Citigroup Selling Servicing Rights as Banks Shrink Role

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

Citigroup Inc. (C), 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. (WFC), 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. That’s 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. (BAC) are also cutting home-loan staff after refinancings dropped more than 60 percent 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, Connecticut. “You will see the whole industry shift.”

Photographer: Craig Warga/Bloomberg

The Citigroup servicing rights offer would be the New York- based lender’s largest potential sale of this type since the 2008 financial crisis. Close

The Citigroup servicing rights offer would be the New York- based lender’s largest... Read More

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Photographer: Craig Warga/Bloomberg

The Citigroup servicing rights offer would be the New York- based lender’s largest potential sale of this type since the 2008 financial crisis.

The Citigroup servicing rights offer would be the New York-based lender’s largest potential sale of this type since the 2008 financial crisis, according to Guy Cecala, publisher of Inside Mortgage Finance, a trade journal. More than 80 percent of the loans are performing, according to the people.

Book Value

“It’s opportunistic,” said David Stephens, the chief financial officer at Denver-based United Capital Markets Inc., who added that he didn’t have knowledge of the Citigroup offering. “The market’s improved to the point where they can actually sell it at their book value. They won’t 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 lender’s quarterly securities filing. The bank valued those contracts at $2.52 billion at midyear.

Basel Rules

Servicers collect payments from borrowers and pass them on to mortgage lenders or investors, minus fees. They also handle foreclosures when borrowers don’t 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.

Citigroup’s Tier 1 common ratio under Basel III stood at 10.4 percent at the end of September. Risk-weighted assets under the regulations shrunk to $1.16 trillion from $1.19 trillion.

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 that’s 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 company’s potential sale of MSRs.

$1 Trillion

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. (NSM), a servicer majority owned by Fortress Investment Group LLC (FIG), said last month. The private-equity firm said in July it raised a $1.1 billion fund to buy the contracts. Nationstar dropped 0.3 percent to $54.35 at 11:11 a.m. in New York trading, trimming its return this year to 75 percent.

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 percent 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 percent in the first half of this year from a peak of 69.2 percent in June 2004. The level is expected to stabilize at about 63 percent, according to Morgan Stanley (MS) analyst Haendel St. Juste.

Foreclosure Practices

Federal and state investigations of foreclosure practices also led to new regulations that drove up costs. Last year the five largest servicers -- Wells Fargo, JPMorgan Chase & Co. (JPM), Bank of America, Citigroup and Ally Financial Inc. (ALLY) -- 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. (OCN) and Walter Investment Management Corp. (WAC) 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, North Carolina-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 percent.

“We’re 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.”

To contact the reporters on this story: Heather Perlberg in New York at hperlberg@bloomberg.net; Dakin Campbell in New York at dcampbell27@bloomberg.net

To contact the editor responsible for this story: Rob Urban in New York at robprag@bloomberg.net; David Scheer at dscheer@bloomberg.net

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