Q2 2015 U.S. Banking Review: Third-Party Mortgage Servicing Portfolios

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The country’s largest banks have been wary of adding mortgages not originated by them to their balance sheets, with the banks reporting another sequential reduction in their third-party mortgage servicing portfolios in Q2 2015. The mortgage serving business fell out of favor with most banks in the aftermath of the economic downturn of 2008, and the three largest banks – JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C) – have reported a notable decline in the size of their mortgage servicing portfolios since early 2009. Although Wells Fargo (NYSE:WFC) and U.S. Bancorp (NYSE:USB) capitalized on the reduced competition and the sharp increase in mortgage activity over 2011-2012 to bulk up their mortgage servicing operations, even these banks have reported a reduction in their third-party mortgage servicing portfolio over recent quarters.

That said, these five banks still retain a strong grip on the industry – taking 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. In this article, we highlight the mortgage servicing portfolios for each of the country’s largest banking groups, and also detail how this portfolio has changed over the last decade.

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

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 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 Q1’15 Q2’15
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 1,809
JPMorgan 884 860 811 859 849 832 831 816 803 786 766 752 724 723
Bank of America 1,313 1,224 1,142 1,045 949 759 616 550 527 505 491 474 459 409
U.S. Bancorp 200 207 211 216 220 224 227 227 227 225 225 225 225 225
Citigroup 379 359 340 320 305 295 287 281 267 246 229 219 212 204

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 article Q2 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. Using data from our article on the outstanding mortgage portfolio for these banks, the total mortgage servicing portfolio for these banks can be found to range from $2.1 trillion for Wells Fargo to just under $300 billion for U.S. Bancorp.

Notably, the banks that are known to focus considerably on mortgage lending (Wells Fargo and U.S. Bancorp), are the ones who have seen the smallest reduction in their third-party mortgage servicing portfolios over recent years. On the other hand, banks that have been trimming their mortgage businesses show a clear reduction in the size of their portfolios – especially Bank of America. It should be noted that the decline over recent quarters is not just because of a more risk-averse stand taken by banks towards third-party mortgages. Although most of these banks have continued to add to their mortgage servicing portfolios, these acquisitions have been unable to match the exceptionally high repayment rates seen in the last few quarters.

The significant changes in third-party mortgage servicing portfolios for these banks can be seen more clearly in the chart below which captures this data since early 2005. The jump in portfolio size for Bank of America, Wells Fargo and JPMorgan in late 2008 was due to the large-ticket acquisitions of Countrywide, Wachovia and Bear Stearns respectively. Since then, only Wells Fargo and U.S. Bancorp have seen growth in their portfolios.

Mortgage Servicing 15Q2

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