Hathaway is the stalking horse bidder for a separate auction of ResCap’s mortgage portfolio, which will follow the servicing auction.

The case is In re Residential Capital LLC, 12-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

To contact the reporters on this story: Kathleen M. Howley in Boston at [e-mail]; Dakin Campbell in San Francisco at [e-mail]; David McLaughlin in New York at [e-mail]

http://www.bloomberg.com/news/2012-10-24/nationstar-fights-ocwen-for-servicer-supremacy-mortgages.html