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Executives

Anthony W. Villani - Executive Vice President and General Counsel

Jay Bray - Chief Executive Officer and Director

David C. Hisey - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Analysts

Douglas Harter - Crédit Suisse AG, Research Division

Daniel Furtado - Jefferies LLC, Research Division

Cheryl M. Pate - Morgan Stanley, Research Division

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Paul J. Miller - FBR Capital Markets & Co., Research Division

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Michael R. Kaye - Citigroup Inc, Research Division

Nationstar Mortgage Holdings (NSM) Q4 2013 Earnings Call February 27, 2014 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2013 Nationstar Mortgage Holdings Inc. Earnings Conference Call. My name is Katina, and I'll be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Tony Villani, Corporate Secretary. Please proceed.

Anthony W. Villani

Good morning, everyone. Please note that this call and the accompanying slide presentation are being webcast from the Investor Relations section of our corporate website, www.nationstarholdings.com. Please refer to that website for important information, including the fourth quarter 2013 earnings press release. A replay of this call will be available on the website within a few hours. Today's slide presentation is also currently available for download.

Financial results in today's press release are unaudited, and the matters we will be discussing today include forward-looking statements and as such as, are subject to risks and uncertainties that we discuss in detail in our documents filed with the SEC, specifically the most recent report on Form 10-K, which identifies important risk factors that could cause actual results to differ materially from those contained in the forward-looking statements.

The financial results in today's press release and the matters we will be discussing today include non-GAAP measures used by Nationstar. GAAP to non-GAAP reconciliation information is appended to our press release and investor presentation and is available on our website.

I would now like to turn the call over to Jay Bray, Nationstar's CEO.

Jay Bray

Thank you, Tony, and thanks, everyone, for joining us. As we look at the business today, we have 2 primary segments: the servicing segment and the origination segment. Our Solutionstar business supports both of those segments, as well as third-party customers. Throughout 2013, we experienced strong growth across all of our business lines. For the fiscal year 2013, Nationstar delivered GAAP earnings per share of $2.40 and pro forma earnings per share of $3.20. Our pro forma earnings per share increased 44% compared to pro forma earnings per share for 2012.

We acquired more than $250 billion of servicing while maintaining a strong focus on the customer. I'm pleased to report that we delivered 108,000 solutions to our customers, including 39,000 loan modifications in 2013.

This represents a 59% increase in overall -- over 2012 solutions. Our goal is to provide solutions to our customers and keep them in their homes. It is worth noting that we continue to see opportunities for increased profits and future portfolio acquisitions in the servicing segment.

Our origination segment continued to profitably create long-term servicing assets and increased by over 200% year-over-year. We originated $24 billion in 2013, including $5.5 billion in the fourth quarter. One of our goals for 2013 was to maximize HARP originations. During the year, we originated 62,000 HARP loans, an increase of over 235% compared to 2012. HARP loans reduce borrowers' payments and make mortgages more affordable for our customers. We did experience transition in the origination segment during the fourth quarter, but we have rightsized the business and returned to profitability in early 2014.

I'm very excited about the financial and operational progress we've made with Solutionstar since its launch in the fourth quarter of 2012. I believe there is a tremendous opportunity to develop a comprehensive digital marketplace that provides services covering the end-to-end life cycle of real estate transactions. I'll provide more details on Solutionstar later in the presentation. While we had some headwinds for originations during the third and fourth quarter, on the whole, for Nationstar, we increased all of our key financial metrics year-over-year, as you can see on the slide. In summary, we remained focus on high-return fee-based opportunities that enable us to increase our profitability and shareholder returns. The combination of servicing, Solutionstar and originations provide attractive return opportunities for the company.

Now let's move to Slide 3. We are completely focused on the customer and helping homeowners with lower mortgage payments through modifications and refinancings while, at the same time, helping mortgage investors earn better returns on their investments. Converting a delinquent loan to a performing loan is a win for all parties: the consumer, the investor and Nationstar. We come to work every day thinking about how we can provide solutions to our customers. We are proud of the fact that we save 3 foreclosures for every 1 loan that goes through foreclosure.

Since 2010, Nationstar has helped 371,000 customers, completing 282,000 workouts for delinquent borrowers and 89,000 HARP originations. We had over 62,000 HARP originations in 2013, allowing borrowers who owe more than their homes are worth to refinance and to lower cost mortgages. In 2013, our HARP originations reduced the homeowners' monthly payment by $200 on average. Our heritage is founded on helping customers, and with a larger portfolio, we have a greater opportunity to provide more solutions to our customers.

Let's move to Slide 4. When I think about last year, I'm extremely proud of the team's successful boarding of the Bank of America portfolios. This was a landmark transaction for the company and doubled the size of our servicing book. Our team did a fabulous job boarding over $200 billion and over 1 million new customers. We remain focused on the customers, the regulators and investors to ensure a smooth transition for all.

If you look at what we've done from a performance standpoint, I'm very proud of our ability to reduce delinquencies and help homeowners. I believe we are among the best in the industry when it comes to improving portfolio performance. For example, if you look on the slide, during the fourth quarter of 2013, we boarded 102,000 units. Since that boarding, we've improved 30-plus-day delinquencies by 27%, which has a positive ripple effect: one, it improves the profitability of those portfolios; two, you are able to help the customers by improving their lives via modifications and other solutions. Our best-in-class boarding expertise makes us the preferred partner in the industry and positions us well for continued growth and portfolio acquisitions in the future.

Let's dive a little deeper into our servicing segment and turn to Slide 5. We ended the year at $391 billion and over 2.3 million customers. Within the servicing business, our original investment thesis remains intact. We acquired servicing at low multiples over the last 6 years, and with an improving economy and stable or higher interest rates, cash flows will be extended and delinquencies will be lower, which will drive higher returns and profits. Over the past 2 years, we have added more than 1.6 million customers, all the while helping homeowners and reducing delinquencies for investors. We've made approximately $150 million in investments, since early 2012, in technology, people and process improvements. We expect to reap the benefits of these investments through improving profitability in upcoming quarters.

In 2014, it's all about execution. We continue to believe we have significant upside from a profitability standpoint and achieve our 11 basis points for all of 2014. We're continuing to focus on acquisitions and are actively working our pipelines, in total of over $350 billion of servicing opportunities. We anticipate we will have over $1 billion in investable cash over the course of this year to deploy in pipeline and high-return investments, and we will continue to execute on our profitability targets and invest in portfolios that meet our return requirements.

Moving to Slide 6. In the fourth quarter, we earned 6 basis points of servicing profitability, and we are going to drive that to 11 basis points on average for 2014. Financial institutions continue to single -- signal their desire to sell additional servicing assets. We closed and boarded $30 billion in the fourth quarter. Our servicing portfolio pipeline remains robust, with bulk and flow in excess of $350 billion, and while transfers have slowed, I still feel very positive about our pipeline.

We were very focused on completing the BofA portfolio acquisition in the last half of 2013. With the completion of the BofA boardings, we certainly will look forward to new pipeline opportunities. We continue to demonstrate portfolio sustainability as originations flow and bulk volume in the fourth quarter replaced over 200% of runoff. We continue to make progress on driving down delinquencies. We ended 2013 at 11.9% or a reduction of 220 basis points during the year. We saw CPR rates drop to 14.8%, down from 19% in the third quarter.

Let's move to Slide 7 and drive down further on the profitability goal to 11 basis points. Our servicing profitability initiatives in 2014 are coming from 4 key areas: automation and workforce management; lowering delicacies; driving down vendor and other external spend; and increased real estate services profitability, which represents growth in our Solutionstar business. First, automation and workforce management, which includes technology improvements, call routing and optimizing customer contact. This can be as simple as routing a customer to the appropriate party or providing them with the option to make a payment online. There are a number of key technology tools that we continue to employ to enhance the customer experience and to help solve our customers' needs more efficiently. We believe these initiatives will contribute to approximately 30% of our profitability lift in 2014.

Second, delinquencies. We were targeting a lower 60-day-plus delinquency rate of 10%. We are on our way to achieving this goal as our 60-plus-day delinquency decreased to 11.9% in the fourth quarter. We have a long track record of reducing delinquencies, and I'm confident we will be able to hit our target for 2014. As a reminder, driving down delinquencies helps the customer and reduces servicing costs. Reductions in delinquencies will represent approximately 20% of our improvement in 2014.

Third, vendor. As we have scaled the organization, we have increased expenditures, and we are focused on leveraging and consolidating expenses. We are driving costs down and some of our major vendors have already begun to offer significant savings, and we expect this to continue. Optimizing our vendor spend will contribute 10% to our profitability goals in 2014.

Fourth, real estate services. Most of the increase in profitability here is Solutionstar and our ability to sell properties through HomeSearch.com. We now offer a variety of different services on HomeSearch.com website, such as financing, and we are starting to gain leads for the origination channels through HomeSearch. We expect this to be a strong opportunity as we move forward. The growth in Solutionstar will contribute the remaining 40% towards our profitability target. Executing on our profitability initiatives translates into earnings and values for our shareholders, and we feel good about the progress we've made in such a short period of time.

Now let's turn to Slide 8, where I will provide an update on Solutionstar. Solutionstar, our fee-based service business, continues to perform well. We acquired the Equifax Settlement Services business in February of 2013. Equifax was primarily providing appraisal, title and closing services to key blue-chip financial institutions. We've been able to retain the vast majority of that third-party business, and now we are capturing a significant portion of Nationstar's business. As we order appraisal, titles and closings, we now use this platform to capture the associated spend and enhance the customer experience. The Equifax acquisition also expanded our third-party clients, and we have increased our penetration rate with those clients.

In March of 2013, we launched HomeSearch, our portal to sell and offer real estate services to consumers. While today, the platform is geared towards REO sales for Nationstar, we are making progress on selling third-party REO properties and non-distressed properties. In 2013, Solutionstar generated over $185 million of revenue and pretax income of $67 million, which included $11 million of corporate build-out expenses. In total, our Solutionstar business generated a 36% margin in 2013.

Solutionstar is principally focused on 4 initiatives in 2014: first, increase the amount of properties sold through our HomeSearch platform. We expect to sell over 20,000 properties in 2014, and I'll provide additional details around the REO opportunities in our servicing portfolio. Second, we are looking to further diversify HomeSearch product offerings by building out other services and expanding in the third-party REO sales and non-distressed property sales. We are developing HomeSearch into a one-stop shop for all things related to real estate. Third, we are focused on continued expansion of our settlement services businesses through additional client wins and allocations from our existing clients, as a result of our higher -- our high quality of customer service. Finally, we are exploring acquisition opportunities. There are a number of bolt-on acquisitions that ultimately will make Solutionstar a premier provider in the industry.

Let's move to Slide 9. If you look into the revenue breakdown in 2014, you can see what we expect, properties -- you can see we expect property sales to comprise 61% of the revenue in Solutionstar, settlement will be 33% and asset recovery and other will be 6%. Overall, we expect Solutionstar to generate $400 million in revenue and $215 million in pretax income for 2014. This represents nearly 190% bottom line growth year-over-year.

The bottom of the slide outlines the vision of, ultimately, where we're going to take this platform. Think about a real estate transaction in a fragmented way that a participant in that transaction has to go to numerous touchpoints and vendors. We are planning to make real estate simple through a technology platform addressing each touchpoint to provide services to our customers, as well as third parties and all of these different product lines. We believe we have the people to execute on the strategy and are expanding our service offerings to continue to diversify our client base. This represents a tremendous opportunity for the company.

Moving to Slide 10. I tell our team every day to focus on what we can control. If you look at the existing Nationstar portfolio, there are significant opportunities for each of our businesses. We've highlighted some of those opportunities on this slide. Prepayment opportunities in our portfolio are significant. 750,000 accounts on a voluntary basis are estimating -- estimated to prepay over the next 5 years. If we recapture 45% of that, we will be able to keep 340,000 customers. That means we have the opportunity to recapture 340,000 originations that we can make 125 basis points or more while creating servicing assets that will produce long-term cash flows. We feel extremely excited about that. We have a strong record of driving the recapture rate up.

From an involuntary standpoint, there are a number of borrowers that are still in the late stages of the foreclosure process. There are 165,000 properties that we think will come out of the existing Nationstar portfolio over the next 5 years that will use HomeSearch and our services to sell those properties. These are significant numbers in our portfolio alone. In addition, annually, there are 8 million real estate transactions in the United States. Our macro goal for Solutionstar and HomeSearch is to capture a fee component of as many U.S. real estate transactions as possible while increasing profitability.

Let's move to Slide 5 -- Slide 11 and discuss our origination segment. The market conditions during the third and fourth quarters resulted in a transition and retooling for our origination segment. Despite these challenges, our origination segment originated more than $24 billion in 2013, a 200% increase over 2012. Our overarching strategy for our origination segment remains unchanged, generate long-term servicing assets at a profit that will supplement and sustain our servicing portfolio. Our portfolio remains rich with refinance opportunities, and we are rightsizing the operations for 2014 volume expectation.

Our focus for 2014 is on our consumer-direct channel, increasing the speed of our turn times and improving profitability. We retooled the platform and have refocused on the more profitable consumer-direct channels, which includes recapture, Greenlight and our partnership with KB Home. We will continue to opportunistically originate from our correspondent channel, another low-cost way to create servicing assets. Finally, we think there are going to be increased opportunities in purchase money originations, and we are starting to see the first signs of return of private capital to the market.

Let's turn to Slide 12 for details on our return to profitability. In the origination business, we've made a number of operational changes in the fourth quarter and early 2014 to rightsize our platform. These actions taken in 2014 will reduce expenses by more than $15 million per quarter. We expect expenses to come down further as we reduce turn times, which will result in improved customer service, lower financing costs and lower hedging costs.

Traditionally, our consumer-direct channel has been our highest-margin and most profitable origination channel. In January, we locked loans at 400 basis points in revenue in the direct-to-consumer channel, and we have seen margins stabilize around these levels. Ultimately, we expect expenses to be between 250 and 275 basis points, which will drive profit of 125 basis points. We are pleased to report our return to profitability in early 2014.

Finally, we continue to remain laser-focused on recapture, and I continue to challenge our team to maximize our recapture rates north of 50%. And with that, I'd now like to turn the call over to our Chief Financial Officer, Dave Hisey, to discuss our company's financial results. Dave?

David C. Hisey

;

Thanks, Jay. Let's turn to Slide 11 (sic) [13] to discuss the results for the fiscal year. Despite the challenging quarter, the execution of our strategic plan produced another year of strong earnings and year-over-year increases across our key metrics. Our revenue increased significantly year-over-year as a result of the increase in the size of our servicing portfolio and larger origination volumes.

As Jay noted, we focused on maximizing the profits from our existing portfolio, in addition to growing our platform and generating new earning streams through the residential real estate value chain that Jay described. Adjusted EBITDA increased 35% from 2012 levels, and our pretax income from operating expenses was approximately $392 million, which included, over the year, $118 million of ramp and other onetime expenses. This represents a 32% increase year-over-year in adjusted EBITDA. Our pretax income and adjusted EBITDA have grown significantly over the past 5 years as depicted on the charts on the slide. Our success would not be possible without the support of our employees and business partners. We would like to thank each of them for all their contributions in 2013.

Turning to Slide 14. For the fiscal year, we delivered earnings per share of $2.40 or $3.20 pro forma from BofA ramp and other onetime costs incurred during the year. As previously disclosed, for the fourth quarter, we reported a GAAP loss of $0.56 per share and a pro forma loss per share of $0.23. The quarterly loss was primarily due to the challenging origination market, as Jay described, and $51 million in onetime expenses. Originations revenue was down for the quarter due to rising interest rates, a lower level of interest rate locks and higher expenses due to funding out our pipeline from previous periods as we retool the origination segment.

Onetime expenses really were in 3 categories. As we had talked about on our third quarter conference call, we had exited a few servicing facilities and also certain origination businesses. In addition to that, during the period, we boarded over $20 billion of servicing, so we had ramp expenses associated with that. And finally, as we had announced towards the end of the year, our sale of advances to new residential included the write-off of some deferred financing facility fees as those facilities were transferred as well. At the bottom of the slide, we have provided a breakdown of our segment financials for the quarter and a comparison to third quarter consolidated performance.

Let's discuss our earnings guidance as shown on Slide 15. While we cannot control or predict major market changes, we remain focused on executing our strategic and profitability initiatives that Jay just described. We are reiterating our forward earnings guidance for 2014 adjusted EBITDA per share range of $13.50 to $15.00 and earnings per share range of $4.50 to $6.00. Our 2014 EPS profile continues to reflect a greater amount of recurring fee-based earnings which generate long-term cash flows that, ultimately, should carry a higher market multiple.

Turning to Slide 16. Based on our year-end cash balance, the expected proceeds from the remaining new residential advance sales and our cash flow from operations, we expect to produce over $1 billion of investable cash flow in 2014. This cash flow could be used to invest in new opportunities that exceed our investment return thresholds, pay down our corporate debt balances that carry higher interest coupons or return capital to our shareholders.

And now I'll turn it back over to Jay for some closing comments.

Jay Bray

Thank you, Dave. In summary, we remain extremely focused on maximizing value for our shareholders. In servicing, we are committed to executing on our previously outlined profitability initiatives. We've made great progress in 2013, and the team is on the right path for delivering 11 basis points of profitability in 2014. Our acquisition pipeline remains strong, and our best-in-class transfer experience positions us well for our future wins.

We expect our servicing assets to continue to rise in value in a rising rate environment and an overall improving economy. We are very excited about our opportunities to grow Solutionstar into the premier provider of services for the real estate industry. We're extremely focused on executing in the near term on the additional property sales from our recent servicing portfolio acquisitions, and we continue to explore ways to generate additional revenues through diversification of our service offers -- offerings and expanding our third-party business.

We continue to view our origination platform as the most cost-effective and profitable way to acquire servicing assets. Our focus is on our core consumer-direct channel, which continues to generate margins above industry benchmarks. We expect to generate significant cash flow in 2014, which will provide nice optionality for capital management and future investments. And finally, we continue to explore additional ways to profitably grow our business and deliver exceptional value to our customers, shareholders and all our employees.

And with that, I'd like to open up the call for a question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Douglas Harter representing Crédit Suisse.

Douglas Harter - Crédit Suisse AG, Research Division

Wondering if you could touch on the regulatory environment and where we stand. I know you still see an attractive pipeline. Can you talk about your confidence in the ability to sort of get approvals to convert that pipeline into loan -- into boardings?

Jay Bray

Yes. I mean, I think the -- and when you look at the non-bank servicers as a whole, there has been strong growth in that. And I think -- it's always been, a piece of the business and an important part of the business is working with the regulators, and I think our interests are very aligned with the regulators to make sure that transfers go well and the customer experience goes well. And from a Nationstar perspective, we remain very focused on that, and our approach and process has always been to sit down with the regulatory bodies and try to work together to achieve a very positive experience for the customer. So I think the most recent news and intensity around that is a function of kind of the growth in the industry and our continued desire to do more and continue to positively impact customers. So my view is that, well, it's going to be a slower process, like we said on previous calls, from an overall transfer standpoint. We're going to have to work even closer with the regulators and continue to educate them on the success we've had in our processes, and we're highly confident that we are focused on the right things throughout that process and that we'll get the necessary approvals. But again, I think it's going to -- it's clearly going to take more time, and it's clearly going to be a more involved process. But ultimately, we firmly believe that the right thing is to move these portfolios and to let us work to find solutions for customers. That's how we think about it.

Douglas Harter - Crédit Suisse AG, Research Division

Great, Jay. And then just on the CFPB. A couple of your competitors have announced either a settlement with the CFPB or the CFPB is pursuing actions. I guess, do you have any -- I guess what interactions have you had with the CFPB? And kind of where do you stand on that?

Jay Bray

Yes. I think just like our other regulators, state regulators and FHFA, et cetera, we have interaction with the CFPB all the time. And we continue to work with them to outline the processes and procedures and our focus on the customer. But we don't have anything to report around any of those items at Nationstar.

Operator

Your next question comes from the line of Daniel Furtado representing Jefferies.

Daniel Furtado - Jefferies LLC, Research Division

The first question I have is, does the recent announcement from the DFS about potential conflicts of interest with a competitor change your appetite or view on any potential spend of Solutionstar?

Jay Bray

No. I mean, I think a reasonable amount of Solutionstar business today is third-party business. Our view, frankly, is that Solutionstar is a better answer for the customer ultimately because it's providing a better service at market prices, and from our view, we think that, that's the value proposition. And when we look at the different functions that Solutionstar is performing and we look at -- our goal in this is always look at all the parties we're representing, whether it's the investors, the customer, Nationstar shareholders, et cetera, and we think that the things that we're executing within Solutionstar are an advantage and wins for all those different parties. So I think from a spend standpoint, we have a vision for Solutionstar. I think we're on a path to accomplishing that. I think the profitability and the growth in that platform has been good. And I think, ultimately, we do believe that, that entity can be a real power in the real estate sector and provide a lot of strong services to every piece of the sector. And we continue to talk about spend and look at spend, but nothing has been decided there definitively. And we think, right now, we just want to make it better and continue to provide great service and continue to drive the right experience for customers and everyone involved.

David C. Hisey

And I guess, Jay, I'd just add to that, that Solutionstar does have a separate management team for the benefit of enhanced governance and control. And that team would be with the company should anything occur.

Daniel Furtado - Jefferies LLC, Research Division

Understood, great. And then focusing on Solutionstar a little bit. You indicated that you're not currently doing REO sales from GSEs. Are you in the process of potentially getting that approved? And does any potential approval -- I assume that does not factor into the 20,000 unit sales guidance for '14 on Solutionstar.

Jay Bray

That's right. It's not in the 20,000 guidance. That is Nationstar's existing portfolio. And yes, I think we are -- I'm hopeful, cautiously optimistic that we're going to get some third-party wins later in this quarter or early in the second quarter. And we are not only working with the GSEs but other financial institutions and other REO property owners to be their provider in selling properties. So I think we are currently working on all of that. And I think we're making progress, and we've got a few pilots going as well. And so I think we feel good about, ultimately, bringing in third-party business from a number of different folks. I think it's really -- if you step back and think about it, it is a good process for all parties because you are driving a lot of odd balls to the side and you're driving multiple businesses in these properties, which ultimately results in better execution, in our mind. And the other thing I'd say we're doing with Solutionstar -- or really with HomeSearch is starting to provide more services. We now have a functionality where if you would like to finance a property that you're looking at on the website, we can immediately transfer you to a loan officer within the Nationstar, kind of Greenlight family and provide financing for you. And we're starting to get hundreds of leads through that process. So I think there's a lot we can do there.

Operator

Your next question comes from the line of Cheryl Pate representing Morgan Stanley.

Cheryl M. Pate - Morgan Stanley, Research Division

Just wondering if we could talk a little bit on the originations business and your commentary that the business has returned to profitability in the first quarter to date. Can you give us a sense of how quickly you can get to the sort of 250 to 275 basis points of expenses per loan and sort of how we should think of the ramp there over the course of 2014?

Jay Bray

Well, I think we'll get to the 250, 275 in March, which is our internal goal, and I think we're darn close to getting that. And I mean the origination -- I mean, what you experienced there, right, is you had -- you certainly had a bit of rate volatility in the third and fourth quarter, and then we had a large pipeline that we intentionally built to try to help as many new customers from a HARP standpoint. And then when the refinancing volume fell off the map, we were still left with that pipeline and still wanted to make sure that we closed out that pipeline, so we were left with a number of costs associated with that. Now we're, I would say, in the final stages of that, and we've reduced costs accordingly. We've taken out over $15 million expense in the quarter -- quarter-over-quarter already, and we had another reduction a couple of weeks ago. And so we're on that path to hit those numbers, and I think we'll be there late first, early second. But cautiously optimistic, we'll be there next month.

Cheryl M. Pate - Morgan Stanley, Research Division

That's helpful. And then maybe just one on the servicing business and the 11 basis points of core profitability. So I guess, can you just help us understand? It looks to us that the pretax margin goals in the Solutionstar business have come up a little bit in your most recent guidance. But the 11 basis points hasn't changed for the overall target for the year. Are there some other areas that there's maybe less upside than you have previously thought? Or can you help us sort of piece it all together?

Jay Bray

No, I think the -- what we've outlined previously is really still intact. I mean, I think there are things within Solutionstar that we feel like -- we just feel like there's opportunity in that business and there's more upside in that business potentially. But overall, I don't think anything has materially changed in any of the initiatives that we have underway. So I would say there really hasn't been a change there.

Operator

Your next question comes from the line of Bose George representing KBW.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Actually, first just on the origination side. The gain on sale margin numbers was lower. Just curious, mechanically, what happened. Did you just run the charges of exiting the wholesale business through there? Was that what happened?

Jay Bray

Well, I think in the gain on sale what you're seeing -- a few things. The pipeline, Bose, went down pretty materially, right? And so as you know, when we take a lock, that's when we're going to recognize the revenue. And then as the pipeline goes down, you're going to have less revenue flow through that gain on sale line, and so that's a big component. The other component is we did have higher extension costs and other costs flow through the gain on sale. Because as we were closing the pipeline, if we didn't hit the 60 or 90-day turn time, we actually incurred that cost. We didn't pass it on to the consumer. And so we incurred some extension costs in that gain on sale line item as well. So that caused, really, the downward pressure and the volatility associated with that. I think, going forward, you're going to have less of all that, right? I mean, I think the pipeline is going to be, a, more stable; b, you will be achieving that 60-day-plus -- 60- to 75-day turn time and you won't be paying extension costs. So I think that will be the way to think about it going forward.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay, great. And then, actually, switching to Solutionstar. On the -- in terms of the foreclosure sales, the people -- the sort of parties you're approaching, I'm curious. Do they do it internally now or are there -- go to the other competitors? Generally, how do they approach it?

Jay Bray

Yes. I think it's a combination. I mean, I think quite a few of them do it internally, and some of them have relationships with vendors where it's a more traditional process. They're not utilizing all the functionality we have with the auction and some of the other things that we're doing as well. So I think -- so it's generally either internally or they're using third parties in what I would call a more traditional fashion. And again, our value proposition is we believe that we're going to drive higher execution via the HomeSearch site and via some of the other tools that we have. So that's really how we're selling that business.

Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And then actually one last thing. The mix for guidance in terms of origination and servicing, is that about 70-30 for servicing and...

Jay Bray

That's right.

Operator

Your next question comes from the line of Paul Miller representing FBR.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Jay, on Page 7 of the slide deck. I mean, because I think this is the main, I think, point that I think everybody is struggling with. Can you get the 6.4 basis points to 11 basis points? And can you just walk through a little bit on every one of these things? My guess is -- the first one, is it mainly cost cuts and then the legacy improvement? And then can you go a little bit into vendor and other, exactly how you're going to squeeze that out? I mean, is that just better managing the vendors?

Jay Bray

Yes. I mean, the way to think about it, the first one is -- I think there's a couple of things, going, right? It's cost cuts in a sense that you're going to be more efficient with what you have, right? I mean, at the end of the day, how we engage with the customer, providing chat functionality, providing more functionality when they call into the automated voice system, providing -- us being smarter about, okay, what customer needs to go where and if you have an actively engaged customer that's working on a modification, routing them to that single point of contact in a more efficient way. I mean it's all the things, Paul, that you would think -- I mean, there's just -- look, if you look back over the last 4 years, we've grown the platform, we've acquired a lot of servicing and we've done that by adding a lot of people and really not stepping back to take a deep breath and improve every process along the way. Now we have a significant amount of costumers, significant scale, and it's just about constantly working smarter. And it's really getting the employees engaged and how that's going to make -- how you're going to make your life better and the costumers' life better. And for example, in customer service, there may be 3 screens that these guys work on to solve all the customer solutions, right? Well, we're turning that into 1 screen. So it's just -- it's all about -- just think of it -- to me, it's almost like time and motion studies and process improvements. And these guys have done a really good -- I mean, there are tasks around all of these things to drive the savings. And so that's what Harold Lewis is managing to and looking at all those different line items and how do we drive those costs down. So that's what that is. On the vendor, it's really not that complicated. At the end of the day, right, I've spent, whatever, $10 million, $20 million, $30 million worth of vendor last year, and I want more love from that vendor. I mean, we're going to put more -- potentially consolidate more spend with certain vendors, and in return, I want to be able to reap some cost savings. In some cases, we may be using -- in our outsourcing or strategic sourcing, we may be paying by the person. Well, I want to pay by the unit. I mean, there's a lot of different things you can do to influence, if you will, that vendor spend. And candidly, we spent a lot of money in growing the platform. And now there's just -- with the pace of technology changes and the pace of things that are going on in the industry, there's just dollars to be taken out. I mean, yes, it could -- I mean, it can be as simple as consolidating our office supply from 2 vendors to 1 vendor. And so we've done a lot of that, and we'll continue to do a lot of that.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then for your -- your calculation for the 6.4 basis points, correct me if I'm wrong, in the third quarter, there was $17 million of ramp-up expenses? Is that correct?

David C. Hisey

Yes. It's David. It's correct, Paul.

Paul J. Miller - FBR Capital Markets & Co., Research Division

And then, in the fourth quarter, you had $37 million ramp-up expenses, right?

David C. Hisey

Exactly.

Jay Bray

Well -- but it's not really ramp-up expenses, right?

David C. Hisey

Well, there's -- in the third quarter, it's predominantly ramp. In the fourth quarter, as I had mentioned on my remarks, there's really sort of 3 things going on. I think we had mentioned, on our third quarter call, this will happen in the fourth quarter, that we closed some facilities we had a Houston and Indianapolis servicing facility that were closed. So that was a component of that. We also boarded about -- as I said, over $20 billion in servicing, so there was some ramp for that. And then the last item is we had about -- a little over $20 million in deferred costs when we sold the NRZ advances that had to get written off. And so it's really the combination of those items that aggregate up to that $37 million. So there's a couple of things in addition to ramp. There's the shutdown of the facilities at Houston and Indianapolis and then there's the NRZ cost -- the advance sale cost.

Jay Bray

Yes. I really don't think of the $37 million -- I think a small component is ramp, the way we've historically defined ramp. The majority of it, Paul, $20 million-plus, is the write-off of the financing costs that we wrote off as a result of the NRZ advance transaction. And then we closed 2 centers. Again, the closing of 2 centers, right, is an example of the efficiency savings that I just talked about. And so we closed those 2 centers, and the costs associated with that made up a big chunk of that as well. So I would say 75% to 80% of the $37 million is not ramp cost.

Paul J. Miller - FBR Capital Markets & Co., Research Division

But the 6.4 basis points, right, excludes that $37 million, correct?

Jay Bray

That's right.

David C. Hisey

That's correct.

Paul J. Miller - FBR Capital Markets & Co., Research Division

So when you back out the $17 million in the third quarter and you back out the $37 million in the fourth quarter, your servicing margin drops from like 3.6 to 2.6. Is there something in the fourth quarter, just to help us understand it? Is there seasonality that's forcing that to drop? Let's say, why did that drop?

Jay Bray

Are you talking about third to fourth?

Paul J. Miller - FBR Capital Markets & Co., Research Division

Yes, third quarter to fourth quarter. When you take out the 6 -- if you take out the $17 million because you got 6 -- roughly 6 basis points in the third quarter, that excludes $17 million, right? And then the fourth quarter, you excluded $37 million, which I guess the big delta is that $20 million deferred stuff -- costs related to NRZ.

Jay Bray

Yes. I don't think -- I think you're looking at it wrong. I mean, I don't think that's -- actually, that comparison doesn't make a lot of sense to me, because, ultimately -- again, you had $20 million-plus in deferred financing costs that had nothing to do with the core servicing operation, right? And so I think you are thinking about it perhaps the wrong way, in that the $37 million really, truly, is onetime, the $17 million was truly onetime and a big point -- big part of the $37 million was the deferred financing costs and the shutdown of those facilities. So on an apples-to-apples basis, I think there's been tremendous progress, and it's actually up and increased quarter-over-quarter, is the way I think about it.

Paul J. Miller - FBR Capital Markets & Co., Research Division

Okay. I mean, I'll take it off-line, because I really need to understand this.

Operator

Your next question comes from line of Vivek Agrawal representing Wells Fargo Securities.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

I'm just curious. How would your strategy change or shift if the MSR transfers continue to be delayed in '14?

Jay Bray

Well, I think it's kind of like we've talked about in the past, Vivek. I mean, we're -- I think there are many arrows in the quiver, if you will. One is, let's just execute on what we have, right? At the end of the day, you got right at a $400 billion portfolio. And if we execute on the plan that we have outlined, it's a significant earnings engine, a significant cash flow engine, and it provides tremendous shareholder value. So at the core, the executive team and the operators are focused on execution, execution, execution. I think from a growth standpoint, look, we have over 2 million customers. I think there are many things we can do with those customers that we're not doing today. We have the Solutionstar business, where, frankly, I think that has the opportunity to be a real differentiator in the market, and we can grow that business through all the different services that we've talked about. We can grow the business through some acquisitions that we're working on kind of as we speak. And then, really, the good thing, I think, we control our own destiny, frankly. If you look at the origination business, if you look at the flow servicing business, you don't need home runs, right? You frankly need to execute on what you have, you need to execute on your origination and flow servicing plan, and you can sustain this thing and grow it for years to come. I mean, recapture, recapture, recapture is the key, right? If you can increase that recapture, which I think with Greenlight and some functionality that ride into Nationstar, it's a gift that keeps on giving. And so that's how we think about it. And there's just a ton of -- if you think about, ultimately, the real estate market, right? It's a $10 trillion servicing market. And you hear it, time and time again, the banks do not want pieces of their servicing business. And we're going to work like crazy with all the parties involved, the regulators, the institutions, et cetera, to make sure that we get our fair share of those assets. Because I really do believe, fundamentally, we can help the customer, and we're a better home for that asset long term. So that's how we think about it.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

I appreciate that. But I'm assuming that within your guidance, there's some level of transfers baked into that. Is that a fair assumption?

Jay Bray

Yes. But it's kind of like -- there's no whale deals. There's nothing that is even close to what we did last year. So it's kind of incremental singles that we feel good about.

Vivek Agrawal - Wells Fargo Securities, LLC, Research Division

Okay. And then on your locked and application pipeline for January, how much of that is your core consumer direct versus correspondent?

Jay Bray

Probably close to 80% is the consumer direct. I would say 75% to 85%, probably right at the 80% range.

Operator

Your next question comes from the line of Michael Kaye representing Citigroup.

Michael R. Kaye - Citigroup Inc, Research Division

Just one quick question. You talked about potentially returning capital to shareholders as a use of your investable cash. Can you talk about any debt covenant restrictions that could limit that ability?

Jay Bray

Yes. David?

David C. Hisey

Well, we do have -- Michael, we do have some different baskets under our high yield. But there's a good amount of flexibility with these baskets. And so we should be able to -- should we choose, we have the flexibility to do some things.

Jay Bray

Yes. I think, well, look, there's -- obviously, we think there's value in Nationstar shares. And for, really, any publicly-traded company, an official buyback program has to go through kind of programmatic steps. So I don't really want to get into specifics around that at this point. But clearly, we see value in the shares. We're going to have $1 billion of cash to put to work this year, and that will be one of the things that we continue to think about really hard. But -- I mean, I think, first and foremost, we want to delever and we want to retire some higher keep on debt. But returning capital to shareholders is something also that we're spending time on. So it's definitely one of the uses of cash that may make sense as the year unfolds.

Michael R. Kaye - Citigroup Inc, Research Division

Great. Just given the company's pedigree and background, can you just talk about the company's appetite to do some non-QM loans? And how would you manage that risk?

Jay Bray

Yes. I think it's actually a great point, and I think it's something that we're spending more and more time on and have set up a few teams within Nationstar to spend time on and figure out what's the right way to play. I mean on the surface, the logical answers are we can be a servicer for anybody, frankly, that would like to do the non-QM loans. And then from an origination standpoint, I think we'll have to see how the market plays out there and just evaluate it over time. But look, when you look at the demographics in the United States and you look at kind of the opportunity there, we think it's significant. I don't know that we would be first to market on a lot of these things, but I do think we would be a participant in that as it unfolds.

Operator

Ladies and gentlemen, this concludes the time we have for questions on today. I would now like to turn the call back to Jay Bray for closing remarks.

Jay Bray

Thanks, everybody, for joining us, and we'll be available later today for questions. Appreciate your participation. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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