PHH the big winner is this Res cap deal...analyst coments from Briefing...can ayone telll me why?
24-Oct-12 12:18 ET
Ocwen Fincl: Commentary from analyst on OCN win; believes positive for OCN as it can still make money with a $3 bln price tag; positive for WAC; PHH the big winner; NSM loses in the deal (36.64 +0.44)
There were a few questions on why PHH was a winner in the deal. The comments were from a Sterne Agee analyst and likely a follow up to a Barron's story from September 26 discussing similar views (Click here for story).
The general belief, from our understanding is that it is positive for PHH as the high bid for the business shows the valuation for mortgage servicing right. While it can be debated whether or not OCN overpaid for the business, the gain on sale spreads for originators remain extremely attractive moving forward. So this is a positive for upcoming earnings reports from PHH.
There is also the aspect of PHH being a takeover candidate. Tthe ResCap business was generally viewed as the 'last big' potential MSR portfolio up for sale. OCN and NSM have been buying portfolios from banks across the board as the two units scramble to build business via acquisition. Prior to the ResCap deal, OCN had just purchased Wilbur Ross' mortgage servicing business for $750 mln. So, with a lack of deals in the future, there is some speculation that M&A activity will be the next direction for companies.
-- Some quick color on the NSM/OCN impact. NSM was the 'stalking horse' for this bid which means it will be entitled to a break up fee. THe amount is unknown but it is expected to be in the $24-72 mln range. A small consolation prize but still worth noting. WIth the deal OCN is now approx 3x the size of NSM. If NSM had won the auction it would have been of equal size to OCN.
Maybe PHH will be put into play, maybe it won't. These are hardly rational times. Where'e Warren Bluffit, Jamie Dimed In? Good quality mortgage business plus leasing has "The Sage from Omaha" written all over - maybe he's been confused or distracted by the election. 3 moving parts might be too many for JP Morgan. That said they did buy good quality MSR's from MetLife bank.
Satire aside and analyst aside, by now we should see that there are good quality msr's and those belonging to lesser quality and subprime loans. Rescap, OCN, NSM - those are the lesser quality msr's. MetLIfe and PHH higher quality. Apples and Oranges. Prior to Rescap I had read comments to the effect that msr's covering $3 trillion could come up for sale. That may or may not include ResCap. I expect it does not include PHH. A couple of mReits I follow have mentioned the possible future purchase of msr's. So, msr's have obviously become a hot investment class in a declining interest rate environment. Next time Stern supplies another article for Barron's maybe they'll put a little more meat in it.