Nationstar Does Well By Doing Better than Big Banks

Nationstar has built its business on the bold premise that it can provide top-notch specialized loan care while expanding at an unprecedented pace. So far, the company appears to be succeeding.

In the year and a half since the Fortress Investment Management-controlled mortgage servicer went public, Nationstar has received high marks from the Federal Housing Finance Agency and the Department of Housing and Urban Development for its handling of government loans. It has also excelled in meeting key servicing metrics, such as preventing borrowers who have missed payments from skipping second ones.

And it has done this while nearly tripling the size of its servicing portfolio in the last fifteen months to more than $200 billion.

The company's seemingly strong results come with an asterisk, however, according to Moody's analyst Warren Kornfeld. He has has downgraded Nationstar's debt rating based on its continued expansion plans. Servicing predecessors, including Fairbanks Capital and Washington Mutual, have stumbled amid rapid buildups. Servicers that are still in business, like American Home Mortgage Servicing, run into trouble expanding in the wake of the housing crisis. Often, such problems exist for months or years before becoming apparent to outsiders.

"We have concerns about the growth of any company, let alone a servicer," says Kornfeld. "The history of very, very rapid growth is not great, but from what we see and what we hear, at this stage there's nothing apparent" that's tripping up Nationstar.

Like other major special servicers, Nationstar started as a subprime shop, giving it experience with troubled loans during the boom years. That didn't necessarily make it a brilliant special servicer, but following the financial crisis, Nationstar invested in the infrastructure to scale up its distressed portfolio, says Chief Executive Officer Jay Bray.

Based outside of Dallas, Nationstar recruits college graduates from local universities and, after training, starts them out in early-stage collections or basic customer service. Gradually, they work up to more challenging projects. The company runs a similar training program for staffers who come on board via acquitions, as it after buying Aurora Loan Services, a former unit of Lehman Brothers.

Behind Nationstar's loss mitigation efforts is a system called Remedy, which it built from scratch. It integrates account data, early delinquency evaluations and a net-present value calculation engine to help determine whether modifications, short sales or foreclosures make the most sense. Nationstar's methods are available to other servicers, Bray says, but it alone appears to have unified the data and analytical tools necessary to decide on the best course of action for delinquent mortgages.

"It's more user friendly than the rest of the world," he says. "What you'll find in a lot of the larger servicers is that they're very compartmentalized."

Nationstar handles all its loans through Remedy. That includes the many thousands it's taken on via its 340 loan acquisition deals over the past four years.

"Our folks would tell you that one of our core competencies is servicing transfers," Bray says.

Any independent evaluation of servicer performance has to come with the caveat that good servicing is difficult to measure. A mediocre servicer that's handed a salvageable portfolio will inevitably outperform an excellent operation handling basket-case loans.

Rating agency reviews of servicers' operations are so uniformly rosy as to be of limited help; despite years of mortgage servicing fiascos, Bank of America is the only one of the top five servicers that S&P rates even as low as "average."

The limited data available so far does suggest that Nationstar is doing well. Under the terms of its agreement with Fannie Mae, it is paid differently than the major banks, with incentives partially tied to metrics like whether it can quickly get delinquent borrowers on the phone.

Its "roll rates" - the percent of delinquent loans that improve - are higher than its peers' and vastly better than some large banks'. According to data Nationstar reports to S&P, its customer service representatives answer calls faster and fewer of its borrowers hang up in frustration than typically the case among the big banks.

Speed may also be Nationstar's greatest asset when attempts to avoid foreclosure fail. The company reported to S&P that it evicts borrowers in an average of 86 days and sells properties in an additional 120 days. That's faster than most servicers for which such data is available.

The company's swift handling of defaults may be as much as an investor could hope for, say industry participants and observers. Spending lots of money and time on delinquent loans is generally considered a losing proposition, and the GSEs don't expect miracles. Nationstar's roll rates are repsectable, though it's fairly average among its non-bank peers.

"The big advantage the special servicers have is that they are preparing for this stuff," says Bose George, a KBW analyst who tracks Nationstar. Unlike major banks, which struggled to deal with a sudden torrent of distressed loans, companies like Nationstar, Green Tree Servicing, and Ocwen Financial have months of lead time to staff up and the financial motivation to do so.

"Especially on the special servicing side, they're being incentivized based on performance," George says. "The big banks clearly don't have the motivation to perform as well."