Nationstar Mortgage Holdings Inc. (NSM)

[Enterprising Investor]

Investors' Soapbox PM (2/06/13)

Two Picks in Mortgage Servicing

Sterne, Agee & Leach

So far, the mortgage market appears to be shifting toward a more defensive posture and sacrificing potential volumes for higher margins.

We think the two special servicers we are following with Buy ratings ( Ocwen Financial (ticker: OCN) and Nationstar Mortgage Holdings (NSM)) will continue to see gains from additional servicing acquisitions and, with PHH (PHH), are focused more on likely growth in cash balances, debt reduction, and growth and gains in mortgage-servicing-right (MSR) values, than a specific long-term earnings-per-share growth rate.

As of Tuesday, the Bloomberg quoted rate on its par mortgage-backed-securities (MBS) index is up 11 basis points since our last survey date (Jan. 24), and reflecting what we see as continued upward pressure on guarantee fees, Fannie Mae 60-day commitment rates are up 16 basis points. Originators so far are opting to defend margin over volume with higher mortgage rates. Last week's Freddie Mac survey pointed to an 11 basis-point increase, and this week, the posted rate for a 30-year mortgage on Wells Fargo's (WFC) site is 25 basis points higher today (rate = 3.75%/annual percentage rate = 3.925%) than two weeks back.

PHH reports after the close Wednesday. We have been factoring a 55 basis-point decline in priced-in margin (based on locks) into our fourth-quarter EPS estimate and in 2013 assuming a 13% decline in loans closed for sale. For now, we are putting the bulk of any expected volume increases tied to the HSBC Holdings (HBC) relationship (begins April 1) into fee-based closing.

PennyMac Mortgage Investment Trust (PMT) is scheduled to report earnings Thursday before the open. As a correspondent originator, its primary sources of fee income are the relatively small fee it earns reselling close mortgages (estimated at about 0 to 20 basis points) plus the gains associated with capitalizing MSRs. We could see some slippage in volumes, but two things worth noting: 1) growth in dividends is driven by gains from the sale of its acquired distressed-loan portfolio and returns from originated or acquired MSRs, not correspondent gain on sale; and 2) GAAP EPS is likely to be positively impacted over time by the expected awarding of a Ginnie Mae seller/servicer license.

-- Henry J. Coffey Jr.
-- Calvin Hotrum

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