THE HEDGEYE EDGE
There are three things NSM needs to do to grow. First, it needs to continue to acquire its share of the outstanding pipeline of servicing assets. We think the risk to execution here is low, as NSM has the infrastructure and backing (Newcastle & Fortress) to be able to execute on significant further volume.
Second, it needs to improve its servicing profit margins. Mortgage servicing is a scale business, and the company will grow its servicing book meaningfully in the coming 12-24 months. As the servicing business grows, we expect to see significant servicing margin improvement.
Third, the company needs to continue to grow its mortgage origination platform. The volume of this business should grow alongside the servicing business; however, one wildcard is gain-on-sale margins. Gain on sale margins depend on factors outside Nationstar’s control, and are currently wider (larger) than their historic norms.
Mean reversion seems like a reasonable assumption, which will put some pressure going forward on this portion of the business, but we think it can be more than offset by volume growth.
INTERMEDIATE TERM (the next 3 months or more)
Over the intermediate term, we expect NSM to announce further portfolio acquisitions and a continued expansion of its mortgage origination platform. Historically, acquisition announcements have been positive catalysts for the stock, and the company has indicated that it has a $300 billion UPB pipeline of acquisitions as of the end of 1Q13.
LONG-TERM (the next 3 years or less)
Over the longer-term, we think banks will continue to sell high-touch, specialty mortgage servicing to a select group of non-bank servicers that includes NSM, OCN and WAC. This industry should remain in a high-growth phase throughout 2013/2014.