--Nationstar has existing deals to add more than $430 billion of servicing rights
--Deal for $10.4 billion in mortgages will be cofunded by Nationstar and Newcastle
--$10.4 billion is less than 1% of Bank of America's mortgage-servicing portfolio
(Adds size of Bank of America's mortgage-servicing portfolio, new details throughout.)
By Andrew R. Johnson and Christian Berthelsen
Nationstar Mortgage Holdings Inc. (NSM) has agreed to acquire servicing rights to $10.4 billion in residential mortgages from Bank of America Corp. (BAC) as the mortgage servicer looks to seize more share from traditional banks scaling back in the business.
The deal is the latest for Nationstar, which already has agreements to add more than $430 billion of mortgage-servicing rights, or MSRs, making it the largest nonbank-mortgage servicer in the U.S. Mainstream lenders have been exiting the servicing business as concerns over new capital requirements, regulatory scrutiny and other factors weigh on banks.
"There continues to be a lot of pressure on financial institutions, a lot of pressure from a regulatory standpoint, from a customer-service standpoint, from a...capital standpoint," Jay Bray, chief executive of Nationstar, said at an investor conference Tuesday. "The financial institutions are looking very hard at reducing their residential exposure and reducing their overall servicing portfolio, and we've been one of the big beneficiaries of that and we think that trend is going to continue."
As a mortgage servicer, Nationstar provides administrative functions on loans held by banks, government organizations, private-investment funds and other owners of mortgage loans and securities. It earns revenue based primarily on the unpaid principal balance of loans serviced.
The servicing business has faced significant pressure since it was discovered in 2010 that several banks had engaged in "robo-signing," in which they signed off on foreclosure proceedings without proper documentation, and other improper practices. This sparked numerous lawsuits by homeowners and investigations by federal and state regulators that led to a $25 billion settlement earlier this year with the five largest U.S. mortgage servicers, which are Bank of America, J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C), Wells Fargo & Co. (WFC) and Ally Financial Inc.
Tuesday, Nationstar said the servicing portfolio being acquired from Bank of America consists entirely of loans in government-sponsored enterprise, or GSE, pools.
Nationstar said it will fund a portion of the purchase price with a $44 million coinvestment by Newcastle Investment Corp. (NCT) that gives Newcastle the right to receive 65% of the monthly cash flow generated by the mortgage-servicing rights. Both Nationstar and Newcastle are partly owned by Fortress Investment Group LLC (FIG), which has been keeping an eye on the mortgage-servicing market. Further financial details weren't disclosed.
The $10.4 billion is based on the unpaid principal balance of the loans underlying the mortgage-servicing rights. The amount represents just under 1% of Bank of America's $1.3 trillion mortgage-servicing portfolio.
But Bank of America values its mortgage-servicing portfolio at $7.6 billion, an amount based on anticipated future revenue and netted against a loan-loss reserve. The deal represents a fraction of Bank of America's total MSR portfolio, though it didn't disclose how much remains on its books.
Bank of America has sold portions of its MSR portfolio in the past from what was once $14.9 billion, as it looks to pare back its mortgage business. The bank is trying to shed "noncore" assets such as loans to people with whom the bank doesn't have an extensive relationship. The deal also helps Bank of America move toward its capitalization goals under the Basel III accord, as MSRs count negatively against the total capital ratio.
The deal has a similar structure to that of a pending deal Nationstar disclosed last month to acquire a significantly larger MSR portfolio from Residential Capital, the mortgage subsidiary of Ally that filed for Chapter 11 bankruptcy May 14. As part of that deal, Nationstar is the "stalking horse" bidder for $374 billion of servicing and subservicing assets. The proposed $2.4 billion deal includes a cash price of $700 million that will be funded partly by Nationstar and Newcastle, which will receive 65% of excess MSRs.
Nationstar said it expects to complete the deal in the fourth quarter.
Nationstar also plans to complete later this month the acquisition of $63 billion of MSRs and other assets of Aurora Bank, which was part of Lehman Brothers Holdings Inc.
While the Bank of America deal is small in comparison, it shows that Nationstar "still feels like they can do other deals and they have capacity to continue to bid," said Donald Fandetti, an analyst with Citi. Still, completing the ResCap deal, which is subject to bankruptcy-court approval and bids from other potential buyers, is key, Fandetti said.
"Financial institutions are struggling still with the housing hangover, and this is a company that actually benefits from those types of issues in addition to Basel and all the other reasons that they're selling MSRs," Fandetti said.
Nationstar's mortgage-servicing portfolio excluding the Aurora Bank and ResCap deals was $103 billion based on unpaid-principal-loan balances.
Shares of Nationstar, which is about 80% owned by Fortress, have risen more than 40% since the company's initial public offering in March. Its shares closed up 1.4% to $19.80 Tuesday.
While most residential-mortgage-loan servicing is concentrated among a few banks, Nationstar is a nonbank servicer, and has said it believes the industry is shifting toward nonbank servicers as banks seek to exit the business, which can be volatile and capital-intensive.
Nationstar's first-quarter revenue increased 89% from a year earlier to $161.7 million. Its profit increased to $50.2 million, or 67 cents a share, from $7.4 million, or 11 cents a share.
"As we've grown the portfolio, the earnings will grow, so each time we acquire a new portfolio it's really like adding a factory or adding another leg to the earnings engine," Mr. Bray said.
-Mia Lamar contributed to this article.
Write to Andrew R. Johnson at firstname.lastname@example.org