Nationstar Mortgage Holdings Inc. (NSM)

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Fortress Is Betting On Bill Collectors With Mortgage Servicer Nationstar

This story appears in the June 10, 2013 issue of Forbes.

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What is mortgage servicing? It’s the business of collecting mortgage payments from homeowners and delivering the funds to investors like Fannie Mae and the mortgage-backed securities trusts. It involves such mundane chores as record-keeping, paying taxes and customer service. It also involves coaxing delinquent borrowers into making payments.

Imagine, as in the case of Nationstar, a nondescript 160,000-square-foot office building in a Dallas suburb where 800 recent college graduates sit in a sea of cubicles. These “loan counselors” wear headsets and chat up customers, earning bonuses when they successfully work out a delinquent mortgage.

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Private equity firms may be snapping up servicing rights, but they still need collection agents like Nationstar.

One convenient partnership helping Nationstar expand rapidly is with a Fortress-owned REIT, Newcastle Investment NCT +1.04%. Newcastle finances 65% of Nationstar’s purchases of MSRs from banks in exchange for half the fee income, after Nationstar extracts 21 basis points to cover operating costs. Newcastle earns a 14% return while Nationstar uses Newcastle’s capital to grow.

That’s a great position to be in, considering that banks are expected to sell or transfer the servicing rights on $300 billion to $500 billion worth of loans each year for the next three years, and Fannie Mae and Freddie Mac , which dominate the mortgage business, hold veto power over servicers. They currently favor three: Nationstar, Ocwen and Walter. Other ways to play the boom include Lender Processing Services, a data and software firm that works with servicers.

Mortgage servicing is a great business now, but Bray isn’t keeping all his eggs in one basket. He rebuilt Nationstar’s lending business, focusing on refinancing the loans it holds the servicing rights to. The company now retains more than half the loans eligible for refinancing that way, and the spread from bundling loans and selling them on Wall Street accounts for half of its revenue.

This should keep Bray and Fortress happy–and flush–no matter which way the economic winds are blowing.

http://www.forbes.com/sites/danielfisher/2013/05/22/fortress-is-betting-on-bill-collectors-with-mortgage-servicer-nationstar/