Updated to include statement from Ocwen in second to last paragraph.
NEW YORK (TheStreet) -- It's hard to find a hotter sector in financial services than mortgage servicing.
In just the past three months, shares of Ocwen Financial (OCN), Nationstar Mortgage Holdings (NSM) and Walter Investment Management Co. (WAC) are up 53%, 56% and 63% respectively. Ocwen shares have more than tripled since November 2010. Nationstar is 76% owned by Fortress Investment Group (FIG), shares of which have trounced other publicly-traded investment managers over the past three months.
Sellside research firms are increasingly drawn to the hot sector, with Compass Point and Sidotti initiating coverage on Ocwen on Wednesday.Mortgage servicers are essentially debt collectors. Bank of America (BAC) above all, but also Residential Capital, the housing unit of Ally Financial (formerly GMAC) as well as JPMorgan Chase (JPM) Citigroup (C) and other banks are moving out of this business due to new rules that make it too costly for them. Wells Fargo (WFC) has been hanging on, and Berkshire Hathaway (BRK-B) wants to get in. For the bull case on mortgage servicers, it doesn't make sense to reinvent the wheel, when this Seeking Alpha essay does such a superlative job. That said, it seems a mistake to get too excited about an industry whose main purpose is to set up phone banks in third world countries to hound people to pay their mortgages. A glimpse of mortgage servicer vulnerability may be seen in this recent article from the Palm Beach Post detailing a transaction involving Ocwen Chairman William Erbey and a $3 million mansion he sold to the company for $6 million. A call to Erbey was referred to an outside spokeswoman, who sent an email stating that "the purchase price was within the market value range provided by an independent third-party appraiser." This industry may be hot, but it ain't pretty. With suspicions of the mortgage servicing industry at an all-time high, Ocwen and its peers would do well to keep the fishy-seeming transactions to a minimum. -- Written by Dan Freed in New York. Follow this writer on Twitter.
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