MAR 8, 2013 11:37am ET

Nationstar Sued by Investor Over Auctions of Mortgage Loans

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Nationstar Mortgage Holdings Inc., the mortgage servicer that collects payments on more than $300 billion of debt, was accused in a lawsuit of harming investors by auctioning home loans backing securities.

Nationstar’s loan liquidations are a “blatant abdication” of the company’s responsibilities as servicer, mortgage-bond investor KIRP LLC said in a complaint filed today in New York State Supreme Court in Manhattan.

“Nationstar has not fulfilled its duties as master servicer but rather has engaged in practices to enrich itself at the expense of” investors, KIRP said. KIRP said that it’s a “significant” investor in six residential mortgage-backed security trusts sponsored by Residential Accredit Loans Inc.

Nationstar, which is majority-owned by Fortress Investment Group LLC, increased its servicing portfolio by 94 percent last year to $198 billion through a series of asset purchases, with sellers including a unit of Lehman Brothers Holdings Inc. Its portfolio rose to more than $300 billion last month after the firm completed part of a deal for $215 billion of contracts from Bank of America Corp., according to a statement today reporting earnings.

Many of the mortgage loans Nationstar has auctioned only realized “a fraction” of the unpaid principal balance of the loans and “far less” than the present value of the property securing the loans, according to the complaint.

When mortgage loans default, Nationstar can take specific steps such as modifying loan terms or foreclosing, KIRP said. The loan sales, conducted on www.auction.com, allow Nationstar to more quickly recover advances made on the loans, according to the complaint. Nationstar has a “business affiliation” with the auction website, the filing states.

“The only party that appears to have benefitted from the bulk note sales is Nationstar itself,” KIRP said.

The Association of Institutional Investors, a trade group whose members include Pacific Investment Management Co. and Loomis Sayles & Co., has been preparing to send letters to mortgage-bond trustees complaining about Nationstar’s sales, according to three people familiar with the matter, who asked not to be named because the deliberations aren’t final.

Nationstar CEO Jay Bray said today on a conference call that the strategy is permissible for some securitizations and is being used by the company to help bondholders.

“It’s all about maximizing the proceeds for the trust and what makes the most sense,” he said.

A spokesman for Lewisville, Texas-based Nationstar, Marshall Murphy, didn’t respond to an email about the lawsuit.

While it’s hard to know whether using the technique instead of foreclosures or so-called short sales will be a positive or negative for investors until seeing the prices paid, the move at least partly reflects Nationstar’s interests, rather than those of bondholders, Credit Suisse Group AG analysts led by Chandrajit Bhattacharya wrote today in a report.

The auctions are “probably driven as much by the servicer’s need to reduce costs (servicing a nonperforming asset is much more costly than servicing a performing loan) and increase profitability as it is to find the best bid on these assets,” the New York-based analysts wrote.

In a recent auction of loans by Nationstar with $179.4 million of balances, the best bids on average equaled 58% of the prices of properties suggested by real estate brokers in states where court approval is needed for foreclosures and 76% in others, Nomura Securities International analysts led by Paul Nikodem said today in a report.

That suggests investors would lose 10 percentage points more of the unpaid balances than in other liquidations such as foreclosures, they wrote.

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