Nationstar Shifts Focus to Servicing

*_Correction: Nationstar's sell of its wholesale channel to Stonegate Mortgage coupled with the company's earnings report caused Nationstar's stock price to decline._*

Just as the seasons change, so does the effectiveness of certain segments in the mortgage industry. Mortgage originators and servicing companies are facing the reality of decreasing new loan volumes and the entrance of new players to the industry, forcing them to reassess where the best sources of revenue can be found.

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Recently, Nationstar Mortgage led a slump in stock prices among mortgage-related companies when its stock fell 17 percent on November 7.

""Nationstar is going to have to do some restructuring,"" said Brent Nyitray, director of capital markets for iServe Residential Lending. He explained in a segment on the ""_Mortgage Markets Today_ radio show"":http://bit.ly/1blLyKs that this has always been a bit of a momentum stock that attracts growth investors who sell when there is a decline in earnings. ""The market is going from a momentum/growth story to a basic financial investor story,"" he added.

Following its recent stock decline, Nationstar announced the sale of its wholesale channel, Stonegate Mortgage, which generated $3.26 billion in the first six months of this year.

Some analysts are saying that when the bulk of a company's revenue comes from origination and they sell what seems to be an effective channel of origination, it indicates a coming slowdown in the mortgage market in the next several months.

Nyitray agrees with that prognosis and said that by this action, Nationstar is indicating the one part of its business that is working and will continue to work is servicing. ""In the past, origination and servicing have both been equally profitable,"" Nyitray explained. ""Now they are going to focus for the most part on servicing.""

One important reason origination has deteriorated is that refi loans have declined drastically. ""The Mortgage Bankers Association Refi Index peaked at 5229 in early May and now has actually declined to 1500,"" Nyitray said.

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""When you consider that refis are approximately 65 percent of origination, that's a really big hit. This explains why everyone is experiencing big downturns and why for Nationstar, there doesn't seem to be enough profitability in the wholesale business anymore,"" he said.

Another company affected by the decline is Ocwen Financial, although this company was not so severely impacted because it is mostly a servicer. Originally viewed as a fast growth company, Ocwen recently announced a $500 million buyback, a signal the company is not experiencing much organic growth. ""Growth investors will now hesitate to buy that stock when they hear about the offer of a $5 million buyback,"" Nyitray said.

In the midst of these declines, there are two recent IPOs, Stonegate and CherryHill, whose stock prices since going public are relatively flat. Some wonder if their timing was a bit off.

""Stonegate could not have gone public last year because they were not big enough,"" Nyitray said. ""However, one advantage Stonegate has is that it is really the only pure originator out there. Some investors don't want to invest in servicing.""

Stonegate priced its stock at $16 and it went up to $18. On the other hand, Nyitray believes that CherryHill's stock was overpriced. ""They started out at $20 per share, and now their stock is trading at $17.""

Another reason behind declining originations may be that a lot of people are choosing to rent. ""American homes for rent saw a 9 percent increase in the same time period that all of this decrease occurredâ€"actually the same day,"" Nyitray said. He also predicts rentals will continue to increase, even if interest rates go up.

""The story of the past year will probably be the story going forward,"" Nyitray predicted, ""and that is one of an improving economy."" In terms of origination, he said there is still plenty of opportunity. ""Although home sales have declined in recent years, that number should be going up because of demographics,"" he explained. He believes new construction will make a comeback as the economy improves. ""There is a lot of pent-up demand, and that is going to produce a lot of demand for mortgages,"" he said.

""This is a cyclical business, and although the low-hanging fruit of the refi market is gone, there is still a lot of opportunity with traditional growth and the normal building and selling of homes,"" Nyitray said. ""All in all, that's good for the market.""

*_The Five Star Institute and Capital Markets Today have partnered to create Mortgage Markets Today, an in-depth, formal talk radio resource featuring expert guests, quality topics, and timely insights. The show delves into a vast array of topics ranging from the secondary market to federal compliance standards and real estate and mortgage lending. Investors, lenders, service providers, and all those interested in and affected by mortgage and housing markets can tune in on the web (""radio.thefivestar.com"":http://radio.thefivestar.com) or download on ""iTunes"":http://bit.ly/1hgUinE ._*