Banks Large and Small Jump into Mortgage Servicing Breach

With Bank of America Corp. methodically dismantling the Countrywide home loan machine, someone else is going to have to service all the loans it used to buy. Who’ll it be?

Most bank holding companies that service more than $125 billion of mortgages have been cutting back, though Wells Fargo & Co. and U.S. Bancorp are stepping on the gas (see the first two charts at right).

A troika of nonbank servicers — Nationstar Mortgage LLC, Ocwen Financial Corp. and Walter Investment Management Corp. — is hungry for more business, but there is plenty of capacity yet among banks, which can use readily available leverage to fund servicing assets.

Across the size spectrum, from the $78 billion-asset M&T Bank Corp. to the $9 billion-asset Sterling Financial Corp., a group of banking companies have been ramping up their mortgage operations, increasing the volume of loans they service for others by a fifth or more in 2011 as measured in unpaid principal balance (see the third chart).

Purchases of servicing rights have fueled the growth at M&T, whose portfolio roughly doubled to $40.7 billion. In a presentation this month, Chief Financial Officer Rene Jones told investors the company would continue to confine mortgage originations to its branch footprint.

But he said there is opportunity in the servicing business with M&T well below the 10% cap on Tier 1 common capital that can be accounted for by mortgage servicing assets under Basel III. (B of A and Ally Financial Inc. have cited the cap as a chief reason for ratcheting back production.)

M&T’s servicing acquisitions include purchases from Bayview Financial Holdings LP, the majority owner of Bayview Lending Group LLC, a commercial mortgage company in which M&T holds a 20% stake. “To the extent that big opportunities kind of come up and that market turns around to be something that is really positive, we would participate in that,” Jones said.

Nonbank servicers have been growing by leaps and bounds, raising capital through public offerings, acquiring other servicers, and buying big portfolios. The mountain of troubled home loans requiring high-touch attention is likely to continue to power their expansion, and such distressed assets are well suited for entities that have relatively weak access to funding — mortgage servicing rights essentially are worth the net present value of servicing fees less the costs of doing the servicing. Higher costs associated with problem loans make the assets smaller.

Banks still hold a distinct advantage with relatively “clean” portfolios, however, because of their large pools of deposits. “You can be a really good servicer, do everything else right, but just a lack of leverage is going to make your return weaker as a nonbank,” says Bose George, an analyst with Keefe, Bruyette & Woods.