Mba 515 final project final

Final Project: Business Analysis of Nationstar Mortgage Holdings, Inc.

Kelly A. Giambra

MBA 515: Business Environment, Innovation and Entrepreneurship


Southern New Hampshire University

May 15, 2016

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Abstract

This paper discusses a business analysis of Nationstar Mortgage Holdings, Inc.

and the United States (U.S.) mortgage industry. Nationstar Mortgage Holdings Inc. (NSM)

(Nationstar) is one of the largest residential mortgage servicers in the U.S. The Company was

initially founded in 1994 and is headquartered in Lewisville, Texas (About Nationstar, 2016).

Nationstar is a Delaware formed corporation since 2011, and includes wholly-owned subsidiaries

that provide servicing, originations, and transaction based services to single family residences.

(Form 10-K, 2016) The Company maintains a servicing portfolio of approximately $402+

billion with more than 2.5 million customers (About Nationstar, 2016).

Select a market domain such as transportation, healthcare, manufacturing, or the service industry. This selected domain will be your area of focus throughout the MBA program, although you will be able to change if you need to. Begin by evaluating the business environment of the market domain. Then, select a specific company within the market domain. The company you select should be a company where you can envision intrapreneurial and entrepreneurial opportunities, as you will identify and assess these opportunities in this project. Finally, evaluate the trends relevant to the business environment of your company and market domain.

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I. Market Domain Analysis of the U.S. Mortgage Industry

A. Historical Significance and Dramatic Changes Over Time

The U.S. mortgage industry has evolved over time and is significantly different when

compared to the 1930’s Pre-Great Depression era (Green and Wachter, 2005). Mortgages

around that time were often featured with variable interest rates, higher down payments, balloon

payments, and shorter maturity periods of around five to ten years (Green and Wachter, 2005).

During the 19th century, most mortgages did not involve large banks or financial institutions, and

were instead issued by “landowners, neighbors, or small community lenders” (Mosson, 2012). In

addition, borrowers not only had equity needed to refinance, but they could easily sell their

homes if necessary (Green and Wachter, 2005).

During the Great Depression from the periods of 1931 to 1935, there was a decline in

property values which led to a wave of foreclosures when borrowers became unable to sell their

homes (Green and Wachter, 2005). From the periods of 1949 to 1979, the amount of U.S.

mortgage debt increased by roughly 46 percent of household income and proceeded to increase

by 73 percent post 1980 (Green and Wachter, 2005). Alongside this trend, total household

mortgage expenses increased by 15 percent of total household assets in 1949, to 28 percent in

1979, and again to 41 percent in 2001 (Green and Wachter, 2005). This growth in debt had

shaped the market’s shift into securitization.

Securitization is defined as the business practice of pooling and selling subprime loans so

that the investors would not hold onto the interest, also referred to as “mortgage-backed

securities” (MBS) (FCIC, 2011). Securitization involved the Government Sponsored Enterprises

(GSE’s) process of packaging such loans into MBS and then selling the rights to principal and

interest payments to investors in the secondary market (FCIC, 2011). Holders of an MBS have

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the right to receive principal and interest payments from borrowers in the pool held by a trust on

behalf of the investors (FCIC, 2011).These types of loans dominated the mortgage market during

the subprime lending crisis (Mosson, 2012).

B. Historical Factors and the Dissolution of Mortgage Lenders

Inhibiting Factors: The Subprime Lending Crisis and Housing Bubble Burst

A significant inhibiting factor in the U.S. mortgage industry involved the 2007 subprime

mortgage crisis. A subprime mortgage is a type of loan made out to high-risk borrowers with

lower credit scores, who cannot qualify for a conventional loan (Carther, 2009). Subprime

lending was a contributing factor that led to the many notable mortgage companies. In fact, in

2007, Freddie Mac’s CEO Richard Syron had warned of this, stating that home prices “appeared

to be overvalued” and trillions of dollars in home value would eventually be lost (Bianco, 2008).

The subprime lending crisis was also accompanied by the housing bubble burst, which

eventually resulted in high numbers of delinquencies and foreclosures (Carther, 2009).

Subprime lending first began in the years 2003 to 2007, when the government passed

several regulations under the Clinton Administration, Bush Administration, Congress, and

Department of Housing and Urban Development (HUD), making it easier for lower income

consumers to purchase homes (Pritchard, 2014). As a result, GSE’s like Fannie Mae and Freddie

Mac were encouraged to offer more of these types of loans to lower income homebuyers. U.S.

banks and mortgage companies had jumped on the opportunity to solicit subprime loans, and

allowed for risky lending practices with lax proof of income requirements (Pritchard, 2014).

The number of originations from subprime loans increased from 9 percent in 1996 to 20

percent in 2006, with total subprime mortgages amounting to $600 billion in 2006 (Bianco,

2008). These numbers led to a majority of lenders taking numerous risks (Bianco, 2008). U.S.

homeownership rates had also risen from 64 percent to 69.2 percent in the years 1994 to 2004

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(Bianco, 2008). The demand helped to fuel the market, as rising home prices and consumer

spending that led to increased home values. Increased refinances in turn led to rising household

debt which was different than the earlier decades (Bianco, 2008).

When the recession hit in 2007, property values plummeted, and this caused many

subprime borrowers to fall underwater and default on their payments (Bianco, 2008). The

foreclosure crisis mainly involved the subprime market, since the loans carried higher interest

rates then “prime” or conventional loans, making them more difficult to pay off (Mallach, 2009).

By the end of 2006, the housing bubble burst resulted in lenders facing over 15 million in loan

debt (Mallach, 2009). In addition, the foreclosure crisis caused home prices to drop while

lenders began to tighten their credit requirements. In 2006, there were 1.2 million foreclosure

filings in the U.S. and most were subprime loans (Mallach, 2009).

As a result, many mortgage lenders either faced lawsuits or went out of business. For

example, in 2007, Ameriquest was one of the U.S.’s largest subprime lenders who closed its

doors and laid off 3,800 employees (Bianco, 2008). There were also several other mortgage

companies that either closed or downsized operations including: WJ Bradley Mortgage, North

Milwaukee State Bank, Barclays, Ally (GMAC), and Alterna Mortgage (Robertson, 2007).

Many of these companies either filed Chapter 11 bankruptcy or were shut down by the FDIC.

Enabling Factors: Delinquencies and Foreclosures

Create New Business for Mortgage Servicing Companies

The growing number of delinquencies and foreclosures provided an entirely new

paradigm as it enabled new opportunities for mortgage servicing companies. These companies

began to recognize the niche markets surrounding foreclosure prevention. In 2010, several large

banks were sued for deceptive practices by the U.S. Department of Justice (DOJ) in the National

Mortgage Settlement Lawsuit (NSM). The lawsuit resulted in recovery for victims of subprime

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and predatory lending in the amount of 25 billion dollars in 2012 (Elias, 2014). The NSM

involved five of the largest mortgage servicers: Ally Financial, Bank of America, Citigroup, JP

Morgan Chase, and Wells Fargo, all who were sued at both the state and federal level (National

Mortgage, 2014).

Negotiations of the settlement occurred amongst the Office of the Attorney General

(AG), the DOJ, as well as other federal agencies such as the Department of Housing and Urban

Development (HUD). The settlement distributed $2.5 billion dollars to forty-nine (49) states

with California, Florida, Texas, New York, and Illinois receiving the largest percentage of funds

(National Mortgage, 2014). Furthermore, homeowners who lost their properties to foreclosure

between the dates January 1 to December, 31, 2008 were given cash payments (National

Mortgage, 2014). The settlement set aside $3 billion to refinance underwater mortgages for

borrowers (National Mortgage, 2014).

A final result of the settlement required mortgage servicers to offer homeowners

alternatives to foreclosure through various home retention programs. (National Mortgage, 2014).

An approximate $17 billion was reserved for loan modifications, short sales, forbearance

programs, and other programs for qualifying borrowers (National Mortgage, 2014). The

settlement ordered mortgage servicers to restructure and improve policies handling mortgage

loans and foreclosures (National Mortgage, 2014). The settlement also permitted federal and

state governments to proceed with criminal prosecutions for any offenses or violations of fair

lending laws (National Mortgage, 2014).

C. Impact of Factors: Opportunities for Change and Innovation

Mortgage Laws and Regulations That Impact the Business

Prior to the National Mortgage Settlement lawsuit, there were several state and federal

laws passed to help homeowners with subprime mortgages (Rosenbleeth, 2008). A most

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significant part of such legislation was the Mortgage Reform and Anti-Predatory Lending Act of

2007, passed in the U.S. House of Representatives. The law created a licensing requirement for

all mortgage loan originators such as brokers, and set several regulatory standards for all

mortgages (Rosenbleeth, 2008). The law also amended parts of the Truth in Lending Act

(TILA), and amended parts of the Home Ownership Equity Protection Act of 1994 (HOEPA)

(Rosenbleeth, 2008).

HOEPA provides foreclosure prevention by allowing borrowers and their lenders to

modify their mortgages (Bond, Musto, & Yilmaz, 2009). As such, lenders approved by the

Federal Housing Administration (FHA) may refinance borrowers into lower payments through

principal reduction and re-amortization of a new term (Bond, Musto, & Yilmaz, 2009). TILA

mandates that a lender fully disclose costs and benefits of each type of mortgage product and

fully disclose the payment terms of the mortgage (Rosenbleeth, 2008).

Regulations in the Mortgage Reform Act subsequently required lenders to take “duty of

care” when offering loan products to consumers (Rosenbleeth, 2008). The authority to enforce

duty of care is monitored by HUD, the Office of the Comptroller of the Currency (OCC), the

Federal Trade Commission (FTC), and the FDIC (Rosenbleeth, 2008). Title I of the Mortgage

Reform Act prohibits an originator from receiving compensation for steering customers into

unaffordable loans (Rosenbleeth, 2008).If the mortgage company violates any regulations under

Title I or TILA the borrower has a “cause of action” and can sue the lender for civil damages

(Rosenbleeth, 2008). Nevertheless, Title II of the Mortgage Reform Act will set minimum

standards that the secured creditor must make a “good faith” determination in approving the

borrower for a mortgage loan (Rosenbleeth, 2008).

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The Mortgage Forgiveness Debt Relief Act of 2007 was another law passed to prevent

foreclosure as a result of the poor housing market (Rosenbleeth, 2008). This act amended the

Internal Revenue Service (IRS) Code of 1986 to prevent borrower tax penalties from loan

modifications (Rosenbleeth, 2008). The federal law helps families obtain lower principal and

interest payments without facing higher taxes. Additional programs included Bush’s Federal

Housing Administration (FHA) Secure program and the HOPE NOW alliance which consists of

counselors, investors, and lenders who help homeowners in need of assistance (Rosenbleeth,

2008). Each of these programs were designed to help homeowners in ARM loan products who

could not repay once the interest rate reset (Rosenbleeth, 2008).

In 2009, Obama introduced the Making Home Affordable Act (MHA), which helps

homeowners in default with loan modifications or refinance, unemployment forbearance plans,

or short sale and deed-in-lieu of foreclosure options. As a part of MHA, Obama introduced the

Home Affordable Modification Program (HAMP), which is a loan modification program for

eligible borrowers that could possibly reduce their monthly payment to a more affordable

payment. In 2012 and 2013, Obama further announced amendments to the MHA by expanding

eligibility criteria, and extending the application deadline for MHA programs to December 31,

2016 (Making Home, 2015.)

Finally, U.S. Congress and President Obama passed and The Dodd-Frank Wall Street

Reform and Consumer Protection Act of 2010, which established the Consumer Financial

Protection Bureau (CFPB) within the Federal Reserve System (FRS) (Carpenter, 2014). The

CFPB writes rules and passes a numerous federal consumer financial protection laws

(Carpenter, 2014). The CFPB also enforces the laws that regulate banking institutions to ensure

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compliance. Most recently, the CFPB implemented new federal mortgage rules that began in

January 2014 (Carpenter, 2014).

These regulations have helped to provide homeowners shopping for a mortgage, with

better protections from unethical business practices (Mortgage Rules, 2014). The CFPB rules

require banks to limit the amount of servicing fees and provide clear monthly billing statements

to borrowers (Mortgage Rules, 2014). The monthly billing statements are also required to notify

the borrower in advance when the interest rate changes on an ARM mortgage (Mortgage Rules,

2014). Lastly, the CFPB will require servicers to immediately offer workout assistance when

borrowers fall behind on payments (Mortgage Rules, 2014).

Further, in October 2015, the CFPB passed the TILA-RESPA Integrated Disclosures

Rule (TRID), making loan originations increasingly expensive (CFPB, 2015). The new TRID

rules provided an amendment to both TIL/Regulation Z and Regulation X disclosure

requirements that must be issued to borrowers for most mortgage transactions (CFPB, 2015). As

a result, total net gains from loan originations made by banks and servicers decreased by 60% in

the fourth quarter of 2015 from TRID (Swanson, 2016). Originations were reportedly up three

trillion in 2006 and decreased to about 1.1 trillion in 2014, while increasing slightly to 1.2 trillion

in 2015 (Whalen, 2014). Ultimately, it is becoming more expensive for lenders to originate

loans, as sales costs, processing, underwriting, and closing costs are now increasing (Swanson,

2016).

The Mortgage Industry Today Offers New Opportunities for Growth

In the present, the subprime mortgage crisis is dwindling away, however, regulations

continue increase as evidenced by TRID (Whalen, 2013). As a result, many large banks like

JPMorgan Chase, are leaving the lending and servicing business (Whalen, 2013). With large

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banks exiting the industry, non-bank specialty servicers like Nationstar Mortgage Holdings

(NSM) are jumping on opportunities to expand (Pangindian, 2013). Nationstar and Ocwen

Financial (OCM) have recently become major players noted to be “best equipped” when it comes

to servicing distressed assets (Pangindian, 2013). Further, a business practice known as “high-

tech servicing” is now on the horizon (Pangindian, 2013). High-tech servicing is a process that

involves regular and frequent contact with borrowers to prevent loan default and foreclosure

(Pangindian, 2013). Both companies have expanded in portfolio size as they continue to acquire

servicing rights of large pools of loans from banks leaving the servicing business (Pangindian,

2013).

Lastly, non-bank servicers have stepped up to meet the needs of consumers, as the

servicing industry continues to handle remaining distressed assets from the crisis (Whalen,

2013). The supply of Mortgage Servicing Rights (MSR) and distressed assets are one of the

most attractive investment strategies for companies like Nationstar and Ocwen (Whalen, 2013).

As profits from originations continue to decrease, Nationstar has recently innovated a new digital

and mobile service known as Xome in to improve their customer’s home buying experience

(Whalen, 2013). Nevertheless, the challenges remain the regulators such as the CFPB, FHFA,

FHA, the Fed, the OCC, and FDIC, all whom oversee the mortgage industry and approve

distressed loan servicing and MSR transfers (Whalen, 2013).

II. Competitive Readiness of Nationstar Mortgage Holdings, Inc.

A. Internal Factors: SWOT Analysis

Nationstar’s financial portfolio mainly consists of purchased mortgage servicing assets,

subservicing of accounts from other lenders, and loan originations (About Nationstar, 2016).

Their customer base includes various members of the real estate market: homeowners, buyers,

sellers, investors, and realtors (Form 10-K, 2016). The Company’s primary investors consist of

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Government Sponsored Entities (GSEs) like Fannie Mae and Freddie Mac, private label

investors, Ginnie Mae, investors in mortgage servicing rights (MSRs), and clients who hire them

to subservice their accounts (Form 10-K, 2016). As of December 31, 2015, Nationstar is the

largest non-bank servicing company and the fourth largest mortgage servicer in the U.S. (Form

10-K, 2016). Their servicing consists of loan administration, payment processing, escrow

accounts, collecting insurance, home retention and foreclosure prevention, and foreclosures

disposition for the owners of the loans (Form-10K, 2016).

Strengths: Customer Centric Model

Nationstar utilizes a customer centric “high-touch” mortgage servicing model which

helps to improve borrower repayments (About Nationstar, 2016). The Company strongly values

home preservation and main goals are to decrease the number of borrower delinquencies and

defaults on mortgages. The high touch servicing model involves regular and frequent borrower

contact to offer an array of payment assistance and loss mitigation options to struggling

homeowners. This helps to not only preserve assets for its investors and clients, but also

preserves neighborhoods to maintain property values (Form 10-K, 2016).

Strengths: Growing Servicing Portfolio

Nationstar has been gradually increasing its servicing portfolio since 2007 (Form 10-K,

2016). The increase is mainly due to acquisitions of MSRs and mortgage loan originations.

During 2015, the Company continued to incorporate a “capital light strategy”. This strategy uses

less capital by growing their MSR portfolio and selling roughly $4.6 billion in MSRs at market

value, while continuing to retain subservicing rights (Form 10-K, 2016). In addition, last

October 2015, Nationstar acquired a private-label subservicing contract of approximately $55

billion for a top performing financial institution (Form 10-K, 2016). The Company expects a

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large number of loans to board at the beginning of 2016, thus growing the MSR portfolio in 2016

(Form 10-K, 2016).

Strengths: Multiple Sources of Revenue

Nationstar has multiple sources of revenue that may be used to purchase MSR’s in order

to meet their returns with little or no capital (Form 10-K, 2016). Revenues are earned through

servicing fees as “basis points” of the unpaid principal balances of loans and late fees,

modification fees, and incentives (Form-10K, 2016). Revenues from loan originations are earned

through application fees used to cover the costs of processing and underwriting. Nationstar also

maintains licensure in all 50 states to originate its own residential loans through Greenlight

Financial Services (Greenlight) and Nationstar brand (Form 10-K, 2016). Additional revenue

sources include a customer retention focused origination platform, new subservicing clients

(expected to grow in upcoming years), expansion into private label subservicing, and its Xome

high-tech real estate system (Form 10-K, 2016).

Weaknesses: Earnings Are Based On Estimates

Nationstar’s earnings are based on financial models and estimates, especially when

calculating the fair market value of assets such as MSRs (Form 10-K, 2016). If the Company’s

assets are found to be incorrect, it could lead to inaccurate reporting to investors. In determining

the value of MSRs, certain assumptions are made about repayment within pools of mortgage

loans, rates of delinquencies, rates of default, interest rate forecasts, and costs to service the loans

(Form 10-K, 2016). If any of these amounts are inaccurate, or if market rates decrease, it could

decrease the value of certain assets and therefore impact the business (Form 10-K, 2016).

Weaknesses: Substantial Debts

Nationstar has significant debt obligations that may limit necessary financial and

operating activities to fulfill future needs. The Company’s indebtedness require a large part of

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their operating cash flow to pay principal and interest payments and therefore reduce capital

available for other purposes (Form 10-K, 2016). This could make it difficult for Nationstar to

repay debt toward senior notes and subject them to increased vulnerability I n changing interest

rates (Form 10-K, 2016). Furthermore, the failure to repay debts could result in default and the

Company’s filing of bankruptcy.

Weaknesses: Nationstar Services High Risk Loans

Nationstar services higher risk loans which make them more expensive to service when

compared to servicing conventional mortgages (Form 10-K, 2016). The loans are more

expensive because they require frequent interactions with borrowers and a greater degree of

monitoring. In addition, higher risk loans have higher compliance costs which increases

servicing costs. Any changes to the government assistance programs under the Home Affordable

Refinance Program (HARP), the Home Affordable Modification Program (HAMP), the Making

Home Affordable plan (MHA), and other payment programs could negatively impact future

revenues (Form 10-K, 2016).

Weaknesses: Servicing Rights and Contracts May be Terminated

The investors and owners of the loans serviced, as well as the loans subserviced by

Nationstar can be terminated at any time (Form 10-K). The Company must also follow strict

investor guidelines as required by the various GSE’s, FHA, and Ginnie Mae. These investors

reserve the right to terminate Nationstar as a servicer, and also sell the MSRs to another third

party, which could impact profits (Form 10-K, 2016). Nationstar is highly dependent on revenue

from GSEs like Fannie Mae, Freddie Mac, and Ginnie Mae. In addition, Nationstar is frequently

involved in lawsuits, audits, and federal, state, and local government investigations (Form 10-K,

2016).

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Opportunities: Strategic Initiatives

Nationstar has a good strategy in place in order to drive its 2016 business growth. The

Company reported 2015 fourth quarter adjusted earnings of $34 million, driven mostly by

improved profits from servicing and earnings from loan originations (Nationstar Reports, 2016).

Nationstar generated net income in the fourth quarter of $79 million or 73 cents per share and

reported its best annual performance since 2012 (Nationstar Reports, 2016.).Nationstar

additionally has big plans to completely reshape the company and its public image by

introducing a new brand name, “Mr. Cooper” to help connect better to its customers (Nationstar

Reports, 2016). Some key strategies for 2016 will include focusing on multiple segments,

acquiring more MSRs, increasing loan originations, expanding their government portfolio of

FHA and VA loans, and reducing operating costs (Business Wire, 2016).

Opportunities: Improved Housing Market in the U.S.

The improved housing market in the U.S. offers significant opportunities for Nationstar

to increase revenue. According to the National Association of Realtors (NAR), existing home

sales have increased from the adjusted annual rate of 5.45 million in December 2015 to 5.47

million in January 2016, exceeding forecasts (Freddie Mac, 2016). In addition, home price

appreciation showed an 8.2 percent yearly growth rate for existing home sales (Freddie Mac,

2016). This combination of low interest rates and increases in property values are likely to

increase the number of homeowners seeking to refinance in 2016 (Freddie Mac, 2016).

Mortgage rates are expected to remain low allowing for refinancing activity to continue to

increase (Freddie Mac, 2016).

Opportunities: U.S. Economic Growth

Nationstar is expected to benefit from the improved U.S. economy. According to

Bankrate.com, “despite the volatility in financial markets and weaknesses with foreign markets,

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an economic recession is unlikely in the U.S.” (Hamrick, 2016). The Federal Reserve (the Fed)

did propose to increase interest rates, however, it may not occur for at least a few more months

(Hamrick, 2016). The 2016 job market is likely to remain steady with the average monthly

growth in payrolls at 187,000, and no changes to unemployment rates (Amadeo, 2016). The

average annualized GDP will remain at 2.2% in 2016 and 2-3% which is ideal (Hamrick, 2016).

Threats: Increase in Compliance Costs

The compliance costs for Nationstar may continue to grow as the aftermath of the 2008

financial crisis has led to additional regulations. According to the Fed, the increase in compliance

costs in the home mortgage business has made it difficult for lenders to earn profits, thus forcing

them to leave the business (Federal Reserve, 2015). Most specifically, TILA-RESPA Act

requires that mortgage related transactions comply with new rules and also use the new CFPB

disclosure forms under TRID. Further, the new qualified mortgage (QM) loans became effective

in January 2014. As a result, servicers have increased their expenses on process improving

processes, quality assurance, and customer service leading to rising servicing costs (Mortgage

Bankers Association & PwC, 2015). Servicers are also finding it challenging to re-rain staff and

new system resources to comply with these very complex rules (Federal Reserve, 2015).

Threats: Fluctuations in Interest Rates

Fluctuations in interest rates may affect Nationstar’s overall business performance.

According to Freddie Mac and the Primary Mortgage Market Survey, a 30 year fixed-rate

mortgage averaged at 3.71 percent for the week ending March 31, 2016 (Freddie Mac, 2016).

This change is not significant when compared to the previous year where the interest rate

averaged at 3.70 percent (Freddie Mac, 2016). Interest rates play a crucial role with driving

loans, securities, deposit pricing, borrowing costs, loan demand, and default rates (Hayes, 2013.

Rate increases many not only impact Nationstar’s ability to realize gains from the sale of assets,

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but also reduce the number of loan originations (Hayes, 2013). Increasing rates also impact a

borrower’s ability to repay their mortgage debt. This may result in an increase in Nationstar’s

nonperforming assets and reductions in revenue for the Company (Hayes, 2013).

Threats: Changing Mortgage Regulations

Nationstar’s business is regulated by various governmental and regulatory authorities.

Recent changes in these regulations are disrupting the mortgage servicing industry (Accenture,

2014). In January of 2014, the Consumer Financial Protection Bureau (CFPB) passed a new set

of servicing rules that amended Regulation X, RESPA, Regulation Z, and TILA (Accenture,

2014). The Dodd-Frank Act (DFA), also passed new “Qualified Mortgage” rules making

underwriting standards much more difficult for homeowners to qualify for a mortgage (Learner,

2015). Alongside the CFPB rules, investors like Fannie Mae and Freddie Mac have changed

their servicing requirements, to require servicers to respond quickly to delinquent borrowers

(Accenture, 2014). As a result, the changes in policies and regulations may have a negative

impact on Nationstar’s strategies for growth and expansion.

B. External Factors: PEST Analysis

Political Factors and Nationstar

There are several political factors that impact business for non-bank mortgage servicers

like Nationstar and their ability to earn profits. As the Company states in its 2015 Annual

Report, “external factors that may affect our estimates on profits may involve the political

environment and the overall U.S. and world economy (Form 10-K, 2016). Nationstar also

contracts with vendors who have operations in India and the Philippines to reduce servicing costs

(Form 10-K, 2016). As a result, the Company may additionally be adversely impacted by

changes in political or economic stability at the international level.

Political Factors: The Great Depression and Economic Recession

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The events of both the 1930s Great Depression and 2008 economic recession has had a

significant influence on the U.S. mortgage industry over time. For instance, thousands of banks

had failed at the beginning of the Great Depression, damaging both the U.S. housing market and

global economy. In 1932, unemployment rates had increased to 23.6 percent and roughly 25

percent of the country’s mortgage debt was in default (FHFA, 2016). Many blamed the economic

downturns from both crisis on government regulations, automatic stabilizers, and fiscal and

monetary policies (Beattie, 2016).

Indeed, the most recent U.S. housing crisis in 2008 has been frequently compared by

economists to the 1930’s Great Depression. This is because there were similar events when

banks diversified their services to include riskier investments such as real estate (Beattie, 2016).

Political Factors: The U.S. Government

In response and throughout time, the government has responded to the financial crisis

through reformatory action and regulations. For example, in 1933 as a part of the New Deal Act,

Roosevelt introduced the Home Owners’ Loan Act which helped to refinance mortgages to slow

down foreclosure rates. In 1934, the National Housing Act was passed to establish FHA’

federally backed insurance for home mortgages made by FHA lenders (FHFA, 2016). Though

the 2008 financial crisis proved to be much worse than the Great Depression and further

prompted additional reform, as seen with the Bush and Obama Administration in recent years.

These financial crisis are a reminder that as sources of risk change and new risks emerge in the

financial system, regulation and oversight is imperative (Reyes, 2013).

Economic Factors and Nationstar

There are several economic factors that influence Nationstar which may include interest

rates, housing supply and demand, stability, unemployment rates, and credit availability. As

Nationstar, noted in their 2015 Annual Report, “financial statements are prepared based on

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estimates and actual results will vary due to adverse changes in the economy, increased interest

rates, changes in prepayment assumptions, and declines in home prices (Form 10-K, 2015)”.

Therefore, the external conditions in the mortgage industry must be carefully monitored since

they may affect future market changes.

Economic Factors: Interest Rates

Mortgage interest rates are a primary economic factor that drives the purchase and

refinance industry. Rising interest rates are likely to result in more loans closing at the below-

market rates, eventually leading to a loss for lenders (OCC, 2014). Rising interest rates will

reduce a homebuyer’s ability or willingness to take out a mortgage, and higher rates will lease to

a decline in loan originations which impacts company profits (OCC, 2014). Changes in interest

rates may also affect the value of loans and falling interest rates could cause borrowers to pursue

more favorable terms with another company (OCC, 2014). Furthermore, while there are many

factors that drive interest rates, lenders set rates according to market activities of Mortgage

Backed Securities (MBS) (Tanneeru, n.d.).

Economic Factors: Supply and Demand

Supply and demand in the mortgage industry is an additional economic factor that will

drive the business for Nationstar. According to the Company: “real estate markets are subject to

fluctuations, due to factors such as the relative relationship of supply to demand” (Form 10-K,

2016). When there is an over-supply of housing the prices are typically lower while an under-

supply would cause prices to rise. An oversupply in properties, may also have an adverse effect

of property values and a decline in the number of loan originations. Interest rates may also

impact demand because when rates are low, more consumers become interested in mortgage

products. However, low interest rates are attributed to low demand as rates will decrease during

this time.

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Economic Factors: The U.S. Housing Market

The upcoming 2016 housing market is expected to improve since rising incomes and job

growth are expected to have a positive impact on home sales (Searcey, 2015). The NAR reported

existing home sales are forecasted to expand due to supply, buyer demand, and steady economic

growth (Desanctis, 2016). Overall, analysts have reported that the market is showing signs of a

turnaround, as renters find ways to enter the mortgage market (Searcey, 2015). Economists are

also predicting that home buying will continue to rise as long as the economy keeps growing and

unemployment continues to fall (Searcey, 2015). Moreover, income is a key driver of demand in

the housing market because the higher the level of aggregate or consumer income, the greater the

demand for housing.

Social Factors and Nationstar

As of December 31, 2015, Nationstar services 2.5 million homeowners throughout the

U.S. (Form 10-K, 2016). Thus, current social factors that impact the Company may include the

challenges of U.S. homeownership, changing demographics, foreclosure prevention, mortgage

affordability, and community preservation.

Social Factors: U.S. Homeownership

Recent studies have shown that U.S. Homeownership has become inaccessible for many

due to the rising cost of rent, leaving the lower and middle class with less income to purchase a

home (Searcy, 2015). Alongside this trend, fewer borrowers have been able to qualify for

mortgages and this includes all age backgrounds (Searcy, 2015). Under the CFPB’s new

Qualified Mortgage rule, the maximum debt to income (DTI) needed to qualify for a loan is 43

percent. However, only 36 percent of renters could afford a 30 year fixed rate mortgage,

assuming a 5 percent down payment on a median priced home in their neighborhood (JCHS,

2015).

19


Social Factors: Changing Demographics

Changing demographics in the U.S. has created a major shift in housing trends. For

instance, populations are now shifting toward an increased number of minorities in most new

households (JCHS, 2015). However, minority populations have been historically known for

having lower income, fewer assets, and lower credit scores, thus leaving them less able to qualify

for a mortgage (Searcey, 2015). In addition, a recent 2015 report released by Zillow, found that

more than 25 percent of African American loan applications are denied, compared to 10 percent

of white Americans (Press Releases, 2015). Less than half of Hispanics and African Americans

were found to own their own homes, compared to three-fourths of whites (Press Releases, 2015).

These social factors place mortgage lenders at risk of litigation and negative publicity likely to

have a negative impact on business (SASB, 2014).

Social Factors: Discrimination

There have been a number of lawsuits filed against lenders due discrimination involving

African American and Hispanic borrowers. One recently included a 2013 complaint that was

filed by the CFPB and DOJ for charging higher mortgage to African American and Hispanic

borrowers who had similar credit as white borrowers (SASB, 2014). In 2012, Wells Fargo Bank

was also sued and settled a 175 million dollar lawsuit for allegations of similar discriminatory

practices (SASB, 2014). Thus, as the current social environment continues to evolve, mortgage

companies must demonstrate fair and responsible lending to restore social value and contribute

to higher levels of home ownership in the U.S. (SASB, 2014).

Social Factors: Foreclosure Prevention

Foreclosure prevention events have led to a decline in U.S. default and foreclosure rates.

Throughout the media, there have been many articles about the stress and trauma faced by

homeowners after losing their homes to foreclosure (Rossi, 2010). Negative attitudes toward

20


lenders have also prompted some borrowers to walk away from their properties to avoid the

stigma associated with foreclosure (Rossi, 2010). Moreover, a 2008 study conducted by

TransUnion, found that borrowers are more likely to prioritize credit card payments as opposed

to paying their mortgage (Rossi, 2010). These factors help to provide insight toward behavioral

trends and delinquency rates on mortgages (Rossi, 2010). Such information is important to

Nationstar when it comes to strategic planning in servicing delinquent accounts.

Technological Factors and Nationstar

Technological factors may consist of how Nationstar uses the internet, online services,

and advancement with computer systems to improve business. Technological factors may also

consider how generations can shift thus changing their technical expectations from businesses.

Such information Technology (IT), has become increasingly important in facilitating mortgage

servicing operations. As Nationstar’s chief marketing officer, Dahlstrom reported, “if there’s

any industry that’s old school and old fashioned, it’s mortgage, so we’re trying to think of

ourselves as a consumer product company that embraces technology”, (Cowan, 2016).

Technological Factors: Increased Spending

Subsequently, mortgage technology has changed over the years thus prompting servicers

like Nationstar to increase spending on new technology. Technology is important for the health

of the industry because good systems and internal controls lead to operational efficiency

(Lebowitz, n.d.). Furthermore, with new regulations under the CFPB and TRID, the costs of

servicing a mortgage is becoming more expensive. In 2013, the cost for lenders to service

delinquent mortgages averaged $2,300 per loan per year, nearly five times the cost in 2008

(Light, 2013).

Technological Factors: The Internet and Automation

21


The internet and automation have become being prevalent in the mortgage servicing

industry in recent years (Lebowitz, n.d.). Nationstar has responded to this by advancing their

computer systems though automation and programs that improve productivity (Form 10-K,

2016). The Company has implemented new technology to improve the speed in processing a

loan, posting payments, answering consumer questions, and issuing reports to management

(Citrix, 2016).,. Mortgage servicers must invest in this technology to improve their service level

to borrowers, bankers, and investors which provides a competitive advantage (Lebowitz, n.d.).

Technological Factors: New Business Lines

Thus, in 2015 Nationstar revealed its new “swipe and click” website and mobile app

called “Xome” (Form 10-K, 2016). Xome technology allows for homebuyers to conveniently

search property listings, select a real estate agent, and apply for a mortgage through a dashboard

(Form 10-K, 2016). Additionally, Nationstar conducted recent consumer research prompting the

launch of their new business line “Mr. Cooper”, to be seen in 2016 (Cowan, 2016). The

Company spent about 5 million on the branding in hopes that the innovation leads to a new ethos

of “personal, customer-focused and easily navigable online service” (Cowan, 2016).

Technological Factors: Risks from Rapid Growth

Nationstar recently experienced rapid growth from several mergers and acquisitions over

the past few years (Citrix, 2014). This level of growth can put a strain on an IT infrastructure and

put customers at risk of privacy breaches. Such growth without enough systems in place may

also make it difficult to meet servicing level agreements and handle the new customers (Citrix,

2014). If systems are not in place to handle large loan volumes, it could subject the company to

loss of revenues, lower numbers of originations, and security breaches. Nationstar has responded

by investing in better IT security to provide the tools and oversight needed for disaster recovery,

data loss prevention, and regulatory compliance (Citrix, 2016).

22


III. Opportunities and Trends: Intrapreneurial and Entrepreneurial Opportunities

A. Intrapreneurial Opportunities for Nationstar Mortgage Holdings, Inc.

Nationstar actively engages in intrapreneurial activities at both the individual employee

level and at team level when it comes to new business lines. According to the Company: “We are

blessed with an incredible culture that promotes innovation, enthusiasm, and passion (About

Nationstar, 2015)”. The Company offers several programs including the “Artists in Residence”

program, “Community Outreach Team”, “Random Acts of Kindness” project, and participation

in “Habitat for Humanity” (About Nationstar, 2015). Furthermore, since Nationstar is focused on

keeping people in their homes, they continue to develop business lines and volunteering

opportunities that help others, while making their team even stronger.

Nationstar earns revenue through the quality delivery of loan servicing, originations, and

mortgage transactions to mostly single family residences throughout the United States (U.S.)

(About Nationstar, 2015). The Company provides services to homeowners, home buyers,

sellers, investors, and other real estate players (About Nationstar, 2015). Because Nationstar is

focused on preserving homeownership, expanding its already existing Community Outreach

business line to underserved borrowers would fulfill this objective further. As a servicer of high

risk loans, a significant increase in delinquencies could have a significant impact on revenues,

expenses, liquidity, and on the valuation of our MSRs as follows (Form 10-K, 2015).

B. Intrapreneurial Assessment: Expansion of Community Outreach to Underserved States

Though the number of delinquencies and foreclosures has declined over recent years,

foreclosure prevention activities continue to remain a primary need in many local communities

(Treasury, 2013). In addition, the mortgage industry has drastically changed since the 2008

financial crisis thus leading to increased public interest in models of that more consumer focused

23


and value based while minimizing risk and maintaining capital gain (Accenture, 2013). At the

beginning of the financial crisis, industry business models were focused mainly on collecting

mortgage payments for investors instead of customer service to homeowners in need of

assistance (Treasury, 2013).

However since 2009, business models shifted toward helping homeowners avoid

foreclosure when Obama launched the Making Home Affordable (MHA) program (Treasury,

2013). At that point servicers were provided with both a structured framework and financial

incentives to encourage modifications (Treasury, 2013). Recent data shows evidence of a need

for mortgage lenders to focus on community outreach to underserved states. In fact, a 2015

oversight review by the federal inspector general of the Troubled Asset Relief Program (TARP),

reported that the U.S. Treasury has done far too little to help troubled homeowners in certain

states (Mantel, 2015).

In the latest TARP quarterly report to Congress, the federal inspector called for the

Treasury to step up its outreach efforts in states where homeowners were underserved to increase

participation in the Home Affordable Modification Program (HAMP) (Prevost, 2015). Therefore,

since Nationstar services all 50 states, an intrapreneurial opportunity exists to expand outreach to

these distressed areas. It has also been found that communication between servicers and

homeowners applying for assistance improves proactive outreach to newly delinquent

homeowners and in resolving borrower complaints (Treasury, 2013). Thus, the Treasury issued

several requirements for servicers like Nationstar who participate in MHA-HAMP (Treasury,

2013). Part of the requirements are for servicers to provide each distressed homeowner with a

Single Point of Contact (SPOC) to help with foreclosure prevention options (Treasury, 2013).

Benefits of Community Outreach in Minimizing Delinquencies and Foreclosures

24


Expanding outreach to underserved states would mainly benefit Nationstar’s ability to

preserve assets for its investors by saving more homes from foreclosure. These underserved

states also present opportunities for Nationstar to find more struggling homeowners to apply for

assistance programs under MHA including HAMP. In addition, community outreach benefits the

customer service relationship through improved communication, while complying with

regulations (Treasury, 2013). To date, only 1.5 million homeowners received HAMP

modifications which is half of what was expected by the Treasury (Prevost, 2015). As a result,

the government called for improve its outreach especially to states that have been underserved by

the program (Prevost, 2015). Specifically, more outreach is needed in states such as Alaska,

Arkansas, Indiana, Iowa, Kansas, Michigan, North Dakota, Oklahoma, Tennessee and Texas

(Prevost, 2015).

Nationstar is considered a nonbank specialty servicer whom a significant part of its

business focuses on servicing delinquent or defaulted loans (Lee, 2014). Though large banks

still control most of the mortgage servicing, nonbanks have been rapidly expanding, This has led

to concerns raised by the Federal Housing Finance Agency (FHFA), especially with the three

fastest growing non-banks Ocwen, Nationstar, and Walter Investment (Lee, 2014). Specifically,

these three companies have been targeted by the FHFA out of concern that rapid growth has led

them to become ill equipped in adequately serving distressed borrowers (Lee, 2014). Thus, an

additional benefit of Nationstar’s expansion of community outreach services is the improvement

of both proactivity and level of compliance with regulatory directives.

Furthermore, recent data on loan modification approvals has indicated that between 2009

and 2014, both Ocwen and Nationstar approved fewer of these programs than the largest banks

25


(Lee, 2014). Whereas, “Bank of America, CitiMortgage, JPMorgan Chase, and Wells Fargo had

higher approval rates of 43 percent, 44 percent, 29 percent, and 30 percent, respectively (Lee,

2014)”. In addition, despite a positive housing outlook for 2015, there are still millions of

homeowners whom are non-responsive to lenders and in danger of foreclosure (Griffin, 2015).

There are also over three million Home Equity Lines of Credit (HELOCS) with interest rates due

to reset over the next few years on underwater homes. This could lead to new wave of mortgage

defaults in the near future (Griffin, 2015). As a result, outreach expansion would benefit

Nationstar’s overall performance in these areas.

Nationstar Mortgage Holdings, Inc.: Level of Effort

And Resources Needed for Mortgage Outreach Expansion

One of the most important lessons of servicers in recent years is proactivity has been

extremely effective in reducing default rates and establishing good rapport with consumers

(Barnard, 2014). Nationstar already maintains the business analysts and workforce needed to

improve its outreach services to its borrowers. Thus, costs to expand outreach are likely to be

minimum. In essence, improved outreach services are likely to improve loan performance and

reduce foreclosure (Barnard, 2014). Therefore the costs would outweigh the benefits.

Nationstar would need to expand marketing activities to underserved areas in offering

foreclosure alternatives. Such activities may include efforts toward borrowers who have refused

to communicate with Nationstar in the past due to anger, fear, and embarrassment (Barnard,

2014). Hence the goal of increased marketing should emphasize on making borrowers feel more

comfortable contacting their servicer when they need homeowner assistance. Nationstar must be

able to effectively drive the message that they are there to help borrowers to keep their homes as

opposed to accelerate the foreclosure process (Barnard, 2014).

26


In addition, Nationstar can utilize internet based communication, email, text messaging

and social media to advertise foreclosure prevention services while targeting underserved states.

Furthermore, offering borrower incentives like $15 dollar gift cards if borrowers qualify for a

modification, or waiving past due interest, and forgiving part of the principal are additional

strategies that may be utilized (Barnard, 2014). Proactive outreach can also be improved by

printing messages on billing statements alerting borrowers that if they have a problem, there are

options for help (Barnard, 2014).

Some costs of outreach activities may be compensated by investors. For instance,

investors like Fannie Mae, Freddie Mac, and FHA will compensate their servicer for outreach

services because they are a part of their service level agreements (Barnard, 2014). However,

some private investors may not offer the same compensation. On the downside, servicing costs

are going up so Nationstar may utilize alternative resources through partnerships and alliances.

Nationstar may expand outreach to underserved areas through partnerships with states and local

communities (Griffin, 2015). Nationstar currently maintains alliances with counselors, mortgage

companies, and other market participants (Nationstar Mortgage, 2014).

Nationstar has initially started its Community Outreach Team in May of 2013, creating

an infrastructure for partner relationships, government funding, the Hope Loan Port, and social

media (Nationstar Mortgage, 2014). The Hope Loan Port is a component of the HOPE NOW

alliance which Nationstar actively participates in (Nationstar Mortgage, 2014). HOPE NOW was

formed in 2007 and is an alliance between counselors, mortgage companies, and investors that

helps maximize outreach efforts to help homeowners in distress (Nationstar Mortgage, 2014).

27


With its alignment, Nationstar can expand on actively participating in HOPE NOW events

offered in underserved areas, and meet face to face with clients in these communities.

Last, Nationstar may continue to utilize resources through HUD approved housing

counselors and non-profit housing assistance agencies (Griffin, 2015). These resources are an

important link to connecting borrowers to Nationstar and strengthening relationships with

distressed homeowners. As Nationstar stated “Few would argue that the consumer mortgage

experience is broken, and it’s time for someone to challenge convention and status quo in the

industry,” So mortgage outreach to underserved states would be advantageous in further

improving the customer experience.

References:

C. Entrepreneurial Opportunities: Develop a list of entrepreneurial opportunities outside the confines of the company you selected. Each opportunity in your list should have supporting rationale based on your market domain evaluation and PEST analysis.

D. Entrepreneurial Assessment: Select one entrepreneurial opportunity from your list to assess. How viable is the opportunity? Your response should be supported with evidence from your market domain evaluation and PEST analysis. E. Trends: Evaluate key trends affecting the global business environment of your selected market domain. These could be geographic, political, or societal trends, or they could be trends specific to your market domain. F. Impact on Opportunities: Determine how these trends will impact the development of your selected intrapreneurial and entrepreneurial opportunities. G. Impact on Sustainability: Determine how these trends will affect the sustainability of your selected company. Which trends could be used to improve sustainable business operations?

Nationstar Mortgage Holdings, Inc.: Entrepreneurial Opportunities

Nationstar Mortgage Holdings, Inc. (Nationstar) is not only the second largest servicer of

subprime mortgages, but also one of the mortgage industry’s fastest growing players. The

Company earns revenue through the quality delivery of loan servicing, originations, and

mortgage transactions to mostly single family residences throughout the United States (U.S.)

28


(About Nationstar, 2015). Nationstar provides services to homeowners, home buyers, sellers,

investors, and other real estate players (About Nationstar, 2015). In addition, the Company is a

servicer of high risk loans consisting of delinquent accounts and foreclosures (Form 10-K, 2015).

Nationstar has innovated its business growth through various intrepreneurial and

entrepreneurial opportunities that became available in recent years when many large banks exited

the industry. However, the first quarter 2016 earnings are showing a 53 cent per share loss due

to falling revenue of 15 percent to 382 million and the third consecutive quarterly miss (Gara,

2016). The Company CEO, Jay Bray, attributes the loss to spending on opportunities within the

servicing transfer market and spending on new real estate technology (Gara, 2016). Nationstar

has also recently invested in its newly created Xome platform and the “Mr. Cooper” brand line.

Entrepreneurial Opportunities in the Mortgage Industry

The 2008 mortgage meltdown had previously caused limited access to secondary markets

required for lenders to be able to make new mortgages, leaving the industry with fewer

opportunities (Connor, 2013). In a recent article in Forbes, it was mentioned that several

“lessons in entrepreneurship” emerged from the 2008 mortgage crisis (Connor, 2013). The article

stresses the importance of lenders being able to think and act entrepreneurially to adjust business

for survival in a volatile industry (Connor, 2013). Thus, recognizing the industry’s current

entrepreneurial opportunities, is imperative to thrive in upcoming years. The projected market for

2016, consists of a widespread shift from foreclosure and loss mitigation, to the strengthening of

business lines that cater to the improving real estate market (Delgado, 2016).

In light of this, the following potential entrepreneurial opportunities are relevant to

Nationstar and the 2016 mortgage industry:

Paperless Mortgages and “eClosing” Documents

29


Electronic Closing (“e-closing”) and Electronic Mortgages (“e-mortgages) are the

processes by which an entire mortgage transaction uses technology for the consumer’s review,

application, and signing of loan documents electronically (CFPB, 2014). The main difference

between this and traditional mortgages are that documents are sent via electronic format such as

PDF, HTML, or TIFF, as opposed to standard paper documents. The usage of “eDelivery”

allows for documents to be sent to the consumer through either a secured email or online portal

within a vendor platform. The consumer may then sign documents electronically instead of

using ink signatures. Mortgages lenders also benefit from e-mortgages through reduced costs,

increased efficiency, reduced operational errors, and improved data quality (CFPB, 2014).

Alternative Mortgage Lending Options

With many of the larger banks now exiting a majority of the mortgage business,

consumers have been seeking mortgages through alternative lending sources. For instance, new

key players have included non-bank lenders like Nationstar, marketplaces, brokers, and online

mortgage lending (Bundrick, 2016). Market places such as Lendingtree, Zillow, and eLoan, also

provide for new opportunities to generate the leads needed for originations. Whereas, mortgage

brokers have entered the market to serve as the middle man between the consumer and lender to

complete the loan package. Alternative lending options are a rising trend in the mortgage

industry as evidenced by the growth of Quicken Loans who is now the second largest lender in

the U.S. (Bundrick, 2016). Quicken Loans recently launched their “Rocket Mortgage” service

which offers mortgage approvals online within the matter of minutes (Bundrick, 2016).

Struggling Homeowners in Underserved States

It has been reported by the Treasury that to date, only 1.5 million homeowners received

HAMP modifications which is half of what was predicted (Prevost, 2015). As a result, the

30


government called for improvement of its outreach especially to states that have been

underserved by the program (Prevost, 2015). Specifically, more outreach is needed in states such

as Alaska, Arkansas, Indiana, Iowa, Kansas, Michigan, North Dakota, Oklahoma, Tennessee and

Texas (Prevost, 2015). Expanding outreach to underserved states is an opportunity for Nationstar

to preserve assets for its investors by saving more homes from foreclosure. These underserved

states also present opportunities for Nationstar to find more struggling homeowners to apply for

assistance programs under MHA including HAMP. In addition, community outreach benefits the

customer service relationship through improved communication, while complying with

regulations (Treasury, 2013).

Technological Advancement in the Mortgage Industry

There have been several recent and emerging technological opportunities for Nationstar

and the mortgage industry. With new regulations and a changing economy, the upcoming trends

in 2016 technology will reshape the mortgage business. Automation in 2016 is expected to

advance the mortgage industry’s productivity, integrity, and deliverability (PWC, 2016).

Automation allows for checks and verifications of borrower data in real-time throughout the loan

process to help streamline the process for the consumer (PWC, 2016). The automated

verification process can speed up the origination process by improving timeliness of mortgage

approvals. In addition, online mortgage offers, direct-to-consumer, and self-servicing driven by

refinances are additional opportunities for 2016. Online offerings can cater to the self-service

consumer by using search engine marketing, lead acquisitions, and operating loan officer and

call center platforms.

Nationwide Mortgage Holdings, Inc.: Entrepreneurial Assessment

31


The current opportunities in the mortgage industry present many options for Nationstar to

continue to innovate the technological development of their mortgage services. Implementation

of these up and coming high-tech and paperless mortgages present a viable entrepreneurial

opportunity for the Company to increase profits. In October 2015, Nationstar already

launched its new Xome interface to help specifically with their purchase market.

Xome is a digitalized platform that assists the consumer with the real estate

buying experience from start finish (About Xome, 2015). As Xome mentions on

their website: “We believe that the process of buying/selling a home shouldn’t

undermine the excitement of home ownership” (About Xome, 2015).

Thus, Xome is expected to help make the home-buying process more

transparent through the usage of app messaging, dashboards, and real-time

status updates (About Xome, 2015). It also offers access to agents and various

services to buyers and sellers. The system additionally includes a listing service

for properties available for sale or rent, while also serving as a “one stop”

shopping service (About Xome, 2015). Homebuyers are now able to browse

everything from selecting a real estate agent and applying for a mortgage, to

tracking the status of a purchase through their online dashboard (About Xome,

2015). Ultimately, the advantage of Xome over competitors is that it allow

consumers to save money. In fact, customers who use their service are likely to

earn 1% commission from the sale and purchase of a home, saving up to $8,000

on the transaction (About Xome, 2016).

However, since the Xome program mainly caters to the purchase market,

Nationstar must continue to develop technology that not only extends to online

refinances and loan modifications but an entirely paperless process. Nationstar

32


already has plans to innovate through its new brand name “Mr. Cooper”, which

will expand its traditional mortgage lending into a foundation for these newer,

higher tech mortgages. Since the mortgage business has always been form and

paper intensive, developing a paperless system will allow for even more

advantages over competitors (Orchestrate, 2016).

Furthermore, the ideal mortgage system under the Dodd-Frank and Wall Street

Reform Act is a system that is electronic, automated, and built for speed (Orchestrate, 2016). An

error-free system that includes, underwriting, efficient processing; and a system that delivers a

“repeatable, commoditized process” will ensure compliance with these latest reforms

(Orchestrate, 2016). Increasingly, mortgage related technologies are allowing for the

communicating and exchange of information online, making it faster when compared to printing

and mailing of all forms and documents (Orchestrate, 2016).

Key Trends Affecting Technology and Paperless Transactions in the Mortgage Industry

Technology and paperless transactions are the future of mortgage lending and

entrepreneurship for the industry in 2016. Hence, Nationstar has an opportunity to innovate into

these more high tech mortgage services to accompany its already existing Xome platform. In

2016, online servicing will take over virtually every step in the mortgage transaction process

from application to closing (Ingall, 2016). In the upcoming years, more consumers are likely to

shop for mortgages and refinances from their mobile devices. Self-servicing will be an

additional trend for mortgage services, and this is likely to lead to more automation in the

mortgage process (Ingall, 2016).

The traditional mortgage process is expected to phase out in upcoming years, as the

industry continues to shift towards online and paperless lending (Ingall, 2016). This new

33


technology will increase Nationstar’s profits by making the borrowing experience more

accessible, cost efficient, faster, and easier to obtain. Moreover, traditional mortgage lending is

expected to phase out with new millennial borrowers, and as regulations from TILA-RESPA

Integrated Disclosures Rule (TRID), press lenders to step up the quality of their mortgage

services (West, 2016).

In attempt to achieve this standard, trends are showing larger financial institutions

devoting a considerable amount of time and money into technology (West, 2016). In fact, the

Xerox 11th Annual Path to Paperless Survey, found that 92 percent of mortgage industry

professionals are expecting an increase in eDelivery services for loans due to TRID (West,

2016). The increase in these services are likely to improve the speed of closing as borrowers will

be able to receive documents electronically (West, 2016). In addition, 51 percent of all mortgage

professionals predict that all mortgage loans will close fully online within the next 4 years, up

from 33 percent in the previous year (West, 2016). The e-signing of documents were also found

to be considered “highly important” by 61 percent of mortgage professionals (West, 2016).

The overall benefits of these upcoming trends will be to accelerate the processes of

applications, closing disclosures, and document delivery, to decrease the time that it takes to

process a loan (West, 2016). The Xerox survey additionally showed a continued shift from

shuffling paper to online platforms that facilitate communication with all parties and at every

stage of the loan process (West, 2016). The usage of smart phones and mobile tablets have

doubled from 16 percent to 32 percent between the years 2014 to 2015 by mortgage

professionals (West, 2016). These statistics are signs that new trends for e-mortgages are

upcoming especially with millennial generations who are now the largest group of homebuyers

in today’s market.

34


We may already see these trends with some of Nationstar’s competitors. For instance,

Union Home Mortgage, implemented their new “vLoan” technology which walks a borrower

through first-time borrowing, purchases, and refinances, and the entire application process

through closing within a 21 day turnaround time (Ingall, 2016). A second example of a new

company, is with “Lenda”. Lenda incorporates a platform that underwrites, appraises, and closes

a loan from start to finish “three times faster than the industry average. “Lenda” also provides

borrowers with a free interest rate quote, paperless loan processing, and a turnaround time for

approval in about 45 days (Ingall, 2016). These high-tech companies are likely to become

competition for Nationstar in upcoming years if they fail to implement the same technology.

Impact of Development of e-Mortgages and the Mortgage Industry

There are several lending institutions who have already put e-mortgage technologies into

use though there is a continued need for more advancement (E-Mortgages, 2015). Hence,

Nationstar’s development of a paperless process will offer its customers many benefits such as

improved workflows, improved data quality, and minimized costs and delays (PWC, 2015). The

concept of e-mortgage” has been in the U.S. since the year 2000, shortly after the passage of the

Uniform Electronic Transactions Act (UETA) (PWC, 2015). The technology was immediately

accepted by investor Fannie Mae, however, most lenders have been slow to adapt due to many

factors as addressed in Nationstar’s PEST analysis (E-Mortgages, 2015).

It is now about 15 years later and the technology evolved significantly, making it much

easier for Nationstar to implement. The components of an e-mortgage will consist of technology

across every aspect of the mortgage process from the initial application to closing to include: “e-

sign, e-doc, e-vault, e-disclosure, e-closing, e-notary and e-recording solutions, as well as

35


Mortgage Electronic Registration Systems’ (MERS) e-registry and e-service solutions” (E-

Mortgages, 2015).

Regulations and enforcement of paperless mortgages have recently been cleared, so

Nationstar will now be able to drive strategic change with the support of federal and most state

governments. In addition, the CFPB’s Ability-to-Repay/Qualified Mortgage (ATR/QM)”Know

Before You Owe” rules passed last August 2015, encourage the development of e-Mortgages

since they reduce costs for lenders (E-Mortgages, 2015). The new CFPB rules have also

required lenders to maintain an electronic audit trail of all mortgage documents so that regulators

have easier access to loan files (E-Mortgages, 2015).

Implementation of new paperless systems in the mortgage industry can present a number

of challenges. For instance, Nationstar would to need to deal with customers who are resistant to

accepting the changes, along with challenges with privacy and security regulations. One client in

particular is the U.S. Department of Housing and Urban Development (HUD), who has been

resistant to accept e-signatures on documents (PWC, 2015). Still, the developmental trends are

moving toward this technology and it is expected that the mortgage industry will close more than

half of all loans as an e-Mortgage within the next seven years (E-Mortgages, 2015).

Impact on Sustainability of Business Operations and the Mortgage Industry

Despite the challenges of technology in the mortgage business, the future of the industry

is continuing to progress toward a completely digital process (Nukois, 2016). As noted by one

analyst “There will a risk of extinction for companies that are either slow to realize the change in

the market or simply do not adapt” (Delgado, 2016). The current “paper-intensive” process is

especially unappealing to younger borrowers who have become accustomed to a world of digital

36


technology (Nukois, 2016). In fact, a study conducted by PWC found that 84% of borrowers said

that they would like a faster mortgage process (PWC, 2015).

Moreover, the average mortgage application may consist of about 500 pages per package

(PWC, 2015). Fannie Mae additionally conducted a study into how to improve the mortgage

process including electronic processing. It was found that digital mortgages could decrease the

average loan closing time from 52 to 22 days (Fannie Mae, 2015). Therefore the statistics are an

indicator that these mortgages will become a sustainable opportunity for Nationstar.

There will be many advantages for Nationstar to implement e-mortgages. For one,

lenders who implement a digital mortgage process are likely to differentiate themselves in the

marketplace, allowing for market share protection and increased growth (PWC, 2015). Second,

the mortgage industry is likely to save about 1 billion per year, since going paperless decreases

operating costs and increases profit margins (PWC, 2015). Third, today’s consumers are seeking

transparency and ease of use, as the general public continues to grow accustomed to paperless

transactions (PWC, 2015).

Subsequently, a majority of the benefits for Nationstar’s implementation involve the

reduction of costs. For instance, the Mortgage Bankers Association (MBA) found that e-

mortgages not only speed up the process 30 days, but also lowers costs by about $1,100 per loan

(PWC, 2015). Costs are reduced in various areas like: processing and underwriting, errors and

re-work, printing and shipping, warehousing, and execution. E-mortgages will also improve

quality control and regulatory compliance, as lenders are able to automate many aspects of

quality control (QC) and compliance programs. This would enable Nationstar to better able to

streamline processes and examination of workflow outcomes (PWC, 2015).

37


Lastly, as more mortgage lenders are applying new business strategies to attract

millennial borrowers, there is a need for Nationstar to implement similar processes in order to

stay competitive. This will include the implementation of social media, consumer portals,

recruiting programs, and loan programs that cater to millennials (Nukois, 2016). The current

sustainability trends are showing progress toward these high tech mortgages. However, the

complexity of the mortgage process and the constant changes make it challenging to comply with

regulatory demands such as TRID (Nukois, 2016). The biggest challenge for companies like

Nationstar will involve integrating the technology so that it is a compliant, digital processing

environment that will still offer a positive customer experience (Nukois, 2016). .

:

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References:

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