Wells Fargo, U.S. Bancorp See Rare Growth In Mortgage Servicing Portfolios

Wells Fargo joined its smaller rival U.S. Bancorp to report a sequential improvement in its total mortgage servicing portfolio for Q3 2017 – making this the first time in more than four years that two of the nation’s five largest banks bucked the industry-wide trend of quarter-on-quarter declines in this figure. The decline has been seen across U.S. banks since 2012, and is a result of the increased capital requirements that banks’ mortgage servicing rights attract in the wake of the economic downturn of 2008.

While U.S. Bancorp’s portfolio continues to grow organically, the jump for Wells Fargo can be attributed to its decision to acquire mortgage servicing rights (MSRs) worth $51 billion from Seneca Mortgage Investments earlier this year. We believe that Wells Fargo’s move is a precursor to other such acquisitions by U.S. banking giants over the coming months. This is because these banks have successfully built strong capital buffers over the years, and as the mortgage servicing business should gain from the Fed’s rate hikes, the banks will seek to use these gains to make up for the corresponding lull in mortgage originations.

We maintain a price estimate of $55 for U.S. Bancorp’s shares, which is slightly ahead of the current market price.

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 almost 71% of the total portfolio.

Notably, data compiled by the New York Fed shows that there were $9.19 trillion in outstanding mortgages in the U.S. at the end of Q3 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 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 | JPMorgan | Bank of America | Citigroup

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