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More investors in mortgage servicers lost faith in the firms yesterday as quarterly results highlighted their struggles to expand into businesses, control costs and address issues raised by regulators.
Nationstar Mortgage Holdings Inc. plunged a record 22% yesterday, increasing its losses this year to 25%. Walter Investment Management Corp. tumbled 21%, leaving it down 51% in 2014. Ocwen Financial Corp., the largest nonbank servicer, has fallen 61% this year.
The firms, which collectively manage about $1 trillion of home loans, gained Wall Street’s favor after the housing crash by focusing on servicing soured mortgages. Now, their challenge of moving past that receding business is becoming clear as regulators investigate whether the three companies mistreated customers. Ocwen may face settlement costs in New York over its handling of loan modifications, and Walter Investment has put aside money amid investigations in states including California.
“The nonbank servicers have become the next villains in the post-financial-crisis fixation on finding someone to blame,” said Jaret Seiberg, an analyst at Guggenheim Securities in Washington. “All these investigations are creating a much more expensive environment and making it harder for them to make money.”
Nationstar, the No. 2 nonbank servicer, is controlled by Fortress Investment Group LLC. The private-equity and hedge fund manager bought Lewisville, Texas-based Nationstar in 2006, spending about $400 million of equity, and boosted its investment to $849 million in 2007 to shore up the company’s finances when the mortgage market deteriorated. The plummet in Nationstar’s shares yesterday cut the value of Fortress’s 74.5% stake to $1.89 billion from $2.42 billion. Fortress spokesman Gordon Runte didn’t return a call seeking comment.
Nationstar and Tampa, Fla.-based Walter Investment, the third-largest nonbank servicer, have been trying to expand mortgage lending as the business of servicing and modifying bad loans has declined during the housing recovery. Mortgage originations at both firms failed to match the expectations of Keefe Bruyette Woods Inc. analysts led by Bose George.
All three companies also originate loans. Nationstar made $4.1 billion in loans in the third quarter, down from $4.4 billion a year earlier, the company said yesterday. Nationstar’s Solutionstar unit, which provides real-estate services such as appraisals and a website used to auction homes, also failed to match the revenue expectation of analysts.
Nationstar’s per-share earnings fell 26% from a year ago. Analysts expected a gain of 2.8%, according to the average of 15 estimates in a Bloomberg poll. Nationstar said yesterday that it would no longer provide earnings guidance.
The company also faces regulatory scrutiny. On March 5, Benjamin M. Lawsky, head of New York’s Department of Financial Services, requested detailed information about the firm’s servicing performance and staffing after receiving hundreds of complaints from consumers about mortgage modifications, improper fees and lost paperwork.
John Hoffmann, a Nationstar spokesman, declined to comment on Lawsky’s request and yesterday’s share drop.
“We have plenty of flaws and we have things we’re always working to improve on, but we take this very seriously and we have spent a lot of time with regulators,” Chief Executive Officer Jay Bray said on a call with analysts yesterday. “We think we are pretty aligned with what they are focused on.”
The company said it is investing in a feedback portal to track and analyze complaints and is improving its communications with customers.
Nationstar has been expanding by buying mortgage servicing rights. It added $16 billion of rights in the third quarter and will close on another $27 billion by the end of 2015’s first quarter, the company said. That would bring Nationstar’s total to about $405 billion, or close to surpassing Atlanta-based Ocwen as the No. 1 nonbank servicer.
“The fact that Lawsky is allowing Nationstar to do deals it would make me very surprised if he had something waiting in the wings that is going to be negative,” said Benjamin Chittenden, director of equity research at New York-based Oppenheimer Co.
Ocwen, which hasn’t bought any rights since Lawsky blocked its $39 billion deal with Wells Fargo Co. in February, held $411.3 billion in the third quarter. That’s a drop of $53.4 billion from the start of the year from so-called runoff as people paid off mortgages. Banks don’t want to risk a confrontation with Lawsky by selling servicing rights to Ocwen until the matter is settled, Chittenden said.
Lawsky, who has sent Ocwen five letters raising concerns about its practices, revealed last month that the company had backdated thousands of loan modification denial notices. That left borrowers with no time to appeal the decisions.
Ocwen apologized, saying the backdating was an inadvertent software error, and appointed an independent investigator to look into the matter. Ocwen said it has set aside $100 million for possible settlement costs.
Walter Investment, which administers loans through Green Tree Servicing, said revenue fell 25% in the third quarter from a year earlier. The company yesterday lowered its core earnings forecast for 2014 to $5 a share from a range of $5.25 to $6.25.
The company said it faced an “elevated tax rate” after being unable to deduct a writedown to the value of its reverse-mortgage unit in the previous quarter. The firm also recorded a $37.2 million charge related to “legal and regulatory matters” as it disclosed a subpoena from California’s attorney general.
The mortgage servicer “did not see it as out of the ordinary that the information request would come” via a subpoena, Vice Chairman Denmar Dixon said yesterday on the earnings call. “It’s a broad inquiry, and that’s kind of standard for the sector.”
Whitney Finch, a vice president at Walter Investment, declined to comment on yesterday’s share performance.
The subpoena was issued amid an investigation by several states and the Office of the United States Trustee, which have expressed concerns over the firm’s practices including its handling of bankruptcy-related matters. Dixon said his firm is in constant dialog with all the regulators.
“The regulatory costs are increasing not decreasing,” Paul Miller, an FBR Capital Markets analyst, said.