U.S. Bancorp Bucks Industry Trend By Continuing To Grow Its Mortgage Servicing Portfolio
The U.S. banking industry has seen the total size of its mortgage servicing portfolio shrink steadily since 2012, as increased capital requirements for mortgage servicing rights after the downturn made the business less attractive for larger banks. As many large banks withdraw from the once-lucrative space, the void is being filled by specialized mortgage servicing companies as well as credit unions.
However, U.S. Bancorp stands out among the largest U.S. banks with a steady growth in its mortgage servicing portfolio over the years. The regional banking giant focused its efforts on growing its mortgage business after the downturn, and this decision – coupled with its traditional loans-and-deposits business model and risk-averse growth strategy – has been yielding returns. Notably, a key factor that works in U.S. Bancorp’s favor is that it does not face the more stringent capital requirements to which its larger competitors are required to adhere – giving it more leeway in terms of managing its capital.
We capture the impact of changes in mortgage banking performance on the share price of the banks with the largest mortgage operations in the U.S. – Wells Fargo, U.S. Bancorp, JPMorgan Chase and Bank of America – in a series of interactive dashboards.
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 sheets, each of these banks also service a sizable portfolio of third-party mortgages. As detailed here, third-party mortgages make up almost 70% of the $3.26 trillion in total mortgages serviced by these five banks. And while all these banks have seen their own mortgage portfolio grow over recent years, the third-party mortgage servicing portfolio has shrunk considerably for all of them except U.S. Bancorp.
The table above highlights how the total mortgage servicing portfolios of these banks have changed over recent quarters. The overall change in industry dynamics over the years is evident from the fact that these five banks service less than 35% of all outstanding mortgages in the U.S. now – down from almost 60% in late 2012. The total value of U.S. housing debt outstanding is taken from the quarterly data compiled by the New York Fed.
The jump in Wells Fargo’s mortgage servicing portfolio jumped in Q3 2017 was due to its acquisition of mortgage servicing rights (MSRs) worth $51 billion from Seneca Mortgage Investments. Taking this into account, the gradual reduction in the mortgage servicing portfolio for the four largest U.S. banks is evident from the table. More importantly, this decline comes in the wake of slow, yet steady growth in total housing debt. While the mortgage industry has been facing headwinds over the last few quarters due to the Fed’s ongoing rate hike process, we believe that U.S. Bancorp is in a better position than its larger peers to improve its share of the mortgage servicing industry once market conditions improve. This presents a potential upside for the regional bank’s stock over a one- to two-year time frame.
Details about how changes to Mortgage Banking performance affect the share price of these banks can be found in our interactive model for Wells Fargo | U.S. Bancorp | JPMorgan Chase | Bank of America
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