Flagstar’s Mortgage Servicing, Growth Strategy Shift Pays Off

One week after announcing plans to shift its servicing focus to performing mortgages as it continues to expand into the performing space, Flagstar Bancorp reported a second-quarter 2013 net income increase of $43.6 million.

Nonetheless, at $65.8 million, or $1.10 per share, up from $22.2 million, or $0.33 per share, in the first quarter, 2Q13 earnings are $20.2 million lower than the $86 million, or $1.47 per share, reported in the second quarter of 2012.

The second-quarter results “represent the successful continuation of Flagstar's efforts to reduce risk, address legacy issues and build strong capital levels," said president and CEO Sandro DiNello. He said these efforts, “along with new initiatives to reduce expenses and maximize efficiency across the organization,” will help position Flagstar for long-term growth.

Flagstar’s mortgage servicing business' focus will shift to core, performing mortgages, executives said. Flagstar expects to realize significant cost savings as its default servicing business is gradually transferred “to a recognized specialty servicer” by the end of the third quarter. This transition also entails the redeployment and layoffs expected to affect approximately 300 employees in the nonperforming mortgage servicing business.

Flagstar’s noncore default servicing business that will be outsourced represents less than 4% of its overall servicing book. The shift is expected “to better position the company to focus on growing the core performing servicing business," DiNello said.

By the end of the quarter completed bulk sales of mortgage servicing rights related to $12.7 billion in underlying mortgage loans already have resulted in significant credit quality improvements.

Following bulk sales of MSRs, net servicing revenue, which combines loan administration income, off-balance-sheet hedges of mortgage servicing rights and the gains on trading securities, increased to $36.2 million for the second quarter of 2013, from $20.4 million for the first quarter of 2013 and $28.7 million for the second quarter of 2012.

More specifically, Flagstar sold $341.1 million in unpaid principal balance of residential first mortgage nonperforming loans and total troubled debt restructurings with a carrying value of $277.9 million, for 99.5% of carrying value that involved a $1.4 million net loss before broker fees.

Real estate owned and other nonperforming assets also decreased to $86.4 million at June 30, from $114.4 million at March 31, 2013 as nonperforming loan volume dropped to $257.9 million.

Improved mortgage loan demand combined with sales of a substantial amount of nonperforming loans and troubled debt restructurings “significantly improved asset quality ratios,” DiNello said.

Balance-sheet risk benefited from bulk loan sales leading to higher loan sale income gains compared to the prior quarter and helped reduce the volume of nonperforming loans by 30%.

Gain on loan sales totaled $144.8 million, up from $137.5 million in the first quarter.

Highlights include the opportunistic resolution of “key legacy litigation” issues with MBIA Insurance Corp. in May and Assured Guaranty Municipal Corp., formerly known as Financial Security Assurance Inc., in June, which resulted in a net gain of $44 million that consisted of $49.1 million income from the settlement with Assured and $4.9 million in losses after settling with MBIA.

At the same time the mortgage market shift from refinancing to purchases decreased 2Q13 originations to $10.9 billion down from $12.4 billion for 1Q13 and $12.5 billion for 2Q12.

In the coming quarters, DiNello said, Flagstar plans to offset at least some of the expected decrease in refinance production due to mortgage rate increases by leveraging existing product offerings, purchase market share growth and “efficiency optimization and disciplined expense management throughout the organization,” as Flagstar moves into its next phase of growth and development.