Citigroup Selling Servicing Rights as Banks Retreat

Mortgage & Real Estate

The U.S. mortgage markets largest lenders are pulling back amid looming regulations and a drop in refinancing that fueled record profits last year.

Citigroup Inc., the third-biggest U.S. bank, is selling mortgage-servicing rights on $63 billion of loans, or about 21 percent of its total contracts at midyear, according to two people briefed on the matter, who asked not to be identified because the sale is private. Wells Fargo Co., the largest home lender, began marketing rights on $41 billion of government-backed home loans in September.

Banks are scaling back from the almost $10 trillion market for mortgage servicing rights, or MSRs, amid looming Basel III regulations. Thats attracting private-equity firms and hedge funds to assets that can increase in value when borrowing costs rise and giving them increased control over the rights to collect Americans monthly mortgage payments. Lenders such as Bank of America Corp. are also cutting home-loan staff after refinancings dropped more than 60% since May, according to the Mortgage Bankers Association.

Three years from now, banks will be making fewer real estate loans and servicing will be smaller, said Chris Whalen, managing director at Carrington Investment Services LLC in Greenwich, Conn. You will see the whole industry shift.

Its opportunistic, said David Stephens, the chief financial officer at Denver-based United Capital Markets Inc., who added that he didnt have knowledge of the Citigroup offering. The markets improved to the point where they can actually sell it at their book value. They wont have a gain or loss.

Shannon Bell, a Citigroup spokeswoman, declined to comment on the potential sale.

Citigroup owned the servicing rights on $301 billion of mortgage balances at the end of June, according to the lenders quarterly securities filing. The bank valued those contracts at $2.52 billion at midyear.

Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, minus fees. They also handle foreclosures when borrowers dont pay. Banks are seeking to reduce the assets amid impending global financial regulations agreed to by the Basel Committee on Banking Supervision, which forces banks to pledge more capital for servicing rights.

MSRs are trading for between 4 and 5 times the 25 basis point servicing fee, according to Stephens. If Citigroup gets a similar price it may collect $630 million to $788 million in the sale, he said.

Wells Fargo is seeking to take advantage of demand thats higher than six months ago or a year ago, and the bank will test the market as a risk-management exercise, CFO Timothy Sloan said this month during a conference call with investors. Tom Goyda, a spokesman for San Francisco-based Wells Fargo, declined to comment on the companys potential sale of MSRs.

Servicing rights on at least $1 trillion of mortgages will trade in the next two years, Jay Bray, chief executive officer of Nationstar Mortgage Holdings Inc., a servicer majority owned by Fortress Investment Group LLC, said last month. The private-equity firm said in July it raised a $1.1 billion fund to buy the contracts.

In addition to a widening pool of buyers, rising mortgage rates this year boosted the appeal of MSRs since higher costs discourage homeowners from refinancing. This prolongs the length of the contracts.

A reduction in new mortgages also restricts the creation of more servicing agreements. Origination volume will decline about 8% this year to $1.6 trillion from 2012, according to the Mortgage Bankers Association. The group forecasts it will fall to $1.1 trillion next year.

The homeownership rate declined to 65% in the first half of this year from a peak of 69.2% in June 2004. The level is expected to stabilize at about 63%, according to Morgan Stanley analyst Haendel St. Juste.

Federal and state investigations of foreclosure practices also led to new regulations that drove up costs. Last year the five largest servicersWells Fargo, JPMorgan Chase Co., Bank of America, Citigroup and Ally Financial Inc.agreed to pay $25 billion to settle a government probe of servicing misconduct.

Banks accelerated sales in 2012 with servicer Residential Capital LLC, a unit of Ally, selling a $374 billion portfolio to Ocwen Financial Corp. and Walter Investment Management Corp. for $3 billion.

Bank of America sold rights to more than $200 billion this year and OneWest Bank FSB said in June it has agreed to sell $78 billion.

Charlotte-based Bank of America is also reducing staff after third-quarter revenue in the mortgage division fell by almost half to $1.58 billion. The lender is cutting about 1,300 more jobs in its mortgage division, two people with direct knowledge of the plans said yesterday. The latest round of reductions means the bank will dismiss about 3,000 people involved in making home loans in the fourth quarter.

Wells Fargo has cut more than 6,200 positions since midyear, and No. 2-ranked JPMorgan has said it may dismiss 15,000. Both reported third-quarter mortgage revenue declines of more than 40%.

Were reverting to the mean in terms of the volume of housing finance, Whalen said. Without levels of credit creation that were excessive and reckless this is what the market looks like.

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