IPO Preview: Nationstar Mortgage Holdings

Mar. 6.12 | About: Nationstar Mortgage (NSM)

Based in Lewisville, Texas, Nationstar Mortgage Holdings (proposed NSM) scheduled a $300 million IPO with a market capitalization of $1.56 billion for Thursday, March 8, 2012.

NSM is one of five IPOs scheduled for this week (see our IPO calendar).

NSM says a government sponsored enterprise ranked NSM in the top 5 out of over 1,000 approved servicers in foreclosure prevention workouts. So if NSM is in a good business segment you'd expect them to show consistent profits.

NSM did generate a profit of $21 million in 2011, up from a loss of $10 million, only because it made $109 million in gain from mortgages held for sale.

So investors are going to bet that NSM can continue to make lots of money from holding mortgages for sale? That bet does not seem prudent in this troubled economic climate.

Also, half the mortgage servicing market is held by several large banking institutions with lower cost structures, and who aren't held to the same regulatory standards as NSM. In other words, NSM competes with a serious negative cost differential.

NSM can't seem to make money on its basic fee-based business. and operates at a cost disadvantage to its major competitors.

Therefore, we would avoid NSM on its IPO.

NSM is a stand-alone mortgage servicer that competes with banking giants that have important competitive advantages. NSM employs over 2,500 people in the United States and is a licensed servicer in all 50 states.

NSM has been the fastest growing mortgage servicer since 2007 as measured by growth in aggregate unpaid principal balance, having grown 70.2% annually on a compounded basis.

As of December 31, 2011, NSM serviced over 645,000 residential mortgage loans with an aggregate UPB of $106.6 billion (including $7.8 billion of servicing under contract), making it the largest high touch non-bank servicer in the United States.

NSM clients include national and regional banks, government organizations, securitization trusts, private investment funds and other owners of residential mortgage loans and securities.


  • Banks Win Reprieve on Home Equity Loans in Settlement: Mortgages, February 27, 2012 read
  • SunTrust Estimates Possible $120 Million Cost in Mortgage, Foreclosure Settlement, February 27, 2012 read
  • Fed releases bank plans to fix mortgage servicing, February 27, 2012 read

No dividends

NSM characterizes itself as "a preferred partner of many large financial organizations, including government-sponsored enterprises ("GSEs") and other regulated institutions."

In terms of revenue growth visibility, being a partner of GSE's in this economic environment is a negative, not a positive.

Top Performing Preferred Servicing Partner
Through careful monitoring and frequent direct communication with borrowers, NSM's high touch, high-quality servicing model allows NSM to improve loan performance and reduce loan defaults and foreclosures, thereby minimizing credit losses and maximizing cash flows for clients.

In recognition of NSM's performance, as of December 2011, a GSE ranked NSM in the top 5 out of over 1,000 approved servicers in foreclosure prevention workouts.

Unlike competitors that are banks, NSM is subject to state licensing and operational requirements that result in substantial compliance costs.

Because NSM is not a depository institution, it does not benefit from a federal exemption to state mortgage banking, loan servicing or debt collection licensing and regulatory requirements.

NSM must comply with state licensing requirements and varying compliance requirements in all fifty states and the District of Columbia, and NSM is sensitive to regulatory changes that may increase its costs through stricter licensing laws, disclosure laws or increased fees or that may impose conditions to licensing that NSM or NSM's personnel are unable to meet.

In addition, NSM is subject to periodic examinations by state regulators, which can result in refunds to borrowers of certain fees earned by us, and NSM may be required to pay substantial penalties imposed by state regulators due to compliance errors.

Future state legislation and changes in existing regulation may significantly increase NSM compliance costs or reduce the amount of ancillary fees, including late fees, that NSM may charge to borrowers.

This could make NSM's business cost-prohibitive in the affected state or states and could materially affect NSM's business.

Federal and state legislative and agency initiatives in mortgage-backed securities ("MBS") and securitization may adversely affect NSM's financial condition and results of operations.

There are federal and state legislative and agency initiatives that could, once fully implemented, adversely affect NSM's business.

For instance, the risk retention requirement under the Dodd-Frank Act requires securitizers to retain a minimum beneficial interest in MBS they sell through a securitization, absent certain qualified residential mortgage ("QRM") exemptions.

Once implemented, the risk retention requirement may result in higher costs of certain originations operations and impose on NSM additional compliance requirements to meet servicing and originations criteria for QRMs.

Additionally, the amendments to Regulation AB relating to the registration statement required to be filed by ABS issuers recently adopted by the SEC pursuant to the Dodd-Frank Act would increase compliance costs for ABS issuers, which could in turn increase NSM's cost of funding and operations.

Lastly, certain proposed federal legislation would permit borrowers in bankruptcy to restructure mortgage loans secured by primary residences. Bankruptcy courts could, if this legislation is enacted, reduce the principal balance of a mortgage loan that is secured by a lien on mortgaged property, reduce the mortgage interest rate, extend the term to maturity or otherwise modify the terms of a bankrupt borrower's mortgage loan. Any of the foregoing could materially affect NSM's financial condition and results of operations.

Because NSM is required to follow the guidelines of the GSEs (government sponsored enterprises) with which it does business and is not able to negotiate fees with these entities for the purchase of loans, NSM competitors may be able to sell their loans to GSEs on more favorable terms.

Even though NSM currently originates conventional agency and government conforming loans, because NSM previously originated non-prime mortgage loans, NSM believes its is required to pay a higher fee to access the secondary market for selling its loans to GSEs.

NSM believes that because many of its competitors have always originated conventional loans, they are able to sell newly originated loans on more favorable terms than NSM. As a result, these competitors are able to earn higher margins than NSM earns on originated loans, which could materially impact NSM's business.

The FHFA has directed GSEs to align their guidelines for servicing delinquent mortgages they own or guarantee, which can result in monetary incentives for servicers that perform well and penalties for those that do not. In addition, FHFA has directed Fannie Mae to assess compensatory fees against servicers in connection with delinquent loans, foreclosure delays, and other breaches of servicing obligations.

NSM cannot negotiate these terms with the GSEs and they are subject to change at any time. A significant change in these guidelines that has the effect of decreasing NSM fees or requires NSM to expend additional resources in providing mortgage services could decrease NSM revenues or increase NSM costs, which could adversely affect its business, financial condition and results of operations.

Competition to service mortgage loans comes primarily from large commercial banks and savings institutions.

In the mortgage loan originations industry, NSM faces competition in such areas as mortgage loan offerings, rates, fees and customer service. Competition to originate mortgage loans comes primarily from large commercial banks and savings institutions. These financial institutions generally have significantly greater resources and access to capital than NSM, which gives them the benefit of a lower cost of funds.

NSM expects to net $277 million from its IPO. The IPO funds are allocated to working capital, general corporate purposes including servicing acquisitions, which may include acquisitions from one or more affiliates of the underwriters in this offering.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.