Mortgage Servicing's New Pecking Order

March 14, 2013 10:49 AM

U.S. banks are expected to unload up to $2 trillion in mortgage servicing rights. Behind the sell-off are tough new Basel III capital requirements and the past failures in servicing troubled loans that has brought unwanted scrutiny. Picking up the slack are nonbanks like Nationstar (NSM), Ocwen Financial (OCN) and Walter Investment (WAC), all of which have been aggressively snapping up banks' servicing portfolios. Watch out, too, for Penny Mac, which plans to use the proceeds from its planned public offering to fund servicing acquisitions.

Break the Megabanks' Stranglehold on Mortgage Servicing

(Image: Thinkstock)

Ally Opts for Auto Loans

Ally Bank has drastically scaled back mortgage lending. Earlier this month it also unveiled plans to sell $85 billion of servicing rights to Ocwen Financial (OCN), which signals Ally's intent to wind down its servicing operations as well. That bank, formerly known as GMAC, received a government bailout following the housing bust and is now repositioning itself as pure-play auto lender.

Wells Fargo: Cutbacks Possible

Wells Fargo (WFC), the nation's second-largest mortgage servicer, appears intent on continuing to service assets in a bid to sell homeowners other financial products. Even so, Chief Financial Officer Timothy Sloan recently told investors that the bank may "test that market" for selling servicing rights in a bid to reduce the size of its portfolio. Behind the possible sales: as one of the largest servicers, Wells faces the prospect that proposed Basel III capital rules will limit to 10% the maximum contribution its servicing assets can make to common equity. Like other large banks, it would also need approval from Fannie Mae and Freddie Mac to sell agency servicing rights.

Bank of America Retreats

Bank of America (BAC) has already sold $300 billion in servicing rights to nonbank servicers and is expected to unload at least another $100 billion in an effort to limit the size of servicing assets on its balance sheet. B of A has said that by reducing the size of its servicing portfolio it can improve customer service and reduce risk. (Image: Bloomberg News)

JPMorgan Chase: Buyer or Seller?

The third-largest servicing player bought a $70 billion mortgage portfolio from MetLife late last year. Adding uncertainty to what direction JPMorgan Chase (JPM) is headed, Fitch Ratings said in a January report that the bank is expected to "complete sales or pursue other strategies" to limit the size of its $1.1 trillion servicing business. (Image: Bloomberg News)

Ocwen's Buying Binge

Atlanta-based Ocwen Financial has been one of the most aggressive nonbank purchasers of mortgage servicing rights. Since October it has: acquired the servicer Homeward Residential Holdings; won a bidding war for the servicing unit of Ally Bank's bankrupt subprime arm, Residential Capital; and struck a deal to buy $85 billion of servicing rights from Ally Bank, with the option to buy more. (Image: Thinkstock)

Nationstar Bulks Up

Nationstar Mortgage, a unit of Fortress Investment Group (FIG), has snapped up servicing portfolios from a number of banks, including a $215 billion package acquired from Bank of America that doubled the number of customers whose loans it services to 2.5 million. Lewisville, Texas-based Nationstar primarily services distressed loans. Chief Executive Jay Bray remains on the lookout for portfolios with high volumes of Fannie, Freddie and Ginnie Mae loans that are running at around 25% delinquent. (Image: Thinkstock)

Walter Investment Wheels and Deals

Nonbank asset manager Walter Investment (WAC) made two big deals for Fannie Mae mortgage servicing rights in January, acquiring a $44 billion former Residential Capital portfolio and a $93 billion pool from Bank of America. Walter also secured an additional $475 million in funding in January "to capitalize on the continued secular shifts occurring in the mortgage sector," according to Chief Executive Officer Mark O'Brien. (Image: Thinkstock)

PennyMac Gets in the Game

In February, PennyMac said it will raise up to $287 million in an initial public offering. Stan Kurland, the chairman and CEO of the Calabasas, Calif., mortgage buyer and correspondent lender, has said it would use the proceeds to acquire mortgage servicing rights. PennyMac is primarily interested in servicing prime, Fannie- and Freddie-backed loans.