According to Reuters, Bank of America Corporation (BAC) is contemplating the sale of mortgage servicing rights (MSRs) worth $300 billion. This step will be taken by BofA in order to scale down its non-core operations and further strengthen the balance sheet.
Among the companies that are in talks to buy MSRs from BofA (in full or part) include Ocwen Financial Corp. (OCN), Walter Investment Management Corp. (WAC) and Nationstar Mortgage Holdings Inc. (NSM). The deal is expected to be announced in the next few weeks.
MSRs, in general, are becoming burdensome for the banks. Stringent capital regulations and increasing balance sheet risk have made these an expensive business. Hence, the banks are trying to offload these to specialized mortgage-servicing companies that include three of the abovementioned firms.
In the last couple of years, major banks like Morgan Stanley (MS) and Goldman Sachs Group Inc (GS) have sold their respective mortgage servicing subsidiaries to Ocwen. Last year, Ocwen, in partnership with Walter Investment, also won the bid to acquire Residential Capital's (ResCap) MSRs for $3 billion.
Getting back to the original story, BofA’s mortgage servicing expenses has shot up tremendously. In the third quarter, it stood at $3.4 million as the company had to hire employees to work with those customers who are late in loan repayments. As of September 30, 2012, the company serviced loans worth $1.1 trillion, down from $1.4 trillion as of December 31, 2011.
Moreover, in June 2012, BofA announced a deal to sell $10.4 billion worth of MSRs to Nationstar Mortgage Holdings’ wholly owned subsidiary – Nationstar Mortgage LLC. The MSRs comprise of loans in government-sponsored enterprise (GSE) pools.
Escalating servicing costs and strict regulations is expected to force BofA and many other banks to do away with once lucrative MSRs operations. Currently, BofA retains a Zacks #3 Rank, which translates into a short-term Hold rating.
We believe that BofA’s plan to vend off MSRs will be slightly positive for the company. Hence, there a marginal chance for upward estimate revisions. This in turn, could also lead to an improvement in its Zacks Rank.
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