Fitch: Others to Follow BofA in Mortgage Servicing Rights Sales
CHICAGO -- January 8, 2013
Fitch believes that Bank of America's (BAC) recent sale of mortgage servicing
rights (MSR) for loans with unpaid principal balances of $306 billion largely
reflects the bank's strategic priorities and its desire to move beyond legacy
mortgage and litigation issues. Upcoming Basel III capital guidelines may also
have played into the decision. We believe that other banks with large MSR
assets may also begin to complete sales or pursue other strategies to limit
their size on bank balance sheets.
Holding MSRs on the balance sheet has considerable capital implications under
Basel III. Since there is a 10% cap on MSRs' contribution to common equity
under forthcoming capital rules, BAC's sale was likely driven in part by
capital relief considerations. This is particularly relevant now, since the
value of MSRs would increase in a rising interest rate environment.
BAC's recent MSR sale also indicates that a market exists for these assets,
and the transaction's $650 million premium over the MSR book value suggests
that the market is relatively attractive now. This is particularly noteworthy
given that BAC had one of the more challenging servicing books compared with
other large institutions. Still, there may be capacity constraints in the
nonbank market for MSR acquisitions, which may make future sales more
That said, we still expect other large mortgage players -- in particular,
comparatively stronger ones like Wells Fargo (WFC) -- to consider potential
strategies for dealing with the MSR cap under Basel III, including servicing
sales and de-emphasizing third-party lending channels. J.P. Morgan, with a
smaller MSR relative to its overall equity position, may also be a likely
candidate to reduce these assets on its balance sheet.
BAC, in particular, had important motivations besides capital rules in
reducing its MSR. The bank is not pursuing a mortgage wholesale lending
strategy anymore, as had been the case at Countrywide when it was purchased by
BAC. As a result, the retention of a large servicing platform is not critical
to its strategy.
Rather, we expect that BAC will continue to originate mortgages but primarily
through its branch network and wealth management units, where it can hold the
assets on balance sheet and cross-sell a number of other products to these
customers. We believe this should lead to more stable earnings for BAC because
it removes some of the earnings volatility inherent in running a national
mortgage lending platform.
Finally, BAC's MSR sale included a number of loans classified as 60-day-plus
delinquent loans. As servicing rights on legacy loans are transferred through
the transaction, BAC's exposure to legacy foreclosure risks will be reduced
The above article originally appeared as a post on the Fitch Wire credit
market commentary page. The original article can be accessed at
www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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Justin Fuller, CFA
70 W. Madison
Chicago, IL 60602
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