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Kyle Bass Makes Contrarian Bet on Nationstar Mortgage

March 18, 2014 | About:
Holly LaFon

Holly LaFon

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Kyle Bass (Trades, Portfolio) of management firm Hayman Advisors often takes large positions in companies facing temporary setbacks or another unusual event but that have potential for future growth. His most recent play involves Nationstar Mortgage Holdings Inc. (NSM), which he recently increased.

Bass on March 13 grew his stake in Nationstar by 338.4%. This involved purchasing 3,673,972 shares which that day cost around $31.27 a share. Bass now controls 5.3% of the company.

He began his Nationstar position in the fourth quarter of 2013, with 1,085,638 shares, which had an average quarterly price of $45 a share. The price year to date has fallen almost 13%, to today’s close at $32.23 a share.

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Nationstar Mortgage is a Texas residential loan servicer, with a $2.91 billion market cap. The company has taken several hits in recent months, including a third quarter earnings report that missed Wall Street estimates, and regulatory scrutiny.

Bass picked up the stock after its price plunged 17% in November on release of its third quarter earnings. Earnings per share results missed expectations at $0.91, with net income of $82 million, compared to $0.61 per share or $55 million for third quarter 2012.

The plot thickened at Nationstar on March 5 when the company received a letter from Benjamin Lawsky, superintendent of the New York Department of Financial Services, questioning its servicing portfolio growth and mortgage servicing practices last year. Lawsky also requested information on the company’s servicing portfolio, staffing levels, business processes, vendors, 2013 mortgage servicing rights (MSR) acquisitions and borrower letters.

In the letter, Lawsky stated that he had received “hundreds” of complaints related to the company’s mortgage practices, such as “mortgage modifications, improper fees and lost paperwork.”

Bass opposes Lawsy’s claims about the company that incited the investigation, telling CNBC on March 14, “I think some of this has to do with his political positioning in the state of New York. And I think that when you look at how effective the non-bank servicers are, when you look at the number of complaints to the number of delinquencies, they’re the best in the business. The banks are the worst in the business. So the answer is yes, they seem to have built the infrastructure to handle this. When you think about New York, you have Nationstar as 2.3 million mortgage loans that they service, of which 90,000 are in New York, of which roughly 11,000 are seriously delinquent. And Lawski claims in his letter that they have received hundreds of complaints. So what he’s saying is he’s received two or three percent of the people that are seriously delinquent are complaining that someone is trying to collect on their mortgage loans. This is a business where there are always going to be complaints if people aren’t paying their loans and if the numbers are in the low, low, low single digits, then that’s just a fact of life.”

In 2013, Nationstar experienced 204% loan originations growth year over year, with revenue of $712, up from $487 million in 2012, and funded $24.0 billion in volume. Net income for the full year was up to $217 million from $205 million in 2012, with a net loss of $50.9 billion in the fourth quarter, compared to net income of $81.89 billion in the same quarter of 2012.

Its core business, servicing, saw fee income increase 77% year over year in the fourth quarter, with a 60-plus-day delinquency rate of 11.9%, down from 14.1% at year-end 2012.

The company services mortgage loans in all 50 states, with a total of 2.3 million serviced at a principal balance of $390.7 million as of Dec. 31, 2013.

Nationstar has a P/E of 13.2, P/B of 3.0 and P/S of 1.66.

Bass' purchase of additional Nationstar shares also moves the position up from his seventh largest portfolio position to his second, behind General Motors (GM) and ahead of Vodafone Group (VOD).

To see Kyle Bass (Trades, Portfolio)’ portfolio, go here. Not a Premium Member of GuruFocus? Try it free for 7 days here!


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