Wells Fargo’s Mortgage Servicing Portfolio Will Grow Thanks To Deal With Seneca

by Trefis Team
U.S. Bancorp
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Earlier this week, Wells Fargo announced its decision to acquire mortgage servicing rights (MSRs) worth $51 billion from Seneca Mortgage Investments in a move that will reverse the trend of a steady decline in the bank’s third-party MSRs nearly each quarter since late 2012. The decline has been seen across U.S. banks over recent years, and is a result of the increased capital requirements that banks’ MSR portfolios attracted in the wake of the economic downturn of 2008. Wells Fargo’s recent move signals a change in industry conditions, as the largest U.S. banks are now sufficiently capitalized and will likely attempt to regain lost market share in the mortgage servicing industry.

That said, Wells Fargo remains the largest mortgage servicer in the country, and the bank is expected to consolidate its position in the industry over coming years. The total mortgage servicing portfolio at the the five largest U.S. banks is currently about $3.3 trillion. Notably, the combined mortgage servicing portfolio for these five banks at the end of 2012 was substantially higher at $5 trillion.

The table above captures the break-up of total mortgages serviced by each of these banks in terms of ownership. In addition to servicing mortgages that they originate and continue to hold on their balance sheet, each of these banks also service a sizable portfolio of third-party mortgages. As detailed here, third-party mortgages make up over $2.3 trillion of the $3.3 trillion in total mortgages serviced by these five banks, or about 70% of the total portfolio.

Notably, data compiled by the New York Fed shows that there were $9.14 trillion in outstanding mortgages in the U.S. at the end of Q2 2017. This implies that these five banks service 36% of all outstanding mortgages in the U.S. – down from almost 60% in late 2012. This is because stricter regulatory requirements since the economic downturn have made the mortgage servicing business less profitable – resulting in banks running off their third-party mortgage servicing portfolios. Bank of America and Citigroup have reduced their third-party MSR portfolios substantially over the years, with the latter recently announcing plans to completely exit the U.S. mortgage servicing industry by the end of 2018.

The regional banking giant U.S. Bancorp stands out as the only major bank to witness an overall increase in its mortgage servicing portfolio over recent years. Wells Fargo should join its smaller competitor by the end of this year to report an increase in the figure thanks to its  recently announced deal with Seneca. We believe that JPMorgan is also likely to jump the mortgage servicing bandwagon and could grow its MSR portfolio over coming months through an acquisition.

The chart below captures U.S. Bancorp’s third-party mortgage servicing portfolio over the years, and also includes our forecast for it. You can see how changes to this portfolio affects our price estimate for the bank by modifying this chart.

See full Trefis analysis for U.S. Bancorp | Wells Fargo | JPMorganBank of America | Citigroup

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