After Massive Growth, Nationstar Promises More to Come


Nationstar — a unit of Fortress Investment Group — has put its foot to the floor. The company reported a $36 million quarterly profit on Tuesday, though its immense growth and operational developments greatly overshadowed the dollars and cents of its earnings.

Quarter over quarter, Nationstar’s servicing portfolio jumped from $107 billion to $193 billion. Along with Aurora Loan Services’ $63 billion in loans, it found time to pick up a $10 billion portfolio of Bank of America loans and two reverse mortgage pools of similar size. It won lead position in the bidding on former GMAC mortgage assets, and reached deals to originate loans for KB Homes and accept new production from still unnamed sources.

If all goes as planned, by the end of next year it will be the country’s fourth-biggest servicer, having acquired the $370 billion of servicing in ResCap — and perhaps another $300 billion in servicing from other sources.

“We see a very long runway for growth,” Nationstar Chief Executive Jay Bray said on an earnings call. “Our portfolio is a testament to the hard work of our dedicated employees and the confidence and trust of our partners.”

The company’s expansion is premised on the assumption that a rapidly growing upstart can vastly outperform the major bank and non-bank servicers who have dominated the market since before the mortgage bust.

Analysts say Nationstar’s push has gone well so far.

“They continue to have good performance in most of the metrics, roll rates and things like that,” says Bose George, an analyst covering mortgage servicers for Keefe, Bruyette Woods. “The data suggest they’re doing the right thing.” (Other sections of KBW have provided investment banking services to Nationstar in the past 12 months.)

Investors have noticed. Over just the past three months, the company’s stock has risen 87%, and the company was up 6.5% on the day by early Tuesday afternoon. The other publicly traded nonbank mortgage servicers have also risen sharply in that period, though less so than Nationstar. Fortress Investment Group owns a majority of the company.

Ramping up Nationstar’s business has come with significant costs. It issued $275 million of debt in early April, deploying the money only toward the end of the second quarter. Bray said that to prepare for new acquisitions or any unforeseen hiccups when transferring loans, the company has some 200 more employees than it currently needs.

“Our ability to provide smooth customer transfer experiences has been a key differentiator for Nationstar,” he said. “The primary driver of profitability continues to be servicer performance.”

There are indications that the company’s handling of its portfolio is also serving its own interests. It recaptured 43% of the loans in its portfolio that refinanced over the past quarter.

“I don’t know that anyone is actually better than us at recapturing loans,” Bray said.

How a possible ResCap deal would affect the company was a prominent subject during the earnings call. Nationstar is in a “favorable position” to win the bidding for the compnay’s assets, Bray said, and assuming it does, it will have plenty of time to ramp up its operations.

The company’s expected returns on recent acquisitions have been extraordinarily high, in part because Nationstar has adopted a “capital light” model in which it has sold a portion of the mortgage servicing fees it collects to Newcastle Investment Corp., a Fortress affiliate. Nationstar’s pretax margin was 28% in the second quarter, and it expects a greater than 20% return on new servicing deals.

But while Nationstar has made clear that it views buying ResCap as a vital priority, KBW’s George said it likely will face significant competition for the assets. That might make it difficult for the company to acquire the servicer at a price that would allow the high margins it has recently enjoyed.

“Given that it’s going to be a public auction, it seems like by definition you shouldn’t have really high returns on an asset being purchased in a public auction,” George said.

On the call, Bray said he was confident that Nationstar was well positioned to win ResCap. But the company wouldn’t overpay.

“We will maintain our discipline in the auction process as we pursue this transformational opportunity,” Bray said.


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