The days of megadeals worth tens of billions of dollars for mortgage servicing rights are over.
Wells Fargo & Co.'s decision to hold onto $39 billion in rights after its deal with Ocwen Financial Corp. collapsed in November is the latest sign of the slowing market.
After Bank of America Corp.'s sale of $215 billion in rights last year, the business of collecting mortgage payments is losing value. Interest rates at 18-month lows are spurring homeowners to refinance mortgages, which strips them from a servicer's portfolio. Regulators also have added rules that diminish the appeal of servicing rights after customers complained of abusive practices in the industry.
"No one is going to do a super-size deal anymore," said Jaret Seiberg, a managing director at Guggenheim Securities LLC in Washington. "This was supposed to be another big sales year but after what happened to Wells, banks see the downside risks of mega-transactions, especially when MSR valuations have declined."
Wells Fargo canceled its deal to sell rights to about 184,000 mortgages after New York's top financial regulator blocked the transaction while it probed Ocwen's business practices. Avid Modjtabai, head of consumer lending at Wells Fargo, said that the bank is not seeking to transfer the loans to a new buyer.
"We are continuing to service them," Modjtabai said in a Nov. 21 interview. "It is business as usual. We always look at where we are in the cycle and what the market looks like."
The lender serviced $1.78 trillion of unpaid principal balance at the end of September.
Banks sold about $90 billion of rights this year to publicly traded nonbank servicers, down from about $750 billion in all of 2013, according to Kevin Barker, an analyst with Washington-based Compass Point Research & Trading LLC. The value of the assets has declined in 2014 to about 1.03% of a mortgage portfolio's unpaid principal balance, said Barker. That's down from about 1.09% at the beginning of the year.
Low mortgage rates have eroded the value of servicing deals because when a borrower refinances, the rights are transferred to the new lender.
The average U.S. rate for a 30-year fixed mortgage fell to 3.89% this week, the lowest level since May 2013, Freddie Mac said yesterday. Lending for nonpurchase mortgages jumped 11% this quarter to the highest level in a year, according to the Mortgage Bankers Association.
Regulators have cracked down on mortgage servicers after borrowers complained about erroneous charges, mishandled modification applications and faulty documentation used in foreclosure cases. The Consumer Financial Protection Bureau in January enacted regulations that extended rules for banks, many stemming from legal settlements in 2012, to nonbank servicers.
The restrictions prohibit servicers from pursuing foreclosures at the same time that they process a modification on the property. The rules also lay out deadlines the firms must meet in responding to borrowers who ask for help. In August, the CFPB issued guidelines for rights transfers to ensure that records aren't lost and modification applications continue to be processed.
The new rules raise the costs of managing the loans and increase the possibility of borrower lawsuits and government penalties, Seiberg said.
"There is only one way to make money servicing mortgages when the government is increasingly requiring you to do more and more — it's to pay less for the assets," said Seiberg. "The government's actions have put downward pressure on pricing."
Banks had been selling rights because the international banking agreement known as Basel III makes them more expensive to hold.
Bank of America's sale of $215 billion of mortgages to Nationstar Mortgage Holdings Inc., announced in January 2013, was the biggest rights deal of the last four years, Barker of Compass Point said. Bank of America serviced $722 billion of unpaid principal balance at the end of September.
In the second-biggest transfer, announced in 2012, Ocwen bought $183.1 billion in rights from a bankrupt unit of Ally Financial Inc.
Ocwen hasn't made any deals since February when the New York Department of Financial Services blocked its purchase from Wells Fargo because of concerns that the servicer's explosive growth put homeowners at risk. The Atlanta-based firm, overseen by billionaire founder and Chairman William Erbey, had more than quadrupled the size of its holdings in the prior two years, becoming the biggest nonbank servicer.
Nationstar, the second largest, has come under less regulatory scrutiny and has continued to expand. In the third quarter it bought $16 billion of rights and will close on another $27 billion by the end of March, Chief Executive Officer Jay Bray said on a conference call last month.
"You are going to see smaller deals that will happen over time," Bray said. "That's the kind of mode that we are in."
Spokesmen for Ocwen and Nationstar declined to comment for this story.
This week, the Federal Housing Finance Agency set financial guidelines for nonbank servicers after its inspector general said the companies showed "warning signs" of weakness. The Conference of State Bank Supervisors said it will issue recommendations on capital and liquidity standards for nonbank servicers by the end of the month.
Regulators are seeking to ensure that Ocwen, Nationstar and other nonbanks have enough cash to withstand financial setbacks. The top five nonbank servicers now have a market share of 14%, up from 5% two years ago, the Office of Financial Research, established to spot systemic risks, said in a report to Congress this week.
After selling $1 trillion of servicing rights in 2012 and 2013, sometimes in $200 billion chunks, banks next year probably will make much smaller deals, said Ron D'Vari, CEO of New York-based advisory firm NewOak Capital LLC and a former BlackRock Inc. managing director.
"The whole industry is in fear because the regulatory landscape is shifting so quickly," said D'Vari. "There's not the rush to buy we saw last year."
