Q1 2015 U.S. Banking Review: Third-Party Mortgage Servicing Portfolios

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The mortgage servicing business fell out of favor with the country’s largest banks in the aftermath of the economic downturn of 2008, with JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) as well as Citigroup (NYSE:C) reporting a steady decline in the size of their mortgage servicing portfolio every quarter since early 2009. However, as the country’s three largest banking groups withdrew from the business in response to the huge losses they incurred during the downturn, competitors Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) stepped in to grab a larger share of the industry. These five banks still retain a strong grip on the industry, though, as they 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.

But with economic conditions having recovered considerably over recent years, and with the low interest rate environment forcing banks to expand their fee-based revenue sources, the largest banks seem to be warming up to the idea of a larger mortgage servicing portfolio again. This would explain JPMorgan’s decision to buy mortgage servicing rights (MSRs) worth $45 billion from Ocwen last month – a move that will take the size of the bank’s total mortgage servicing portfolio to above $1 trillion at the end of the current quarter. [1] Notably, this is well below the $1.75 trillion in total mortgages serviced by the market leader, Wells Fargo. In this article, we 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.

See the full Trefis analysis for Wells FargoJPMorganU.S. BancorpBank of America | Citigroup

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Mortgage 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 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 thirteen quarters. 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 Q1’15
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 1,835
JPMorgan 884 860 811 859 849 832 831 816 803 786 766 752 724
Bank of America 1,313 1,224 1,142 1,045 949 759 616 550 527 505 491 474 459
U.S. Bancorp 200 207 211 216 220 224 227 227 227 225 225 225 225
Citigroup 379 359 340 320 305 295 287 281 267 246 229 219 212

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 Q1 2015 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. To put things in perspective, the size of Bank of America’s third-party mortgage servicing portfolio was less than $300 billion at the end of Q2 2008, but it swelled to almost $1.7 trillion in early 2009 due to the bank’s acquisition of Countrywide. The bank has worked its way through mortgages worth more than $1.2 trillion over the years to reach the current level of $459 billion, and this figure is only expected to fall for several more quarters.

The situation for Citigroup is also similar, with the geographically diversified banking group shrinking its mortgage servicing portfolio from almost $650 billion in mid-2008 to $212 billion now. Nearly all this reduction has come from the servicing portfolio housed under the non-core Citi Holdings division. While the size of MSRs held by Citicorp has fallen nominally from $200 billion in late 2009 to $170 billion now, the MSRs under Citi Holdings have shrunk from over $400 billion to less than $45 billion over the same period.

The significant changes in mortgage servicing portfolios for these banks since early 2005 stands out in the chart below – especially the marked changes for Bank of America and Wells Fargo.

Mortgage Servicing 15Q1

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Notes:
  1. JPMorgan to Buy $45 Billion of Ocwen’s Loan-Servicing Rights, Bloomberg, May 14 2015 []