Seeking Alpha

Sterne Agee: Investors need to reset expectations for mortgage business

  • "We have two takeaways from the quarter and both are negative," says Sterne Agee of the mortgage finance and servicing sector:
  • 1) The land grab is coming to an end, i.e. the easy money (for servicers) from buying MSRs being unloaded by the banks is about done. While regulators want more MSRs out of the banking system, this must be balanced against the GSEs which may be slowing down the approval process as they question the transfer of servicing rights from banks to nonbanks.
  • 2) HARP margins are down more than expected and the pipeline of future volumes is slowing.
  • Already taking a hit amid disappointing earnings were OCN, NSM, WAC, PMT, WD, and NRZ. "We think it will take two to five days for investors to readjust to the quarter's disappointing news and then investors will need to take a more realistic, long-term view," says the team, which, nevertheless, upgrades Two Harbors (TWO -2.7%) to Buy because of its new mortgage servicing investment.
  • Also of interest are the single-family rental shops, SBY, AMH, ARPI amid Blackstone's successful rental securitization. High leverage combined with this new low cost of funds could make for some "exceptionally high" return on equity.
Comments (9)
  • Stone Fox Capital
    , contributor
    Comments (6263) | Send Message
    thought Sterne was about to be bearish on SBY even trading 20% below NAV, but that last statement actually shows that maybe investors should shift from OCN to SBY.
    8 Nov 2013, 01:42 PM Reply Like
  • Trayjay1
    , contributor
    Comments (82) | Send Message
    OCN missed Q3 estimates bec. of delay in onboarding a $70B MSR portfolio - was not slow growth. If mgt sees slow growth ahead, why offer only a $500M buyback, when they could easily do $1B (maybe they expect to need the cash for MSR buys?)
    8 Nov 2013, 02:37 PM Reply Like
  • Renoira
    , contributor
    Comments (86) | Send Message
    So they're admitting it was a land grab? They're admitting it was easy money? Now it's slowing down? Oh darn, wonder if the thousands of homeless families are as enthusiastic.
    8 Nov 2013, 09:30 PM Reply Like
  • Matthew Mazurczak
    , contributor
    Comments (1092) | Send Message
    WAC NSM and OCN all see hundreds of billions of business closing in the next 2-12 months. Doesn't it make sense that the companies involved in the purchase would know more then analysts? WFC and C are shopping 100B plus of MSRs right now!


    There are still regulations including Dodd frank and Basel 3 to go into effect that will penalize banks for holding MSRs. OCN admits to being in the middle innings but there are still likely 1T of MSRs that will prob trade in the next 1-2 years.


    In the most recent CC OCN says they have a 400B pipeline as does NSM and WAC . They must all be lying.


    10 Nov 2013, 09:10 PM Reply Like
  • Matthew Mazurczak
    , contributor
    Comments (1092) | Send Message
    Stern Agee just started NRZ at buy 3 weeks ago. You can't trust these guys at all. After OCN earnings one analyst says buy any weakness. 2 raise price targets and these bozos are cautious.
    10 Nov 2013, 09:15 PM Reply Like
  • Matthew Mazurczak
    , contributor
    Comments (1092) | Send Message
    Here is the rest of the article.


    We have two takeaways from the quarter and both are negative: 1) the land grab is coming to an end, and it is our assessment that there are arguably two more rounds of servicing transfers (not three), which could push something between $400 billion and $700 billion into the market; and 2) Home Affordable Refinance Program (HARP) margins are down more than expected and while not quantified, the pipeline of future HARP volumes is slowing.


    400-700B and it's slowing? Are you kidding me? 2 more rounds no less. What is slowing down instead of 1T there is 700 B?


    OCN didn't board the loans it has let alone hundreds of billions more!


    These guys are a joke
    10 Nov 2013, 09:20 PM Reply Like
  • Renoira
    , contributor
    Comments (86) | Send Message
    from PMT transcripts: "We acquired two non-performing whole loan pools totaling $930 million in unpaid principal balance; completed PMT’s first jumbo securitization, retaining $366 million of senior, subordinate and I/O securities; acquired PMT’s initial investment in excess servicing spread on mortgage servicing rights acquired by PennyMac Financial; and organically grew our investments in mortgage servicing rights by $43 million."


    "PMT also entered into an agreement to purchase an additional $563 million of non-performing whole loans, which we are expected to settle at the end of November. These recent investments will be purchased using a combination of cash and debt financing. PMT is well-positioned to grow and replenish its investments, producing valuable returns for our shareholders."


    If the land-grab is coming to an end, why are these good investments?


    How is it that rentals, which have a history of being short-term, are now being securitized?
    11 Nov 2013, 12:17 PM Reply Like
  • Matthew Mazurczak
    , contributor
    Comments (1092) | Send Message
    @ Renoria.


    Its not coming to an end. as I mentioned there are over 100B loans being "shopped" by WFC and C currently. They are feeling out the market to see what prices they can get and then I bet they dump more. Banks make less money on these assets as they are hard to manage and can be expense from an employee stand point. Its in their best interest to get rid of these for multiple reasons.


    All told the MSR industry is a 10 Trillion dollar industry.


    JPM has 1000B in servicing rights
    WFC has 1900B in servicing rights
    BAC is down to 500B in servicing rights


    Thats not also including all of the other community banks/regional banks. Lets not forget Basel III starts after the 1st of January and Dodd Frank also penalizes banks for holding MSRs.


    2 more waves from a pessimistic analyst with 700B in value does not sound like slowing to me. These are great investments because as rates rise the CPR (constant pre payment rate) slows and the stream of income goes on longer.


    All of these names are excellent buys right now.
    11 Nov 2013, 01:25 PM Reply Like
  • Matthew Mazurczak
    , contributor
    Comments (1092) | Send Message
    Todays action looks to be proving this also.
    11 Nov 2013, 02:51 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector