Q4 2014 Bank Review: Third-Party Mortgage Servicing Portfolios

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Last week, it was revealed that JPMorgan (NYSE:JPM) is buying mortgage servicing rights (MSRs) worth $45 billion from Ocwen. [1] While Ocwen announced that it has signed a letter of intent to sell this portfolio of performing loans early this month, it remained silent about the buyer – identified as JPMorgan more recently. [2] The deal consolidates JPMorgan’s position as the second-largest mortgage servicer in the country.

We take this opportunity to highlight the mortgage servicing portfolios for each of the country’s largest banking groups, and also to detail how this portfolio has changed over recent years. Notably, the country’s five largest commercial banks – JPMorgan, Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), Citigroup (NYSE:C) and U.S. Bancorp (NYSE:USB) – take up five of the top six positions in the mortgage servicing industry. Nationstar is the only non-banking financial institution to figure in the top 5 list, at the #4 position.

See the full Trefis analysis for Wells FargoJPMorganU.S. BancorpBank of AmericaCitigroup

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Mortage servicing differs considerably from other forms of lending. It is rare for a bank to buy the servicing rights for a portfolio of student loans, auto loans or even commercial loans from an originator. But this is a very common practice when it comes to home loans, in which banks assume the risk involved with a mortgage portfolio by buying the servicing rights from the original lender, in return for all future payments from the borrowers making up that portfolio. As the big banks already have a strong workforce focused on servicing their primary loans, the mortgage servicing business allows them to generate additional revenues by using the very same resources.

The table below summarizes the size of the third-party mortgage servicing portfolio for each of the country’s five biggest banks at the end of each quarter over the last three years. The data has been compiled using figures reported by the individual banks as a part of their quarterly announcements.

(in $ billions) Q1’12 Q2’12 Q3’12 Q4’12 Q1’13 Q2’13 Q3’13 Q4’13 Q1’14 Q2’14 Q3’14 Q4’14
Wells Fargo 1,890 1,905 1,913 1,906 1,890 1,896 1,910 1,904 1,894 1,880 1,870 1,861
JPMorgan 884 860 811 859 849 832 831 816 803 786 766 752
Bank of America 1,313 1,224 1,142 1,045 949 759 616 550 527 505 491 474
Citigroup 379 359 340 320 305 295 287 281 267 246 229 219
U.S. Bancorp 200 207 211 216 220 224 227 227 227 225 225 225

A quick glance through the table highlights how closely the mortgage servicing business is tied to the mortgage origination business, as we detailed in our recent article Q4 2014 U.S. Banking Review: Mortgage Originations. It should be noted that the total servicing portfolio for each of these banks is larger than the figures seen here, as each of them also services the mortgages they originate and retain. Therefore, the banks that are known to focus considerably on mortgage lending (Wells Fargo and U.S. Bancorp), are the ones who have seen positive movement in their third-party mortgage servicing portfolio over this period.

On the other hand, banks that have been trimming their mortgage businesses show a clear reduction in the size of their portfolios. Bank of America and Citigroup have both been plagued by mortgage-related charges since the economic downturn and have only recently renewed their focus on the mortgage business. The significant changes in mortgage servicing portfolios since early 2011 stands out in the chart below – especially the rapid pace at which Bank of America got rid of its mortgage servicing rights.

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Notes:
  1. JPMorgan Said to Buy $45 Billion of Ocwen’s Servicing Rights, Bloomberg, Mar 17 2015 []
  2. Ocwen Financial Corporation Provides Significant Updates, Ocwen Press Releases, Mar 2 2015 []