Flagstar to Outsource Servicing on $3B of Defaulted Mortgages

Flagstar Bancorp (FBC) in Troy, Mich., plans to outsource the servicing of some $3 billion of defaulted mortgages.

The $13.1 billion-asset company said Wednesday that it expects to hire a subservicer, which it did not name, to handle its default servicing business. This business makes up less than 4% of Flagstar's overall servicing portfolio, which totaled about $74 billion in unpaid principal balances as of the end of the first quarter, according to a regulatory filing. (In a subservicing arrangement, a company keeps the servicing rights on a portfolio of mortgages but farms out some or all of the work to another party.)

The bank plans to focus more on its performing mortgages, it said. Under the leadership of Chief Executive Michael Tierney, who stepped aside as CEO in May after seven months in the role, the company has sought to redefine itself as a Michigan commercial bank with a nationwide mortgage business.

The outsourcing will affect approximately 300 employees, to whom Flagstar will provide "transition support," it said in the news release.

"By focusing our mortgage servicing business on core, performing mortgages, we seek to enhance Flagstar's profitability and be even better positioned to serve our clients and capitalize on value-enhancing opportunities," said Sandro DiNello, Flagstar's president and chief executive, in a press release. "Further, this action will better position our servicing department for long-term growth."

The company said it would release further details on the cost savings during its quarterly earnings conference call, scheduled for July 24.

Banks have been unloading mortgage-servicing rights in the past year as Basel III capital requirements force them to raise equity. Buyers have included nonbanks like Nationstar (NSM), Ocwen Financial (OCN) and Walter Investment (WAC).

Flagstar has agreed to pay hundreds of millions in penalties this year to settle allegations that it misrepresented the mortgages it underwrote or failed to stick to proper underwriting standards. Last month, it agreed to pay $105 million to settle charges that it misrepresented loans insured by Assured Guaranty (AGO). In May, it agreed to pay $110 million to settle similar claims brought by insurer MBIA.

Flagstar sold a document-imaging business in February and sold $1.2 billion worth of commercial loans located in the Northeast to CIT Group.