This column originally appeared on Real Money Pro at 12:47 p.m. EDT on Aug. 8.NEW YORK ( Real Money) -- As I will explain in this column, in the mortgage-servicing space I favor Ocwen Financial (OCN - Get Report) over Nationstar Mortgage Holdings (NSM - Get Report). Yesterday, mortgage servicer Nationstar Mortgage reported a beat to second-quarter 2013 expectations and initially ticked much higher in premarket trading, changing hands as high as $53 a share, up $4. (Note: The shares closed yesterday at $50 a share and are now trading lower at about $49.15 a share.) In my view, the gap was unjustified as the buyers and some of the sell-side analysts who applauded the report and the share price gap higher didn't appear to understand the quality of the earnings very well. I tried to short the stock but missed the trade. The reason I write this is because, among other liberal accounting recognition techniques, Nationstar utilizes a more aggressive gain-on-sale accounting in its earnings reports -- as such, I have an issue with Nationstar's quality of earnings. (I don't think this is well understood in the marketplace.) you will find in this column, if competitor Ocwen reported on a similar accounting basis (adding mortgage-servicing rights valuation adjustment and discount on advances), its second-quarter operating profits would have been over $400 million, and its pretax earnings would be $323.6 million compared to $199 million at Nationstar, rather than the reported pretax income of $87.5 million. If we further remove the impact of contribution to consumer relief fund, Ocwen's pretax income would have stood at $376.6 million vs. $199 million at Nationstar. Conversely, if Nationstar reported with the similar accounting conventions as Ocwen, taking out mortgage-servicing rights valuation adjustment and discount on advances, Nationstar's reported pretax income of $199 million would be adjusted and reduced to about $117 million. What follows is my more detailed analysis and calculation of how Nationstar's accounting policies differ appreciably with Ocwen's accounting.
Kass: Nationstar vs. Ocwen
Aug 09, 2013 | 06:00 AM EDT
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