KB Home, Nationstar Joint Venture Stumbles Out of the Gate










Efforts by Nationstar Mortgage Holdings and KB Home to launch a mortgage lending joint venture in July didn’t go exactly as planned.

“There is never an ideal point in time to launch a transition of this magnitude and there will always be some level of disruption that hinders the home closings in process,” KB Home President and CEO Jeffrey Mezger said Wednesday.

“We anticipated some minor delays. However, we experienced far more paperwork processing and approval issues than we expected with launch,” the CEO told analysts and investors during a conference call to discuss earnings for the company’s fiscal year third-quarter, which ended Aug. 31.

Nationstar Mortgage has been KB Home’s preferred lender since March 2012 and it generally finances 60% of KB Home’s buyers that needed financing. With the joint venture, the homebuilder hopes to increase that capture rate.

The joint venture, Community Home Mortgage, began offering mortgage banking services to the builder’s homebuyers on July 21.

“The initial disruption is now behind us,” Mezger said. “While we have more work to do in fine tuning this new business, we expect a smoother mortgage process within the mortgage venture going forward.”

The Los Angeles-based homebuilder reported pretax income of $1.8 million from its financial services operations in the third quarter, down from $2.4 million a year ago. KB Home attributed the decline mainly to the “transition costs” of launching the joint mortgage venture.

Overall, KB Home reported disappointing results and its stock was down over 5% at the end of trading on Wednesday.

Mezger told the analyst and investors that the housing recovery is continuing. “But the biggest obstacle to a full recovery is the lack of real job and income growth.”

However the CEO said homeownership is a “compelling option” due to rising rental rates. “In a majority of our markets, the out of pocket payments for homeownership are lower than the rental payments for a similar home.”

He stressed that mortgage credit remains tight, particularly for the first time buyers, despite some easing on Federal Housing Administration underwriting.

FHA lenders are willing to finance borrowers with credit scores under 670 to 680, but they “have to put a lot more money down,” Mezger said. But most first-time buyers don’t have the cash to put up a larger down payment.

Meanwhile, the number of potential buyers visiting KB model homes was up 24% in the third quarter from a year ago. “Our traffic levels were elevated throughout the quarter,” Mezger said.

This suggests there is “strengthening interest in homeownership and we think it will propel more sales in the future,” the CEO said.

However, interested buyers are taking their time and will come back five to seven times before they make the home buying decision. “The good ole days are gonewhere you could get what I call a ‘floor pop,'” Mezger said. That’s “where you can actually sell somebody on their first time in.”

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