While banks break out their earnings for mortgages, they don’t necessarily go into enough detail to satisfy analysts trying to make side-by-side comparisons. To get a better understanding of mortgage servicing results Sterne Agee analysts Henry J. Coffey, Jr., Jason P. Weaver and Calvin Hotrum move past the data provided by major banks, which they describe as ‘relatively opaque’ and focus on differences between Nationstar Mortgage Holdings Inc (NYSE:NSM), Ocwen Financial Corp (NYSE:OCN), and Walter Investment Management Corp (NYSE:WAC).

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Mortgage servicing rights: Amortization costs and overhead are key differentiators

“We are beginning the process of seeing what the special servicers will look like as stand-alone businesses,” they write. “In 1Q14, all three generated approximately the same level of revenue from their servicing assets, but each delivered a different level of profitability.”

Ocwen Financial Corp (NYSE:OCN) is the most profitable of the three, and the Sterne Agee expects it to stay on top for the foreseeable future because it has the best results on so many different levels. It consistently has lower mortgage servicing rights (MSR) amortization costs and lower overhead than the other two, which more than makes up for the fact that it doesn’t have the highest revenue relative to its unpaid principal balance (UPB). Interest expenses are another major differentiator, with Nationstar Mortgage Holdings Inc (NYSE:NSM) falling well behind Ocwen and Walter Investment Management Corp (NYSE:WAC), and Other Revenue, which includes real estate owned (REO), disposition fees, and insurance sales is also worth keeping an eye on even though it doesn’t help NSM in this particular comparison.

These differences explain why the Sterne Agee report rates Nationstar Mortgage Holdings (NYSE:NSM) as Neutral, but rates Ocwen Financial Corp (NYSE:OCN) and Walter Investment Management Corp (NYSE:WAC) as Buys.

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Core and core-adjusted earnings

To help with future comparisons Coffey, Weaver, and Hotrum recommend looking at both core and adjusted core earnings. Core earnings include direct interest costs such as corporate debt and the costs associated with servicer advances, but doesn’t take fair value marks on the MSRs into account. The ramp expenses used to calculate adjusted core earnings also includes things like litigation, refinancing costs, but doesn’t add back stock compensation or non-cash interest accruals.

“We also have tried to distinguish between ongoing MSR amoritization expenses associated with originated or acquired MSRs and amoritization/depreciation tied to platform acquistions and any related step-up in basis adjustments,” they write.

Coffey, Weaver, and Hotrum note that they are still building up their view of the special servicers, but think that this is a good starting point for analysts who want to get a better handle for what drive mortgage servicing outperformance.