Flagstar Bancorp (FBC) beat market expectations as a result of reserve releases on its loan portfolio and reps and warrants provisions, analysts claim.
These factors produced a reduction in expenses that led to a solid third quarter, Compass Point Research & Trading Group reported Wednesday.
"Overall, this looks to be a decent quarter for Flagstar given the company was able to stay profitable in the face of significant mortgage banking headwinds," explained Compass Point analysts Kevin Barker and Steven Seperson.
They added, "We would expect the stock to react favorably if there is no disclosure of higher rep and warrant claims…"
To put it into perspective, Flagstar took a $4 million provision for reps and warrants in the third quarter, a significant drop from $29 million last quarter. Consequently, total reserves now stand at $174 million.
In June, Flagstar and Assured Guaranty (AGO) entered into a settlement for alleged breaches of reps and warrants in insured residential mortgage-backed securities.
As part of the settlement, Assured Guaranty received a cash payment of $105 million.
Meanwhile, Flagstar sold a large sum of nonperforming loans, leading to significantly better credit metrics.
The bank sold $167 million of nonperforming loans, which contributed to a net gain of $2 million.
As a result, the sale led to a major decrease in provisions from $243 million to $207 million, Compass Point explained.
Flagstar did not sell any mortgage servicing rights during the quarter despite several reports that the institution was in the market attempting to sell a hefty portion of its servicing portfolio.
Nonetheless, Flagstar did state the bank is "also working to recreate a sub-servicing platform."
No surprise, Flagstar felt the strain of tumbling mortgage originations, with total fees and gain on sale income reaching $126 million, down from market expectations.
For instance, gain on sale margins were well below expectations of 0.90% compared to Compass Point’s estimate of 1.30% last quarter.
Total originations were also down 29% to $7.4 billion, indicating Flagstar’s market share stood at 1.9% for both home purchases and refinance volume.
Big mortgage lenders are witnessing a dramatic shift in their mortgage production business, leaving many with no choice but to take a beating thanks to drops in refinancing activity.
"We would expect pressure on margin and volume to continue through the firs quarter of 2014," Compass Point analysts concluded.
